IBAB-BBC

Playing the Odds as an Indian Life Sciences Start-up

Kaushik Gala

8 August 2016

Science & Technology in India

2

• As much as 2/3rd of R&D spend in India is by the Government, amounting to over INR 25,000 crore (CSIR, DAE, DRDO, ICMR, DoS, ICAR, DBT, DST, …) across 25,000+ scientists, each year.

• CSIR-Tech Private Limited has access to nearly a 1/3rd of these R&D assets – IP, knowhow, scientific capabilities & expertise, infrastructure, brand.

Catalyze LabMarket

3

R&D Institutions

Process Technology

Product Technology

IP Rights

Scientists’ Time

Infrastructure

Brand

CSIR-Tech

Global Industry

MNCs

MSMEs

Entrepreneurs

Technology Transfer

’Directed’ R&D

Spinoffs / JVs / Investments

Mechanisms

India Science Venture Fundhttp://www.isvf.in

CSIR-Tech Pvt. Ltd. is raising an INR 70 crore fund to invest in, and build, high growth innovative enterprises that leverage science & technology as an edge for global markets.

4

An Early Stage Science-Focused Venture FundProof of Concept to Revenue

5

Incorporation, Incubation

• INR 10s of lakh by promoter, grants, incubators

ISVF Round 1

• INR 1+ crore, of INR 2 - 3 cr

• Target: Commercial prototype, beta customers

ISVF Round 2

• INR 3+ crore, of INR 5 - 7 cr

• Target: INR1cr+ revenue

Series A

• INR 10 – 20 crore by growth-stage VCs

Advanced Materials Advanced Engineering Life sciences , Healthcare

Specialty chemicals, nanomaterials, biomaterials

Infrastructure, oil & gas, defense, aerospace , energy, automotive

Medical devices & equipment, biotech, plant medicine

VC-funded Biotech Startups

6

Startup Investors

Mitra Biotech IIF, KITVEN, Tata Capital, Accel

vLife Sciences (Novalead) Tata Capital, Kotak

Invictus Oncology Ratan Tata, Sabre, Navam, Aarin

CuraDev ICICI, Sabre?

Vyome BioSciences Navam, Sabre, Kalaari, Aarin, Romulus

Consure Medical IIF, Accel

Vitas Pharma IAN

Connexios Nadathur Holdings

Seagull BioSolutions BMG, ICICI

Shantani Proteome Analytics DBT, IIF, Blume

BugWorks IAN

Theramyt Novobiologics Aarin, Accel, IDG

Intas Bio Tata Capital

Strand Life Sciences UTI Ventures, WestBridge, Sequoia, Medibic, Burrill/Biomark

Note: Some of the above have also received TDB/NSTEDB seed fund & DBT grants.

80+ Medtech (funded) Startups

7http://xeler8.com/blog/2016/07/08/medical-devices-startups-adding-affordability-to-the-lives/

New (LifeSci/Healthcare) VC funds

8

• Endiya Partners

• Unitus

• HealthQuad

• Bharat Fund

• Villgro – Menterra

• Axilor

…

Why India Science Venture Fund?

• Indian VCs focus on:– IT products & services, BFSI, E-commerce, B2C ventures (65%+*)

• Less capital intensive than science/engineering ventures

– Strong, unfulfilled demand from science/engineering ventures in INR 60 lakh – 6 crore (US$100K - US$1M) range • Valley of Death funding

• Pure Investment vs. Company Building– Early-stage VCs focus on creation of large portfolio versus

concentrated investing combined with building businesses

• Publicly-funded R&D →Maximum Wealth Creation via Spinoffs– Global successes are in life sciences & healthcare!

9* India Venture Capital Report- 2012, Venture Intelligence

Understanding the Odds of an Indian Life Sciences Start-up

10

life sciencesWhy start & build a ^ startup?

11

धन्धा

Early Exit } ₹$£€ in the bank!

12https://twitter.com/markstraub/status/745660945070907392/photo/1

Change the World or Go Home.

