The makings of a great life science VC fund: What sets leading funds apart?

How structure, dedicated expertise and sharp tools can make a difference: Guest Commentary

If you’ve spent half a lifetime in life science VC investments, you probably have a trick or two up your sleeve. Chances are that your hard-earned experience was built on a long list of your own successes — and mistakes. No one investing in early-stage biotech gets through an entire career without experiencing setbacks — portfolio companies that underperform, clinical trials that miss their endpoints, stalled developments, or simply the failure to deliver as expected. In life science venture capital, the risk of failure is always stalking you. Yet even when success comes and things go your way, you might still wonder: Have my peers in the VC world found the key to success or discovered some kind of secret recipe we could learn from?

That question drove us at Lundbeckfonden BioCapital to explore what sets top-performing life science VC funds apart. After designing an in-depth survey and conducting anonymous interviews with senior leaders at 24 leading funds across Europe and North America, we found the resounding answer is “Yes” — there is a smarter way to work.

But the fuller answer is more nuanced and paints a picture indicating we all have something to learn from each other. The data are available in a new white paper — Strategies for Success: What makes a great life science venture capital fund? Key insights from the report include:

• Create an objective, data-driven and forensic approach to the performance of your portfolio; don’t over-index on intuition

• Provide access to key specialist competencies across the biopharma value chain in areas that would otherwise not be available to your portfolio company

• Go beyond your usual network for deal flow

• Consider which proactive ESG initiatives could create additional value in your portfolio companies

Creating success through forensics and well-balanced teams

First, great VC funds are rigorous in analyzing the progress of their portfolio companies. They use objective methods and are disciplined about making comparisons on a like-for-like basis. It isn’t easy to compare firms that are pursuing different technologies in different disease areas, at different stages of development. But that’s no reason not to attempt the exercise. We found VC funds that use a more structured evaluation approach — including quantitative assessments that go beyond company milestones — tend to be more successful at raising bigger funds.

Yet surprisingly few VC funds take a truly forensic approach to this. Why does it matter? Because if you are not applying the same standards across your companies, then it diminishes your ability to identify the risks in your portfolio — and that can drag down returns.

An objective comparison tool is like looking through a polarizing filter — it sharpens your view of portfolio performance. And the more clarity you have, the more likely you are to identify which investments are actually doing well, which need extra support, and which may need to be cut loose.

Second, VC funds could maximize their portfolio companies’ chances of success by employing more well-rounded support teams. VC teams almost always include scientific and financial specialists, who are of course essential, but sometimes lack specialists in critical areas like regulatory affairs, clinical development and pharmaceutical manufacturing. Drug development is an incredibly complicated business, and small, young companies don’t have the personnel or bandwidth to do everything well themselves. If a VC fund can assist by providing the right specialists at the right time, that can be an enormously powerful value add.

Naturally, larger VC funds have more capacity to employ in-house specialists. But small and mid-sized funds can still close the gap by sourcing such specialists on a contractual basis. Today, a surprising number of VC funds are not providing a full suite of specialists to their portfolio companies. The typical model is for VC managers to be “generalists” who help their fund’s portfolio companies from start to finish.

Our third major finding is that VC funds are heavily reliant on personal networks for sourcing potential investments. More than 90% of VC funds in our analysis cited this as their primary mechanism for sourcing opportunities, rather than technology transfer offices, incubators or discovery engines. In addition, few use systematic screening tools to proactively identify companies that could complement current gaps in their portfolio.

That’s not to say using personal networks is a bad thing. Investing is about judgement, and a lot of our judgement is based on what we think about the people involved — our relationship with them, or with people we know, who know them. We will never get away from that, and neither should we.

However, there are risks. If we fail to look for investment opportunities beyond our personal networks, we will surely fail to find them. We also risk being driven by the fashion of the day and thereby acting like a herd.

In venture capital, a lot of our capital is human: the people we employ. Like the companies we invest in, our people must be nurtured if they are to flourish. However, while VC funds do help their junior staff grow — for instance by getting them to observe company board meetings, by encouraging them to take courses, and by partnering them with mentors who give advice — few utilize formal learning and development programs.

Finally, we found that while around half of VC funds formally incorporate environmental, social and governance (ESG) and sustainability criteria in their investment decisions, half do not. And many consider investing in next-generation medical therapies as enough to ensure they’ve ‘ticked the box.’ We found that the top VC funds tend to adopt a more proactive approach to ESG and sustainability, to identify themes and initiatives that truly add value to their portfolio companies and investment decisions rather than being a mere reporting tool catering to LPs.

Flair and formula are not mutually exclusive

If there is a common theme to our findings, it’s that the most successful VC funds appear to use more formalized processes to unearth investment opportunities, assist their portfolio companies, and assess their progress. Likewise, when it comes to nurturing their own talent.

This is at odds with the perceived culture in the VC world, where intuition tends to be prized over process. We love to celebrate the maverick who happened to spot a diamond in the rough, chiselled and polished it into a sparkling gem, and made a fortune. We conveniently forget about the many duds that drag down average investment returns.

But we would argue that flair and formula are not at odds at all. In fact, our findings suggests that life science VC funds that equip their people with the best tools — the strongest picks and shovels, the most even sieves, the sharpest chisels and the smoothest polishing cloths — end up coming away with the most treasure. By systematically reducing risk, they set themselves up for success.

Jan-Erik Messling is an associate and Christian Elling SVP and managing partner at Lundbeckfonden BioCapital, an enterprise foundation that invests in the Danish biotech ecosystem and internationally.

Signed commentaries do not necessarily reflect the views of BioCentury.