Early stage platform startups, a smart investment?

I recently had a call with an entrepreneur who wanted to spin out a platform technology from a university and during the course of the conversation the entrepreneur paused to say “why are we even having this chat, its not like you are going invest in an early stage platform anyway”.  I thought the entrepreneur had to be joking and took the comment in stride.

After the call I dialed up a few VC friends to ask them if they too had heard a similar refrain from entrepreneurs.  They confirmed that my conversation with the entrepreneur was not an isolated incident.  It would appear that quite a few entrepreneurs, or possibly one very vocal entrepreneur, seem to think that VCs hate platform companies.  Sure there are challenges with platform investments (finding the killer app, development timelines, capital required, etc.), but that does not imply that platform deals are dead on arrival when they hit a VC’s inbox. 

VCs do invest in platforms and will continue to do so for the foreseeable future.

I thought it might be helpful to walk through how I analyze platform investments, how that analysis can be applied to a well known university startup, and finish up with a short list of some up-and-coming platform plays.

My platform investment checklist:

First, it is always a good habit to start a diligence process by looking at an investment through the eyes of the ultimate acquirer, which is almost always a pharmaceutical company.  After I put on my best pharma exec face, I begin to analyze the following:

Scientific founder: The most valuable platforms are those that solve unmet needs and provide significant technical hurdles that prevent (or at least delay) other groups from being able to reengineer the discovery.  There in lies the rub for investors.   Bleeding edge discoveries are risky because the work is so new and sophisticated that few, if any, outside groups can replicate it.  Therefore, trusting the quality of the work is essential, which is why many VCs turn to founders that they have worked with before.  Also, choosing the right founder to invest behind can have significant advantages when it comes time to build partnerships and ultimately sell the company as many top researchers have deep industries ties that they can leverage.

Managerial talent: Developing a platform requires a lot of skill and know-how, therefore building a team that can nurture the development of the technology is essential to the ultimate success of the startup.  On top of that, choosing the right lead indication and backup programs requires significant skill.  The challenge is formidable, which is why many VCs turn to entrepreneurs they have worked with before.  That is also the same reason that CEOs tend to choose teams they have worked with before.  Experienced CEOs know that platforms are always more challenging than investors predict, which is why they want battle-tested people around them when the going gets tough.

Ability to generate value quickly:  Platforms have to be able to reach a significant inflection point after two rounds of venture investment.  “Significant inflection point” can have many meanings, but I would describe it as a stage where there is enough data in hand for a pharma company to hang their hat on and give significant thought to acquiring the platform. 

Acquirer integration:  Run tests and assays as if you were a pharma company, which helps make the startup “integration ready”.  However, there is always a tug of war between penny-pinching and going overboard with development costs.  VCs certainly do not want their portfolio companies spending their money profligately, but they also do not want to risk skipping an assay or clinical end point that an acquirer values. I always encourage companies to ask pharma companies what they think.  You would be surprised how open pharma can be when it comes to giving out advice.  While you do run the risk that the pharma could change their stance over time, you do at least get some input as to what should be done to be acquirered.  

Lead program: Pharma companies typically buy startup companies because the lead molecule is too good to pass up / provides a strategic benefit for the company (ex: Daiichi acquiring Plexxikon), or because the platform has shown early promise for its ability to spawn numerous products (ex: Gilead acquiring Arresto Biosciences).  It is rare that pharma companies buy startups because they value both the platform and the lead molecule, as pure platform acquisition typically occur before the lead is in late stage development while lead product acquisitions are the reverse.  Therefore, platform companies must nail down the platform to entice an early platform takeout by an acquirer, but also have a strong lead molecule in development to provide a safety net should the company not be acquired early.    

Breadth of platform: This typically does not matter a whole lot, as VCs typically prefer to see 2-3 possible indications that a small startup can support, rather than a litany of indications that only a large cap pharma could handle. 

Tranching the investment: This is becoming more common in early stage platform investments as VCs look to better collaborate with startups on goals and expectations for the company.  I like tranching as it bakes in an inflection point where all stakeholders must provide an honest assessment of how the company is progressing.

Syndicate partners:  The average length of a holding period for life science VCs is a little more than 7 years.  Given that time frame, it is essential to surround yourself with people you can work with, who have capital, and are willing to support the company with you should it hit a rough patch. 

Case Study: Promedior – Rice University

Scientific founder: Promedior is based upon the research of Dr. Richard Gomer and his associate, Dr. Darrell Pilling.  Dr. Gomer is an expert in cell counting and enumeration, and he is an HHMI alumnus (2000-2005). 

Key Discovery: Scientific founders discovered a naturally occurring blood protein that prevents dangerous scar tissue from forming.  Depletion of serum amyloid P (SAP) causes bone marrow derived cells to migrate to the site of injury and produce collagen, the main component of scarring. SAP orchestrates the type of microphage that shows up at the wound, is also dominant over the traditionally accepted cytokines in the fibrotic process.  By pumping up the levels of SAP, Drs. Gomer and Pilling showed that fibrosis could be inhibited in mouse models.

Managerial talent: The CEO, Nick Colangelo, has an ideal mix of industry, entrepreneurial, and domain experience.  While not a scientist by training, Mr. Colangelo has significant drug development experience and was a founding Managing Director of Lilly Ventures.

Ability to generate value quickly: While fibrosis is a very difficult disease to treat, there are several in vivo models that can tease out possible efficacy early on in a program’s development.  For instance, a methacholine challenge model for asthma is widely accepted, cheap, fast, and easy to perform. 

Acquirer integration: A key step for Promedior is showing pharma that the company can successfully produce their protein at scale.  Once the protein is produced at scale, the acquisition would be rather turn-key.  The challenge for the acquirer would be to figure out how to choose what markets / programs to go after.

Lead program: Promedior’s lead product, PRM-151, is in clinical trials to analyze if it can prevent scarring that typically occurs after glaucoma filtration surgery, a niche condition that could afford the company orphan drug status.  VCs like ophthalmology because you can get a pretty good idea of a drug’s efficacy early on its development, studies require relatively few patients and can be performed quickly, and typically the diseases being addressed are chronic in nature.  Promedior’s lead program will build out the efficacy and safety profile of their protein in a relatively cheap and efficient manner.

Breadth of platform: There are dozens of fibrotic diseases, including atherosclerosis, asthma, cirrhosis, scleroderma and pulmonary fibrosis.  There are also numerous fibrotic diseases a small company can tackle such as asthma, NASH, idiopathic pulmonary fibrosis, and diabetic retinopathy.  The challenge is less to develop platform itself, but more to choose the right first indication and to nail it.

Tranching the investment: While tranching milestones were undisclosed, it appears that the Series A extension was timed with the filing of the company’s first IND.

Syndicate partners: Forbion, Polaris, Morganthaler, HealthCare Ventures have invested about $40 million to date.

Intangibles: Could be first treatment that prevents the build-up of deadly scar tissue in a broad class of diseases that account for an estimated 45 percent of U.S. deaths each year.  Since there are no FDA-approved treatments to prevent fibrotic tissue from forming, doctors typically consider fibrosis to be an irreversible process, and they try to slow it as much as possible with anti-inflammatory and immunosuppressive drugs that have serious side effect risks. 

Up-and-coming platform companies

• Anosos Biotherapeutics (UPenn)
• Envoy Therapeutics (Rockefeller)
• Helix Therapeutics (Yale)
• Origen Therapeutics (UC Berkeley)
• Redwood Biosciences (UC Berkeley)
• Synbody Biotechnology (Arizona State)