Early Phase Forecast

Overcoming some of biotech's Biggest Hurdles

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By Amber Lepage-Monette

In November 2003, BioFinance Early Phase was held in Toronto, Ont., bringing investors together with early stage companies eager for financing. Over the last few years, finding financing has been difficult, to say the least, for startup biotech companies in Canada, and it seems like simply holding an event like BioFinance Early Phase may signal a change in the winds when it comes to Canadian biotech startups.

Janet Lambert, president of Ottawa, Ont.-based BIOTECanada, says things are starting to look up for startups compared to a few years ago. “Which is great news,” she says, “because it’s been what we call a nuclear winter in terms of financing.

“As always, in Canada, the science is great, and it’s just making sure we have these nascent companies that are able to move along and to gather valuation on their way to commercialization.”

Though Kelly Holman, managing director of Genesys Capital Partners Inc. (Toronto, ON), says BioFinance Early Phase was a positive step in the right direction, he is more cautious about the outlook for startups and warns that startups still have tough times to look forward to.

“For the last three years it’s been extremely tough for existing early stage companies or startups to access capital,” Holman says. “And I predict that will continue, unfortunately, until we see some leadership within the Canadian landscape, be it the public companies or the mature private companies. So I’d still give it another 24 months or so.”

The Money Woes
The fact that financing remains one of the single biggest challenges startups face certainly doesn’t seem to be changing. But what some are pointing to in the current biotech landscape is not a change in investment practices, but in attitude.

“I think there’s significant momentum in Canada amongst government and industry advocates that there’s a very significant need to find some way to help early stage biotech, in that there used to be more venture players who were willing to play in the early stage venture funding of biotech — that, for the most part, has curtailed greatly,” says Aaron Davidson, Toronto, Ont.-based vice-president of Ventures West Management Inc. (Vancouver, BC).

“The people who are in that stage of development, at companies in that stage of development, have been hurting really hard for the last 12 or 18 months or more,” Davidson says.

“I think seeing a conference like that and just seeing the amount of attention it’s getting amongst Industry Canada and CIHR (Canadian Institutes of Health Research) and other advocates and the initiatives like MaRS, which are all saying the right things about trying to support startups, is very positive in tone,” Davidson says. “Now actual dollars flowing, I think are still pretty far away,” he adds.

Michael Stinson, executive director of BioFinance, says holding a specific event just for early stage companies has been on the minds of the event organizers for a while. When BioFinance first started out, Stinson says, it resembled Early Phase quite a bit: small, private, venture capital-financed companies working to develop products and establish themselves. Eventually, many of these companies went public and became much larger operations.

But, as Stinson points out, going public changes a company’s needs and the challenges it faces and BioFinance changed along with the companies. “So what we found is that the big BioFinance has become more and more of a public company forum, and we really needed something that could focus on early stage companies, which have a different investor clientele,” Stinson says.

After mulling over the idea of a forum for early stage companies for a couple of years, Stinson says, the BioFinance team decided 2003 was an ideal time to host an event for early stage companies.

According to Stinson, the event seems to have been appreciated across the board. “The feedback that we got is pretty positive about the opportunity to get a message out there to an investor and a general audience,” he says.

Lambert says events like Early Phase play a key role for startups. “Events like this are great for startup companies to get on their legs a little bit and see how they can position themselves in the biotech community,” she says.

Though the short-term impact of BioFinance Early Phase — in terms of providing companies with VC money — won’t be seen for several months, Holman says, simply providing the venue is an important step.

“Holding things, conferences and meetings, that are focused more on early stage companies who are at the interface between university research institutes and commercialization — we need to do more of that,” he says.

Being Heard
In the current climate, getting an investor’s ear may not only be the most important thing a startup needs to do, but also the hardest.

“I think what’s new is that (startups) have to come up with a much more compelling story,” says René Douville, vice-president of Life Science Ventures with RBC Technology Ventures Inc. (Toronto, ON). “It hasn’t gotten any easier to raise capital for a startup company. If anything, it’s become much harder.”

Douville says one difficulty in getting venture funds is that venture capital firms are being smarter and more cautious when it comes to investment and developing companies, aiming to make companies sustainable — or have the potential for sustainability — right from the start.

In this sense, he says, early stage venture funds have changed from several years ago, when the sentiment was much more, “one technology, one company.”

“That’s what we’re trying to do . . . give the company very early on the characteristics of maybe a bigger company in terms of sustainability,” Douville explains. “When I say that, it doesn’t mean brick and mortar and 50 people. It’s just enough technology in the pipeline so that if something fails, you have a fallback. And bring professional management early on, syndicate deals early on, bring other venture capital to the table so the company has a broader group of investors earlier on.”

Proceed with Caution


Despite the difficulties startups face when it comes to obtaining financing, companies shouldn’t necessarily be biting at the bit to get money from any potential source. Both Davidson and Holman urge startups to think carefully before finding a new bedfellow.

“The main thing I would probably say is be careful who you take your money from, in that you’ve got to live with those people for a long, long time,” Davidson says. “We have such high failure rates in drug development by its nature that what matters most is reducing the probability of failure. So picking the right people to be in business with is more important than just getting money.”

Holman agrees that startups should be cautious when looking for financing. “I guess you’ve got to make the decision as an entrepreneur raising capital — what comes with this money? And how that chemistry works between you and the investor,” he says. Echoing some of his comments as a panelist at BioFinance Early Phase, Holman says startups should put investors in the hot seat as much as the other way around.

“I can’t emphasize it enough — entrepreneurs should probably subject their potential investors to the same amount of due diligence as the investors do for them,” he says. “If you’re getting in bed with me, so to speak, for the next seven years . . . you want to make sure you’re getting in with the right cat.”

Funding Earlier On
While startups struggle to decide with whom to do business, financing seems to be an issue for biotech at much earlier stages in the process as well and some suggest that there is a role government could play that would help address these issues. Technologies coming out of universities could be further along in terms of development, Holman says, if government provided early proof of principle funding.

“Grants in the U.S., they typically have what I’ll call applied research grants, which are not basic research grants,” he says. Pointing to the CIHR’s Proof of Principle Initiative, which invests between $50,000 and $100,000, as an example, Holman says such applied research money is out there in Canada, but not at the required level.

“I think that if (CIHR) scaled a program like that so that they’d be awarding much larger amounts of money to things for applied research — so no longer basic research — we as VCs, and as an industry, would see mature opportunities coming out of the university,” he says.

The idea of government funding earlier research is one that Davidson agrees with and says would help address some of the challenges startups face.

“We play in a global market, and more particularly in a North American market and . . . North American academics have access to much larger grants to do translational or therapeutic development of their basic research. So Canadian startups are working at a disadvantage,” Davidson says.

“It’s something that we as a nation sort of need to address and step up and provide bigger grant funding to academics — but it has to be concentrated on funding therapeutic development, not more basic research — and it has to be very focused and directed,” he says. “When we do that, then we’ll be enabling our biotech industry to be more successful and play at a level playing field.”