Being a CVC - A perspective on Novartis Venture Fund's investment (& exit) strategy

If anything, the recent news of Novartis agreeing to sell its vaccine & veterinary businesses while simultaneously acquiring oncology assets from GSK consolidates my earlier view/ observation that the investment philosophy of a corporate’s venture arm seldom reflects the strategic goals pursued by the corporation itself - effectively meaning that there’s hardly any difference between a CVC and a VC as far as the ‘intention behind the investment’ goes – the intent in this context being a tangible ROI.

There is albeit a definitive difference between a CVC & VC as far as the ‘intelligence behind the investment’ goes – the intelligence in this context being the insider-edge the CVC enjoys when it comes to identifying, qualifying and investing in a promising enterprise, an edge seemingly acknowledged by the VC & angel community given the sheer number of fundraising rounds led by the likes of Google, Intel & Novartis compared to than those led by non-CVC brave-hearts – This propensity of the investing junta to look up to the CVCs to take lead is demonstrated once again by the quantum of followers the likes of Kevin Rose (Google Ventures) & Jerry Yang (Yahoo) command on AngelList, the new age pit-stop of investors & enterprises alike.

I realize though that compared to the regular VC, an average CVC can afford to be lot more adventurous/ less-conservative since the LP, which is the corporate itself, has a far less looming presence given the non-financial nature of the corporation.  This context of less-intense LP scrutiny thus affords a CVC greater liberty & hence their investment strategy may not be that de-risked after all & this isn’t saying anything.

With no prejudice whatsoever on the relative merits of a CVC vis-à-vis a VC & going merely by the data, I think Novartis Venture Funds (NVF) is what one could refer as the ‘Google Ventures of pharmaceutical innovation’, a yard-stick, if not a bench-mark other VCs could use within the pharmaceutical domain. With this premise, I went about analyzing the NVF’s investments data, of both current & exited portfolio, the key takeaways of which I have discussed below;

DUALITY OF VISION

A quick comparison of NVF investment focus & Novartis business focus;

  

INVEST SMALL – EXIST FAST

When it comes to making small molecule therapeutics work both as a business strategy & investment focus, few seem to be able to bend it like Novartis. Despite Small molecule therapeutics being a mere 20% of the total invested value, this segment is a star performer at 63% when it comes to exits. This performance is consistent in both the major exit types of IPO (69%) and Acquisition (59%) – the relatively higher contribution of IPO as an exit also seems to suggest that the chances of an IPO are higher for an enterprise developing small molecules & that going public isn’t an easy game for a company developing biologicals.

No wonder then that the current portfolio of NVF once again is dominated by enterprises pursuing small molecule therapeutic dreams (53%). However the marginally higher percentage share of biologic therapeutics in the current investments indicates NVF is cautiously optimistic about these living herbs!  

ATTITUDE, IT’S THERAPEUTIC

The NVF investment spread across therapeutics is nothing counter intuitive & is expectedly skewed towards oncology. What’s interesting is the sentiment/ attitude driving these investments in different disease segments.

Looking at the interplay of number v/s value of investments, NVF’s investor attitude can be summarised as follows for a few key segments;

Oncology           -->          Casting the net far & wide

Hematology      -->          Betting high

Cardiology         -->          Upping the stakes

Allergy               -->          Risking it big

Infection            -->          Seeding a promise

EXIT THROUGH ACQUISITION THAN IPO

With companies having FIC assets making up 60% of the total current investments & since FIC assets are typically more attractive acquisition targets, it can be surmised that NVF is not counting on IPO as the primary exit path.

BULLISH ON EARLY & BEARISH ABOUT LATE-PHASE ASSETS

Perhaps this is more of an alert to enterprises seeking venture funding than other VCs – the date clearly shows NVFs reluctance to risk its green-backs on the very volatile PIII assets – this once again underscores the primal premise that for NVF’s vision is limited to supporting viable clinical assets and NOT in seeing them through to the market.

