What is the Role of Venture Capital in Drug Discovery and Development?
Alexandra Snyder
Generate Biomedicines
@generate_biomed
T

he collapse of Silicon Valley Bank (SVB) in March 2023 sent a frisson of concern through the biotechnology and tech industries, given the significant implications the bank’s failure had for some banks and early-stage companies. Because SVB was widely known as the venture capital industry’s leading bank, it immediately raised questions about the role that VCs play in determining the financial fortunes of biotechnology startups. This leads naturally to a related question that I will address in this essay: What is the role of venture capital in drug discovery and development?

Thinking About the Role of Venture Capital

Venture capitalists are relatively new actors in the industrial ecosystem, with the first examples traced back to Silicon Valley in the decade after World War II. The emergence of the biotechnology industry 50 years ago with the discovery of gene splicing and the creation of Genentech and the first generation of biotech firms was enabled by venture capital. Since then, the venture capitalist has become a familiar figure in biotechnology; as Sebastian Mallaby notes in The Power Law: Venture Capital and the Making of the New Future (New York: Penguin Press, 2022), “their job is to look over the horizon, to reach for high-risk, high-reward possibilities that most people believe to be unreachable.” At the same time, venture capital is an approach based on probabilities: that a large portfolio of bets on companies will include a few that generate outsized returns to compensate for the many bright ideas that will inevitably fail to make the transition to companies that have impact and value. So how do these insights apply to drug discovery and development?

I admit that when I was in academe or working in a large pharmaceutical company at earlier stages in my career, I never really understood the ways in which venture capitalists shaped new biotech ventures. But now that I have had more experience in early-stage biotechnology companies, I can suggest several dimensions of the relationship between venture capital and drug discovery and development that help us to understand how to improve the probability of success in risky R&D ventures. These dimensions can be grouped into two distinct areas: resources, and relationships and networks.

Resources

First, and most obvious, venture capital provides startups with the financial wherewithal to try to translate their scientific ideas into an organization that can provide value and impact in the marketplace by meeting an unmet medical need. But it’s not just a question of providing money: Venture capitalists also help the companies in which they invest learn how to use that capital efficiently and how to allocate resources. The main objective is to derisk the core idea behind the company so that other investors will be encouraged to participate at later stages of the company’s development.

VCs are not all alike in their approach. Some are trained as MDs or in basic science, and they may have a different perspective than those who come from finance. Different VCs have different risk appetites. Some want to invest at the outset of a new venture by backing key people rather than products. Others invest because they like where the company’s pipeline is headed, while those who may be more risk-averse prefer to wait until the platform is shown to work. As companies build a track record of success, investors may be willing to have the management team take on riskier projects.

Throughout these different stages of a company’s early development, the way in which value is defined will change, as will the assessment of acceptable risk. An interesting example of this relationship and how it had unanticipated effects in early oncology drug development comes from a commentary published last year in Nature Medicine. We analyzed 39 clinical holds in early oncology drug trials between 2016 and 2021. We found that early toxicity events often had a negative impact on company valuation, but that the information from dose optimization often led to better understanding of the benefit-risk profile of the therapy and, ultimately, better patient outcomes. Share price movements caused by investors penalizing platform developers for transitory challenges encountered in the development process may result in a skewed understanding of a drug’s mechanism of action and disease biology—and stifle innovation in the long run. So, decisions made by venture capitalists investing in early-stage biotech companies can either enable or hinder the drug discovery and development process, depending on the depth of scientific understanding and risk appetite of the VCs.

Relationships and Networks

Second, venture capital also brings a wide range of relationships to the team running new drug-development startups. These relationships bring diverse experiences and skill sets to the company, providing perspectives on scientific direction and how to surmount organizational challenges early on. Because venture capital firms may have worked with dozens of portfolio companies, learning how to build and scale new companies efficiently, their guidance as board members or advisors can help a management team “see around corners” as they begin to build their own organization. Their insights based on wide-ranging engagement with other corporate cultures, business processes, and people help the companies in which they invest to create new processes and a culture that enables them to move quickly and avoid the entanglements of a legacy culture that can slow the pace of change.

Another aspect of the relationship between venture capitalists and drug discovery and development startups is that people invest in others based on trust. This is often a function of prior relationships, sometimes built over decades of work in the relevant intellectual and industry communities. Those relationships are a critical element of the assets that venture capitalists bring to their collaboration with new startups.

Finally, venture capital brings a range of networks to the drug-development startups with which they work. They have connections with other investors, with scientists and potential partners at other companies, with academics who can help with platform development, and with suppliers who will be critical as companies begin to scale their efforts. Being able to alert the management team to the right people with the right skills is an indispensable element of how the VC’s networks help companies to scale and to create a valuable business with real impact. The kinds of skills required will be different at different stages of a company’s growth, but good venture capitalists have networks that are both broad and deep and can be helpful at different stages.

A related aspect of these networks is that they often operate in geographic clusters of innovation. It’s not a coincidence that many drug development startups are located in the greater Boston area, for instance, where there is proximity to venture capital firms interested in biotech; to many universities that are ready sources of technical experts in a range of scientific, computing, technical, and business disciplines; to hundreds of companies with complementary platforms and products; and to suppliers of the many inputs that drug discovery and development requires. The proximity of people with money and people who are doing the work in places like the Boston area also facilitates movement from academe to biotech startups, and from biotech to venture capital. Talent attracts other people willing to take risks, and the concentration of talent in such innovation clusters makes it easier for drug discovery and development startups to find the people they need.

Conclusion

Venture capital offers a way to translate science into impact. By bringing resources, relationships, and networks to bear in creative ways on the startups with which they work, venture capitalists can help these companies increase their probability of success. There is much more to discuss—for instance: What role does diversity play in recruitment to drug discovery and development startups? And are venture capital firms (still largely run by white males) alert to the way in which working with more diverse networks could yield a larger universe of choice as people think of the next idea to test and how to make it work? Are they pushing their portfolio companies to address these issues, to recruit a more diverse workforce and to ensure that recruitment to clinical trials is more representative of the populations that they hope to benefit?

On a related note, many investors are raising expectations for companies to take environmental, social, and governance (ESG) issues seriously: Are venture capitalists also urging their portfolio companies to take on these questions? Our conversations suggest that these concepts are becoming standard considerations within VC and biotech, but there is still much work to be done. For now, it is clear that venture capital has played an important role in nurturing the success of new drug discovery and development startups—from the earliest gene-splicing companies to today’s cutting-edge work in generative AI.

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