13

Wealth vs. Health

14

Company Size = Zipf Distribution

15

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# Companies vs. Annual Revenue

http://science.sciencemag.org/content/293/5536/1818

VCs Unicorns

16

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# Companies vs. Revenue

17http://blakemasters.com/post/21869934240/peter-thiels-cs183-startup-class-7-notes-essay

VC: Go Big or Go Home!

Portfolio Math

18http://techcrunch.com/2014/05/24/deciphering-the-economics-of-venture-capital/

0-1X 3-5X 10-1000X

Venture Capital Economics

• Target 18%+ IRR over 8 years (= 4X RoI - fees)

• 10 investments: 5 bust + 2 B/E + 2 4X + 1 30X

• 100 crore fund (10 * 10 crore)

Average exit of 80+ crore (10, 10, 40, 40, 300)

Biggest exit of 300+ crore

Target valuation of 1200+ crore @ 25% stake

Revenue of 200+ crore @ exit

19http://santeventures.com/wp-content/uploads/Why-Venture-Doesnt-Scale-Sante-Ventures.pdf

30X or Bust!

20

“Entrepreneurs should understand the ‘unwritten’ term in the term sheet: few VCs will willingly part with a ‘winning company’ (i.e., a company that is executing/performing well) for less than a 10x return.” – Josh Kopelman

Funding = Double-edged sword

21Credit: Maneesh Bhandari, CIIE Pune, Bharat Innovation Fund

$

$$

$$$

Money has the Same Color? No!

• Customers

• Strategic partners

• Self/Family/Friends

• Government grants

• Professional angels

• Venture Capitalists (VCs)

• Rookie angels/VCs

• Real estate developers

22

The 3Cs That Matter

23

Control

Capital

Counsel (esp. in Sciences)

What Are The Odds?

24

< 2% startups get multiple VC investments

< 5% of VC-funded startups get big

(10X – 1000X) exits

Your odds of raising VC & getting big exit <

1 in 1000

Time to large exits ~ 7 – 12 years!

Why These Odds?

25

Large / Very fast growing global

market

Star team / Domain expertise / Past successes

Appetite of (Indian)

investors

Huge buyer/IPO multiples

Time to large exits ~ 7 – 12 years!

(Life) Science = Too Difficult!

26http://www.nasdaq.com/article/energy-storage-the-valley-of-death-and-the-elephant-hunters-cm52715

LifeSci vs. IT: Cognitive Minefield

• Availability bias

– Recent ‘successes’ – Ola, Flipkart, …

• Bandwagon effect

– Entrepreneurs, angels, VCs, …

• Stereotyping

– All biotech is expensive | risky | long-term

• Ignoring base rates

27

Blood vs. Bits

Peter Thiel: http://0to1.com/28

Investment Readiness LevelTherapeutics

http://steveblank.com/2014/02/25/is-this-startup-ready-for-investment/29

Investment Readiness LevelMedical Devices

http://steveblank.com/2014/02/25/is-this-startup-ready-for-investment/30

Investment Readiness LevelDiagnostics

http://steveblank.com/2014/02/25/is-this-startup-ready-for-investment/31

VCs All or Nothing Bets

32

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# Companies vs. Revenue

But, You Can Play The Odds!

33

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# Companies vs. Revenue

4X in 4 years = 30X in 10 years

34$ $$$$

Strand Life Sciences

35

2000

• Founded

2001

• UTI Ventures invests $1.3M for 17%

2002

• Sequoia-Westbridgeinvests $1.7M for 20%

2008

• Break-even

• Cumulative $2M in govt. grants

2009

• Revenue target Rs 30 crore (?)

2013

• BioMark/Burrill invests $10M for 50%+ (?)

• Buys out VCs

2014

• Revenue ~ Rs 45 crore

2016

• Failed NASDAQ listing

(Life|Material|Engg)Science Startups

Not quite the same as software|web|mobile.

36

Chances of Failure: 99%

http://www.amazon.com/Crossing-Chasm-Marketing-Disruptive-Mainstream/dp/006051712337

Not 1, But 3 Chasms to Cross

http://www.acceleratorindia.com/download.ashx?id=538

Value of Technology Over Time

39http://www.mckinsey.com/insights/operations/the_path_to_improved_returns_in_materials_commercialization

Cost of Technology over Time

40http://arxiv.org/abs/1502.05274

Commercialization of NCEs/NBEs

41

Commercialization of Med Devices

42

Laparoscopic instrument –

LicensedOut!

