Any molecule early in development is not yet an asset, but it is already a “cash burner.”
– Michele Ollier, Index Ventures

Yesterday, RE:INVENTION attended Prescience International‘s “Catalyzing Life Science Startups” event at San Diego’s Janssen Labs. Moderator Diego Miralles, Head of the Janssen R&D West Coast Research Center and Janssen Healthcare Innovation, led a rockstar panel comprised of Rowan Chapman (Mohr Davidow Ventures), David Coats (Correlation Ventures), Anand Mehra (Sofinnova Ventures), and Pratik Shah (Thomas, McNerney & Partners). It was a sell-out event — not uncommon for the Prescience International team. They’ve already established a proven life science research center and incubator innovation business model with the San Jose Biocenter.

Noteworthy attendees? Ruprecht von Buttlar (CONNECT). Chris Steinhardt (a Partner at Knobbe Martins). Bright folks from Big Pharma (no surprise: big pharma + small biotech company = perfect marriage. The small biotech company gets money to fund development of its breakthrough technology and the large pharmaceutical company gets a blockbuster product).

We were excited to learn more about the evolution of biosciences venture funding, particularly since venture financing for biotech and life sciences has been in decline due to the global financial crisis and poor returns from stock offerings. We fondly recalled Paul Singh’s recent tweet: “VCs 5 years ago: “how do you make money?” VCs today: “how do you acquire customers?”

Ironically, not one of the VCs on the Prescience panel mentioned customers. Not once.

What the panel DID discuss…

the challenges of funding innovation in the life science industry. VCs, afterall, are in the business of generating returns, preferring lower-risk, short-term projects. Rowan Chapman articulated this prisoner’s dilemma well: “When Mohr Davidow Ventures evaluates a potential life science investment, we classify the business as LIFT or SHIFT. A LIFT company offers improvements on an existing solution (cost-savings, better treatment, etc.). A SHIFT company has created a novel solution, never done, never categorized.” In the case of SHIFT biosciences companies, Chapman continued, the FDA is a huge barrier to commercialization and VCs can’t accurately scope trial timelines and tactics. SHIFT companies present huge technical risks in terms of time and money.

In other words: the more INNOVATIVE your life science company, the more likely you will face FDA opposition and technical trial barriers. The more CAPITAL you will need to commercialize your product. Yet the LESS likely your company will receive the capital it needs to achieve product commercialization.

The solution, suggested by the panelists? Innovative life science companies that hope to raise capital need to FIRST AND FOREMOST educate VCs about perceptions of risk in a clear, consistent, easy to understand way.

Bingo. An investor pitch requires presentation of risks upfront. Creating a risk-aware environment for potential investors is actually not that difficult if you stick to the basics: What’s your biz? What’s the opportunity? Does it make sense for an investor to be in that space? What’s the commercial viability of your product? Is there foreseeable and significant market growth for the next 7-15 years? Do clinicians agree that your technology/product would be desirable for patients? How will your company achieve proof of concept? Are you scaled appropriately for your strategy? How will your company leverage strategic capital efficiency? How will your company mitigate technical risk? Who would buy/license your product? What would prevent them from doing so? What’s the most likely scenario and the worst case scenario?

Share the hope and forget the hype. Close with realistic exit scenarios.

Given the tenuous nature of raising capital in the life science industry, that’s pretty good advice even if it seems oversimplified. What do you think?