Venture Creation is in Vogue

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In the biotech industry, it’s common for a company to raise billions of dollars and wait more than a dozen years before their investors see a return. That’s why capital formation can be an arduous journey in the biotech industry.

But the biotech IPO market is coming off of a hot 2018 with more than 50 biotech companies going public on the back of more than $5.4 billion in funding, marking the second-best year for biotech IPOs in a decade. But what challenges will need to be overcome to continue this trend in 2019?

Dr. Sapna Srivastava sat down with Geoff Meyerson, Managing Partner and Co-founder of Locust Walk, for a fireside chat at the 2019 BIO CEO & Investor Conference to discuss these issues from an investor’s perspective. Meyerson’s background is in investment baking, business development, venture capital and licensing where he has closed more than fifty transactions of all varieties. 

Meyerson noted the many pitfalls for an emerging company when navigating the capital formation process. Unfortunately, many companies don’t begin raising capital with a financing strategy, such as not knowing whether to dilute equity or assets. Perhaps the management team might not be aligned with their board on the targeted geographies and therapeutic areas of focus.

To avoid these pitfalls, he emphasized the importance of a sound corporate strategy and that the management team should also be adaptable to the situation, which often involves making tough decisions. While it rarely works out as we planned, having a choreographed strategy from the beginning will still pay dividends in the end.

Meyerson’s most salient point of the day was in his explanation of a new trend in the investor community, saying “I actually think the term ‘VC’ has changed. It’s no longer ‘venture capital’; it’s ‘venture creation’.” 

This seems to be a new buzzword within the investor community, no better illustrated in the fact that some VC firms are getting pressure from investors who view the venture creation strategy as the best way to generate returns.

Venture creation occurs when a firm uses capital to spin out a new idea or technology into a successful business. This differs from venture capital in that venture creation involves the firm’s creation of a company, then forming the management team as well as establishing the corporate strategy and valuation. Venture capital typically injects funding into an existing business with the management team and strategy already in place.

Universities have caught on to the trend and traditional VC feeders like Yale, Harvard and Stanford all have specialized offerings on venture creation. Some entrepreneurship programs now include this as an element of their curriculum, focusing on the application of innovation to produce real economic value for both society and investors. Hopefully these programs will help reshape the broader investor community to approach capital formation in a more holistic way that results in better outcomes.

Perhaps, if biotechs focus on their corporate strategy and if the investor community continues to adopt the venture creation approach, we may see 2019 prove that last year’s IPO success wasn’t just a flash in the pan.