Partnering with Corporate Venture Capital: Tips from Industry Veterans

23 Oct

By Shaoyu Chang, Research Analyst, LSN

Shaoyu 10*10The role of corporate venture capital (CVC) continued its remarkable expansion in 2014. In the second quarter, CVC funding accounted for 29% of total venture capital funding. In the healthcare sector alone, CVC funding soared to a five-quarter high of $1.4 billion, up 200% from the previous quarter.[1] SR One, Novartis Venture Funds, and Johnson & Johnson Development Corporation led CVC funding in life sciences, while Aduro Biotech, Coherus BioSciences, and Principia BioPharma successfully raised more than $50 million in financing rounds with their CVC partners.

CVC funds are an attractive option for life science entrepreneurs for several reasons. Compared with other investors, CVC funds are not only able to provide more capital but also willing to take on riskier projects with promising potential. Working with industry veterans can provide start-ups with critical know-how in areas such as technology design, clinical development, and product commercialization.[2] And in some cases, CVC investments lead to an acquisition or strategic partnership.

How should a fundraising executive approach a CVC fund? At the most recent RESI conference, experts from six prominent CVC funds gave the following tips.

To begin with, entrepreneurs should understand what CVC funds are looking for and manage expectations from both sides. As discussed in our previous blog post,[3] CVC funds come in different flavors. Generally speaking, internally focused CVC funds seek innovations that can bolster the future portfolio of their parent company, while externally focused CVC funds look for technologies from a return-on-investment viewpoint, with less regard for the mission of the parent company. Aligning your goals with the expectations of a corporate partner is essential. A recent study found that this is an area where there is often a mismatch.[4]

CVC funds prefer to work with entrepreneurs who have a tight grasp of intellectual property and a good understanding of the commercial potential and the competitive landscape. They also favor an academic team with whom they have collaborated or with previous experience with another industry partner. To win the confidence of a CVC fund, first-time CEOs are advised to invite experienced entrepreneurs to join the start-up and build a team with credible advisors, consultants, and board members. “If you ask for money, you’re going to get advice. If you ask for advice, you’re probably going to get money,” a panelist said.

Entrepreneurs should invest time to foster relationships. Simply submitting proposals through the websites of pharmaceutical companies is not going to result in funding. It requires a substantial amount of energy to find key industry personnel who have the scientific expertise to understand the discovery and a senior position to make decisions. When a start-up has identified the key people, entrepreneurs should use conferences, social networks, personal referrals, email, and phone calls to engage these folks in conversation.

Finally, our panelists emphasized the importance of long-term relationships. Although the first contact with a CVC fund may not always develop into an investment, entrepreneurs are encouraged to maintain the dialogue. New opportunities may open up, investment criteria may change, or a portfolio’s requirments may change. “We have a lot of continuing dialogues that blossom into something really cool and end up different from the initial conversation,” a panelist concluded.


 

[1] CB Insights. “Corporate Venture Capital Report – Q2 2014 – CVCs Participated in $4B of Funding Across 187 Deals,” September 23, 2014. Accessed from https://www.cbinsights.com/blog/corporate-venture-capital-report-2014-q2/.

[2] Behr, J., & Murray, P. “In Search of Dry Powder,” Nature Biotechnology, October 31, 2013.

[3] Fuller, J. “Gorillas at the Table: Corporate Venture Capital,” Life Science Nation, August 9, 2013. Accessed from https://blog.lifesciencenation.com/2013/08/09/gorillas-at-the-table-corporate-venture-capital/.

[4] McCammon, M. G., Pio, E., Barakat, S., & Vyakarnam, S. “Corporate Venture Capital and Cambridge,” Nature Biotechnology, October 9, 2014.

 

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