The message hence for the biotech is - knock at the doors of NVF after your IND is filed & count on their support till end of Phase II & showcase the potential of your clinical asset to get acquired even as it is still in PI or PII.

SLOWER, LONGER & BIGGER – NVF’s NEW MOTTO?

VC is more a patient fund than earlier & NVF seemingly realizes that – that’s what the numbers say at least

Despite the now apparent & clear segregation of objectives of a corporate & of its venture fund, a CVC seemingly still employs the insider-edge in making its investment & exit decisions.

Meray Chaaraaney.

Not wanting to sell-off is key to being bought!

19 billion dollars for a company with one app & 20 million in revenue is of course a frickin’ big deal - No wonder that everyone from entrepreneurs to VCs to analysts want to have a go at cracking the code called WhatsApp.

Suvir Sujan in his latest blog post broached this quintessential topic & attributes the success achieved by WhatsApp to its founders keeping disciplined focus on superior product offering with an eye towards building a profitable and sustainable business – True, but I wished to be more direct and say an enterprise that starts with the intention of selling-off will probably never get this kind of supreme pay-off, my comment on Suvir’s post is as follows;   

---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

WhatsApp indeed pulled-off a coup and got this eye-popping valuation. While I agree they keeping the product no-frills helped in making its adoption viral, I'm not sure it'd have helped the acquisition costs - after all a 19 billion pay-out would cover any quantum of unreasonable asset stock-pile (bells & whistles..)   

In my humble opinion where WhatsApp scored is on how it did not go after the formulaic 'Built to Sell' strategy and instead adhered to it’s probable original idea of 'Built to Solve/ Differentiate' - Let's not forget that most of us got attracted to WhatsApp primarily since it offered what FB mobile chat denied/ couldn’t assure viz., communication & data privacy.

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Afterthought:

Communication & data privacy, precisely what I’m edgy about right now as a WhatsApp user - Will this remain intact when FB eventually attempts to integrate the app with its own & monetize the user-base? If I were Zuckerberg, I’d be worried sick thinking how to prevent the edgy half-a-billion junta from waltzing towards Snapchat & likes - that would be a real bummer, wouldn't it be?

Isn't securing employee personal information equally important (vis-a-vis' company data) in a BYOD scenario?

The title of a recent article on W.I.R.E.D Innovation Insights asks "How Secure Is Your Company's Information With the Mobile-Carrying Social Employee?" - The apparent one-sidedness of this 'concern' got me thinking that somewhere in all this securing data of employers, the employee's is getting compromised.

Just may be, while designing the data-security solutions the product companies should simultaneously address another question "How secure is the Mobile-Carrying Social Employee's Personal Information with the Company?" - Not just for the heck of it, but so as to come-up with a compliance boosting mutual-data security feature! 

Below is the comment I posted against the above article:

---------------------------------------------------------------------------------------------

An interesting observation in the second paragraph "The second thing that worried me was all the data on the phone, the contacts, the texts and all the account passwords that I had fed into the various applications and the data within those apps".... this aspect doesn't however figure in the solution though...

Sure while employers securing their data by way of ‘remote controlling information even after dissemination’ is probably necessary for justifiable business reasons, the technologies employed for this purpose must not breach the fine-line between ‘securing employers corporate data’ & ‘respecting employees social/ personal data' - as safety of personal data is an equally big concern for the individual in question as suggested by the quoted text above.

As a social corporate employee I personally would hate carrying two smartphones if not for anything else, for the sake of not sacrificing efficiency & convenience. This means my corporate mobile will have to double up as my personal device too & I suspect I’m with the majority in this matter. Given this and given the corporate decision makers too are part of this BYOD environment & since ensuring compliance (by employees) ideally should be a two-way transaction of trust, I believe whichever company develops technologies/ products that equally address both the above aspects will have a sure-shot winner at hand.

Is YODA-enabled clinical data-transparency more than smart externalization of clinical data-mining & analysis?

