Memo to entrepreneurs: Stay flexible

It happens all the time: A few scientists or engineers – experts in, say, proteomics or polymers – start a company to commercialize their inventions, and then hit a wall. Customers don’t want what the founders expected. Does the company plow on with its original dream, or does it change strategy?

That’s exactly the problem that Domenico Valerio, an expert in gene therapy at the University of Leiden, encountered when trying to get his start-up, Crucell NV, off the ground in the 1990s. Gene therapy was hot science, but cold commerce; the pharmaceutical industry viewed it as a long-shot. What he learned from that experience helped convert Crucell into a biotech success, with Nasdaq, Euronext and SWX listings.

Now, as a general partner in a new Dutch venture capital fund, Aescap Venture, he is trying to teach those lessons to other biotech entrepreneurs in Europe. The first closing of the fund last year raised €59 million, and he and his partners have since raised more than €40 million more towards a second closing scheduled for July.

Valerio - widely known by his nickname, Dinko, in the industry - spoke with Science|Business Editor Richard L. Hudson about the lessons he learned and the kind of entrepreneurs he’s now looking to fund.

So what was the Crucell story?

I founded Crucell with the intention for it to become a gene therapy company. And in order to do so we needed to develop manufacturing technology, because there was no proper technology. By going out and out-licensing this technology to other gene therapy players, we got a much better handle on the strength of this technology and the broad applicability outside gene therapy – for instance, vaccines. That coincided with an internal view on timelines for the gene therapy area that were much, much longer than we had anticipated. And that led to a decision to change the strategy from gene therapy into the area of vaccines. I always said that we are the only company that actually made money in the area of gene therapy because we out-licensed our technology to the other players, but we don’t have products in that area.

Was it painful to change strategy?

Clearly it was a difficult decision to make, but it became very, very clear when we honestly discussed the strengths and weaknesses of our technology. It happened at a management outing. As a scientist I was a professor in gene therapy, so if I would have been a typical scientific entrepreneur with his heart lost on the technology he had developed, it would have been much more difficult. But I am much more of an entrepreneur than a scientist.

For entrepreneurs contemplating a strategy change, what’s your advice?

Work with the best of the best. That is the overriding reason why companies fail or succeed: They underestimate the enormous growth you need to go through, speed-wise, and volume-wise, from start to actual product to licensing arrangements. And very, very often we see companies taking second-choice staff on board, or second-choice management, just because it’s difficult to find these people.

But a little company needs people fast….

If you always say no to the second choice, you build up pressure. Which is good. Without pressure, nothing happens. I like to make the analogy to Italy during the Renaissance period. There must be thousands of Michelangelos walking around; it’s a matter of being able to have your company be the Florence of the biotech environment.

Why aren’t there more Crucells in Europe?

It is a reflection of our technology that there are somewhat more companies in Europe than in the U.S. But very, very few continue to grow into bigger, successful companies. It has to do with irreversible mistakes in the early phase. It comes back to the quality of management, and of investors.

So how does this relate to your fund, Aescap?

We look for technology that is broad enough to have your own products developed on it, while at the same time being able to drive business in out-licensing. You need to be very much aware of the strength of your technologies and how you can cut slices of your cake where you have the benefits of this licensing activity.

And it generates cash early…

It’s not just the cash flow. We think that early-stage companies are greatly aided by being active in the marketplace and doing business. It helps them to create a culture in the company that is business-like, where people understand that there is a customer out there that eventually needs to pay for what you’re doing. It gives a company a much better handle on the strengths and weaknesses of their own technology. Without these license deals there is a tendency to become rather introverted, which is very counter-productive. We often see that people miss opportunities that, by talking to potential customers, you suddenly become aware of.

But isn’t it risky for a young biotech company to license early to Big Pharma?

There is a risk in doing that: That you sell the table silver. So you need to do this carefully, and that is something where we will play a role: To recruit the strongest business developers.

What is your investment strategy?

We focus on biomedical companies: New medicines, but also diagnostics and a few – but not many – in the tools area.  The lion’s share will be in new medicine. We don’t shy away from very early stages. We would go also in later-stage investments. But you won’t find us in mezzanine, bridge financing that is very large. Our strength is identifying very strong technology and teams, and helping them to grow over a period of time to become a successful company.