Early stage investing is worth it

There was good news for Europe’s early stage life sciences companies when Advent Venture Partners announced the final closing at £75 million of its new fund last week.

At a time when most venture capital firms have pulled out of investing in start-ups, this fund will flow towards early and mid-stage companies, with 70 per cent to be invested in Europe and 30 per cent in the US. This is the first fund Advent has raised to be dedicated to life sciences – previous funds have balanced risk by investing across biotech and information technology.

Some feat then, to close a life sciences-only fund in the thick of what Shahzad Malik, General Partner at Advent describes as a “nuclear winter” for finance.

It may be a nuclear winter, but it’s not a perfect storm: although others may dismiss the field as too risky and denuded of exits, Malik believes there is lots of good research in Europe that is ripe for commercialisation.

Reasons to invest

Investors give three reasons not to invest in early stage life sciences companies. “It’s too risky, takes too long and you don’t get enough money back,” Malik says. He and his fellow General Partner Raj Parekh set out to change this attitude when they joined Advent in the middle of the decade.

“Advent never left the early stage arena to move to lower risk, later stage, as other VCs did. Instead we always set out to look for first-in-class or best-in-class technology, based on the fundamental thesis that if it is innovative enough, pharma will buy it sooner or later,” says Malik.

This means that rather than building a company up through repeated rounds of venture capital, Advent structures its investee companies for merger and acquisition (M&A). “We set up companies for M&A and sell them at the first opportunity. You can only do this if you don’t put too much money in, if you aren’t too greedy, and you find areas that are ripe for innovation.”

Building a portfolio

At the same time, Advent does not look at investments on a deal-by-deal basis, but aims to construct a portfolio, to better balance risk and reward, in an inherently risky business. “We look for companies with true innovation that don’t require a lot of capital,” Malik says. “We know we can’t take companies all the way to commercialisation, and similarly we walk away if something we have invested in isn’t going to work.”

The new Advent Life Sciences Fund will make investments of between £6 – £7 million. Malik says Advent does not hand over all the money in at once, but neither does it drip feed the cash in against fixed milestones. “We put in sufficient money for a [company] to be able to operate in a reasonable way, and then put in a second [tranche].”

As a result of this strategy, Advent has reduced its holding period to five years or less, which Malik claims is matched only by one or two other funds worldwide. The firm has had four exits in as many years, the most recent coming with the cash sale in June 2010 of the Imperial College spin-out RespiVert, a company in which Advent made just one round of investment, to Johnson & Johnson.

Advent was the largest shareholder, and while the sale price was not disclosed, another shareholder, Imperial Innovation, the technology transfer arm of Imperial College, said it made £9.5 million on the RespiVert deal.

In December 2008 Thiakis, another Imperial College spin-out in which Advent invested, was sold for $120 million to Wyeth (now part of Pfizer), and Advent exited the Norwegian cancer treatment specialist Algeta in the company’s initial public offering. Advent was also an investor in the DNA vaccines company PowderMed, which was acquired by Pfizer in 2006.

An investment of £15 million in Advent’s new fund has come from the UK Future Technologies Fund, a government-sponsored fund, set up to invest in UK companies. Malik says this will not affect the investment strategy. “We’ve always been a UK investor; this won’t change what Advent does.”