The day started with a news item on Xconomy declaring "J&JOpens Data Vault to Yale, in ‘Unprecedented’ Transparency Move" - Surely an important development on something that's been propounded for long - below is my comment on this piece;

---------------------------------------------------------------------------------------------

Way back in March 2008 a fellow member initiated a discussion topic titled ”Radical Transparency for Drug Safety?” on Pharmaceutical Discussion Group that I manage. The brief engagement that this topic generated ended up identifying the following as ‘key aspects that need to be addressed’ before radical transparency becomes acceptable to pharma;

• Enabling climate (safe harbor) &
• Some incentivization

Well, it appears Yale cracked this code, of de-risked data-sharing after beta-testing it on rhBMP-2 Project based on Medtronic’s data-sharing, well enough to get J&J aboard this transparency express.

A brief read of the Data Use Agreement of the rhBMP-2 project shows what emboldened, motivated J&J with agreeing to share all its data publicly. Below is a list of clauses within the data use agreement broadly catagorized into the key aspects stated above;

Safe Harbor
Reproduced Text in “quotes”

Section 2.3 - No Direct Identifiers

“The Data will not include any direct personal identifiers ofthe study subjects to whom the information relates, nor will it identify which clinical investigators or sites contributed the data for a particular subject. Within the Data, subjects and investigators are identified by unique identification numbers, and User will not have access to the keys that relate the identification numbers to the identities of the subjects or investigators”

Section 5 - Confidentiality of Data

Across sub-sections 5.1 (obligations of Confidentiality) through to 5.4 (Survival of Obligations)

Section 6 - Subject Protection

“The Data may contain certain information that can be used by itself or in combination with other available information to identify a specific study subject (“Study Subject Personal Data”)”

This section is detailed further through sub-sections/ clauses 6.1 (no re-identification) through to 6.4 (safeguards)

Section 8 – Publications

Prevents user sharing any ‘redacted portions’ of the data fro being referred in any publication.

To the credit of Medtronic & YODA though section 6.3 (Non-Disclosure) allows user to share study subject personal data with the “regulatory authorities, upon lawful request by such authority” – It will be interesting though if a similar openness would be retained in the J&J data use agreement, given the much larger data set & hence greater regulatory implication.

Incentivization
Reproduced Text in “quotes”

Section 7 - Reporting and Use of Results

Obligates user to share all data generated from the analysis/ reserach into the sponsor data with YODA and the sponsor. Further YODA retains the right to make this report public (or not…)

Section 9 - Inventions

“In the event that User utilizes the Data to develop any inventions or discoveries, whether patentable or not (“Inventions”), User will assign to Medtronic all proprietary interests in said Inventions and in the event that User is statutorily prohibited from assigning its interest, User will grant, or ensure that the inventor grants, to Medtronic a fully paid, perpetual, worldwide, exclusive, royalty-free irrevocable transferable license for all purposes, including sub license and assignment to each such Invention without further consideration. User will cooperate with Medtronic to ensure execution and delivery of all documentation that Medtronic reasonably deems necessary to perfect Medtronic’s rights in the Inventions.”

The sheer scope of the section 9 along with the safe harbor provisions listed above makes this exercise come across more as externalization of clinical data-mining & analysis by the sponsor organization – I have no reason to believe J&J will have it any different except that the safe-harbor provisions may be more detailed, as mentioned above.

Finally, the one unstated intent of any pharma opening up its own data banks is to build pressure on the other peers and thus have insight into competitor clinical data that till date eluded them.

All said, it’s great to see transparency starting to be practiced rather than just debated about & hopefully this’ll give pharmaceutical research a chance to impact lives better than it could before.

More power to radical transparency.

Funds-on-Tap is passé & Drip-Funding is the new reality.

It’s probably been true for IT/ ITES (particularly for e-commerce and social media & app-developers) much longer, but for the drug discovery start-ups hitherto unaccustomed to expecting anything under a mio given their rather pricey research, the writing on the wall is abundantly clear - Funds-on-Tap is a pipe dream & Drip-Funding is the new reality.

