Partner – Sofinnova Partners
Meet Edward Kliphuis, Partner, Sofinnova Partners, a venture capital firm that invests in the life sciences sector, from seed to later-stage. Edward Kliphuis gives us some vital insights from his considerable experience in investing in life science. – He details some of the financial hurdles, as well as the benefits available to all of us from sound and far-sighted investments made in this important sector.
#1 – Why is it a great time to be alive?
There’s never been a moment like this in human history. Yes, we’re living in uncertain times, with the effects of climate change becoming increasingly visible, the widespread adoption of technologies that are impacting our social fabrics, and of course the extremely volatile financial markets. But, on the other hand, our average life expectancy is at an all-time high, extreme poverty is at an all-time low and humanity has never been this productive. We’re making technological advances our ancestors didn’t dream of, by pushing the boundaries of our understanding of the world around us – and within us. In Sofinnova’s field of life sciences, we are witnessing this progress first-hand. The phenomenal amounts of well-structured data (on a scale never witnessed before) available to us today means we can link the source-code of biology, through DNA- and RNA sequencing, to real-world events- such as the onset of disease. Today, sophisticated computational techniques such as machine-learning algorithms allow us to crunch through vast amounts of data to generate incredibly precise, unique insights, accelerating our understanding of disease and conditions at a pace never witnessed before. This would be impossible with traditional methods. In the past, coming up with just one of these insights would have been like searching for a needle in a haystack. Now, with the convergence of data and computation, we are finally able to observe and understand biology in all its glorious complexity, without the need to oversimplify. This is a revolutionary moment for all the life sciences, for medicine and for our species as a whole.
#2 – How do you value a company?
We are early-stage investors. We invest at Seed or Series-A, and sometimes even at company formation. Usually, we’re the first institutional check into a new company. At such an early stage, traditional valuation methods such as Net Present Value (NPV)-based DCF’s are pointless.
What we do is look at:
(i) The technology – is the proposition globally scalable?
(ii) How big is the market – not just the total addressable market, but also the Serviceable Available / Obtainable Market?
(iii) Can any of the claims made be backed up with evidence?
(iv) And most importantly: the team.
#3 – What form of healthcare and technology do you think will make a big difference in the future?
Undoubtedly that is the near simultaneous convergence of novel data generation and the exponential improvements in our ability to make sense of this data through novel computational techniques. In other words, AI and Machine Learning. This will create the next major breakthrough in medicine. Up to now, science has been based on reductionism: solving complex problems by breaking them into smaller pieces and then separately analysing these pieces. This has been incredibly successful for every branch of science. But the new frontiers of science are about what happens when you put these individual parts together to understand the whole. This is the field of complex systems – and human biology is such a complex system. As a result of these amazing developments, we can perceive each-and-every person individually and assess their particular medical needs like never before. This will be the end of one-size-fits-all protocols such as dosing based on body weight or following pre-determined treatment protocols. We will now be able to look at each individual’s unique needs and tailor the best treatment for them specifically. All of which means that true precision medicine is finally within our reach. And the consequences of this cannot be overstated, especially with the huge cost-reductions that will follow, and the cutting out of unnecessary healthcare spending. We can look forward to increased patient outcomes and increased productivity. The wins are enormous, both in economic terms and in human well-being.
#4 – Can you share the main fundraising pitfalls?
From my experience, the hardest thing when fundraising is to get the ask right. Both in the amount of money and the runway, or time for execution which this money implies. Ideally, a fund-raise is an amount of money which allows the company to achieve a clear value-inflexion point. This can either be a commercial milestone, or a particular point of de-risking of the technology, such as regulatory clearance or proof-of-concept. Companies either build into profitability or into the next fundraise. It’s important to understand what you are building towards and what the important value-creative elements are in this journey. If a company is building into profitability, and this is the last round of capital into the company, then you can have different discussions with investors than when you are looking to raise three additional rounds of funding to bring the company to exit.
We see founders negotiating on dilution rather than on capital and time requirements to achieve such value-inflection points. I’m not saying that dilution is not important – it definitely is –but the main objective for management is to generate value for shareholders. So, in the case of underfunding a company, the clear risk is that the existing shareholders (founders included) will not be rewarded for the work they have done to bring the technology forward. That would be the result of not having enough runway to reach the finish line. If that happens, you either have to raise new capital without having generated tangible value, or you fold the company. Not a great choice. But there is also a risk in overfunding, because in that case you can’t put all the capital to work, so the return on invested capital is lower. That means the rewards for early investors (who were bold enough to take risks other investors weren’t willing to) are diluted. The final point is that it’s always wise to budget for delays to make sure there will be sufficient runway, even after you reach a value inflection point, so you can successfully execute the next fund raise. Typically, we budget three to six months for this. So, to summarize: the main fundraising pitfall we observe is that the fundraise is mistakenly regarded as the aim in itself, rather than as a means of achieving a larger goal.
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