Over the past year, more and more VCs have started to unveil & employ their own versions of a ‘return-maximizing, risk-mitigated investment model’ that typically involves multiplying the early-stage portfolio & bringing down the average-size of seed-investment while maintaining the overall seed-stage investment at no greater levels than earlier - A case-in-study being the recent Seed-class of Atlas Ventures & equally demonstrated by Index Ventures developing its proprietary version of MonteCarlo simulation for optimally distributing precious funds across its portfolio of biotechs' with assets across different phases of clinic.

This holds largely true for the increasingly active Pharma CVCs too that not only are mimicking the VCs in increasing their early-asset portfolio, but have taken derisking a notch higher with their joining forces* with other CVCs (competing pharma) in funding rounds, quite apparently compromising on the eventual ownership of the commercial potential &/or IP generated in the bargain.

* OPSONA (Novartis, Roche, Baxter among other VCs) AILERON (Novartis, Roche & Lilly among other VCs); MERUS (Novartis, J&J & Pfizer among other VCs)

While this may sound like life sciences venture funding is slowly turning into a mere statistical exercise (venture-farming…?), a la the stock market, knowing what it takes to separate wheat from the chaff in the complex world of drug discovery, the users of these models will surely need a lot more than a practical knowledge of the probability theory – which even a cursory read of the above posts again will make it very evident. Just may be, a biotech VC can still showcase ‘proprietary deal-flow’ as a core-strength while making a pitch to the LPs.

Now how does this lean-funding scenario impact the development strategy of the start-up? – while a few indicators of change are already out there like the CROs being encouraged (~arm-twisted) to share risk with the biotech while providing services, I believe this'll trigger bigger changes & hopefully nudge the drug-discovery towards an innovation pathway that’s a lot more rational & predictable – but then this is something Drug Baron should talk about.

Manna from the mud - Daliya!

No, I’m not transforming my venture-blog into a food-blog!

Despite a rather underwhelming 2013, I am just not ready to give up chasing pavements and this post is but a tasty interlude in an otherwise bland biz-talk that still is my lifeline to a new tomorrow.

Daliya – Manna from the Mud

My hunt for a perfect vegetarian breakfast meal brought me to this amazingly versatile north Indian option called Daliya, which is nothing but broken whole-wheat grain & very likely the more nutritious cousin of the popular Bulgur, which is semi-polished and parboiled durum wheat.

To my south-Indian sensibilities, breakfast & sweet don’t go together and thus porridge with milk and sugar wasn’t an option at all. I also wanted vegetables & legumes to be more than a decoration in my breakfast & hence the ubiquitous Upma or Khichdi too didn’t present themselves as the true alternatives, thus inspiring me to come up with my own multiple variants of daliya, which for the sake of this post I christened “Daliya Quick Meals” (DQM), that now enable me to have this meal for breakfast three times a week without getting bored once.

So overwhelmed I am with the sheer convenience of this nutritious preparation, that I decided to turn a daliya-messiah and share my most prized recipe through this blog;

Daliya Quick Meal – Thai variant

Serves – 2

Ingredients:

The core-elements of DQM are Daliya (understandably so..) & Split Moong dal (not too obviously so…) and these two ingredients hence are non-negotiable.

The vegetables suggested are based on ease of availability & on mutual compatibility and last but not the least, for visual appeal. 

Finally, since this is a ‘Thai’ variant, I wouldn’t however compromise on using coconut, red chilly & lemon grass.

• Daliya – 100g ~1 small stainless steel tumbler (SST) (shown in pictures)
• Split green gram (split moong dal) – 50g ~1/2 SST
• Carrot – 1, peeled & cut into 1in pieces (optional & can be replaced with Zucchini too.. the pictures don’t show carrot btw..)
• Tomato – 2, deseeded, sliced into crescents
• Green Beans – 6, cut into 1in pieces
• Corn Kernel (Maize) – quarter cup
• Garlic cloves – 6, peeled & whole
• Red chilli flakes - ½ tsp.
• Jaggery (Gurh) – a small piece/ grated, 1 tsp.
• Turmeric powder (Haldi) – ¼ tsp.
• Coconut kernel (Fresh/ dried) Small piece, grated OR Coconut milk – I tbsp.
• Lemon Grass (dried) – ½ tsp. OR Lemon Grass Oil – 10 drops
• Peanut powder – 1 tsp., optional
• Almonds – 6, chopped, optional
• Oil (sunflower/ rice bran/ olive) – 2 tsp.
• Salt to taste

Preparation:

This is the best & easiest part!

Put all ingredients in a microwavable ceramic or glass bowl (~Borosil cookware), add water (4 times the measure of daliya + dal, which in this recipe translates as 6 SST), cover it with a microwavable glass top and microwave for 14 minutes. When cooking larger quantities the cooking time should be increased accordingly - Once cooked, let it idle for 10 minutes. 

Mix well and serve hot with half a cup of curd/ yogurt.

Preparation time
-> 15 minutes (not counting microwave time)

Eating time
-> 10 minutes (hey, it's break'fast'...)

Quick, nutritious & tasty – give it a try!

Wishing all a Happy, Healthy & Successful 2014!

A suitably bootstrapped perspective

As someone who routinely wears boots under Levi’s 511s, I understand the sheer utility of those small loops called bootstraps - Sramana Mitra’s high focus on an entrepreneur bootstrapping the start-up in her book “Seed India -How To Navigate the Seed Capital Gap In India (Entrepreneur Journeys)” helped me appreciate the criticality of this aspect in the Indian venture funding context.

The book’s USP is its brevity and the matter-of-fact, blog-like style but what keeps your interest on is the verbatim reproduction of the interviews. Spurred by the author’s knowledgeable querying, the interviewed entrepreneurs come up with some honest reflections & very useful insights into their successful entrepreneurial journey. Some statements though come across as anachronistic, particularly when Sachin Bansal of Flipkart seemingly undermines the adaptation, penetration & potential of digital books and affordability of e-readers in India - the fact that I was reading this book on my Kindle Fire HD made the assertion even more ironic.

While it is a welcome trend that Indian start-up stories are getting written about, I once again can’t help but notice that the term ‘start-up’ is gradually getting equated with IT/ITES/ Cloud enterprise.  Most other enterprise categories such as biotech, green-tech are clearly missing out being written about as interesting case-studies since they can’t quite compete with a typical cloud based start-up which (can..) starts generating income within few months of existence – As Sramana did admit passingly, the logic of bootstrapping one’s business is a very different ball-game if the start-up product offering is physical (~biotech) as against being virtual (~SaaS)

Coming back to the book, I felt that what was perhaps intended to be showcased by the author but not quite articulated is an observation that ‘bootstrapping an early enterprise’ comes quite naturally to Indian entrepreneurs given the culturally ingrained reluctance to diluting ownership/ stake of a start-up business early on & the practical jugaad (in a fair sense) mind-set of sailing in two boats before hitching on to the one of choice.

Considering this being a cluster/ market dominated by such lean business ethos & relatively more fiscally-conservative entrepreneurial attitude which by default de-risk the investor’s moolah, one’d have expected India to be a hot destination for an alternate asset fund manager looking for a safe-harbour for her/ his precious dollars, but quite obviously it is not. Of course it is also apparent that there isn’t enough fish in the pond for any LP to develop a serious strategy betting on Indian start-up scene & perhaps the only way to make this ‘LP-friendly entrepreneurial ethic’ work in India’s favour at scale is to seed more & more promising enterprises, bootstrapped or otherwise.

Afterthought

Just wondering.... the Global LPs could be a lot more interested if the Indian VCs claim to be ‘Conservative’ rather than being ‘Contrarian’ in their choice of deals :-)