Fecal Incontinence bag - FDA Approval!

AIIMS Stanford India Bio Design

Arsenal Medical

43http://arsenalmedical.com/

“only work with materials that had already been used in an approved medical device in the human body, and there was already FDA information and safety information about that”.

“Leverage existing materials and use new process technologies –use new ways of creating composites out of materials, and avoid the risk of scaling new molecules or new chemistry”.

Early partnerships + Govt Grants + VC $ > VC $$$

Digital Medicine

44http://libgen.io/scimag/get.php?doi=10.1038/nbt.3339&key=PVNK06EO6RE4CIDP

Digital Medicine

45http://libgen.io/scimag/get.php?doi=10.1038/nbt.3339&key=PVNK06EO6RE4CIDP

Digital – Medicine - Digital

46http://libgen.io/scimag/get.php?doi=10.1038/nbt.3339&key=PVNK06EO6RE4CIDP

Best of Both Worlds

47http://libgen.io/scimag/get.php?doi=10.1038/nbt.3339&key=PVNK06EO6RE4CIDP

Improving the Odds of an Indian Life Sciences Start-up

48

Value of a Science Startup

• Dividends

• Cash Flow

• Profits/Earnings

• Revenues/Sales

• Users

• Team, CXOs

• Intangible assets: Brand, IP/Knowhow

• Tangible assets: Infrastructure, Cash reserves

49

What is Biz-Dev?

Systematic way to rapidly create, and realize, value of your science startup.

50

Biz-Dev Continuum

51

Complexity

Sales Agent

Reseller, Distributor

LicensorOEM

Systems Integrator

Alliance Partner

CustomerStrategic Investor

Acquirer

Create Value

Realize Value

Biz-Dev in B2B/B2G Context

52

Sales Agent

Reseller, Distributor

LicensorOEM

Systems Integrator

Alliance Partner

CustomerStrategic Investor

Acquirer

Build & Manage Relationships.

Scientists convince; Marketers persuade.

http://sethgodin.typepad.com/seths_blog/2012/11/persuade-vs-convince.html53

Figure out Whom to Influence

http://www.amazon.com/Managing-Channels-Distribution-Marketing-Executives/dp/0814431798/54

How Do They Fit In?

https://www.safaribooksonline.com/library/view/disciplined-entrepreneurship-24/9781118692288/21_chap12.html

55

Understand B2B Buying

56

Politics

• CXOs versus Managers versus Users

• Promotion or Penalty?

• Org Culture: Lalas, Babus, Silos, 2nd gen ???

Precedent

• In-house alternatives (‘NIH’)

• Legacy technology, incumbents

Process

• Budget timelines, committees, approvals

• Business case / RoI / Pay-back

Pricing

• Purchasing Dept: Discounts, tenders, ..

• Payment terms, milestones

• PoC / Prototype / Pilot

Pricing Continuum

57

₹1K ₹10K ₹1L ₹10L ₹1Cr ₹10Cr ₹100Cr

Wearable

Lens

Stent

Instrument

Therapy

Vaccine

Molecule

B2B

http://www.nextbigwhat.com/startups-doing-business-with-corporates-sanjay-swamy-297/58

BigCo

• Complex sales cycle

• Free, Exclusivity, ROFR

• Trust, Track record

You

• The New, New Thing

• Fast, Custom

Establish (Tech) Credibility

59

• Scientific/Technical

– Publications, patents, pedigree, awards, white papers, …

– Peer references

• Talk about what only (few of) you can do in the world

• Seek advice on risks to Proof-of-Concept / Product

Make ‘em Curious

60

• Awareness

– Website, Email, Social Media, Conferences, Newsletters, …

– Personal networks (alumni, ex-colleagues, F&F, …)

• Build & Maintain Relationships

– One a day

– Contextual• Org Chart

• Resume

• Commonality

Medical Devices: Design to Value

https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Pharma%20and%20Medical%20Products/PMP%20NEW/PDFs/774172_Design_to_value_in_medical_devices1.ashx 61

Hunt in Pairs

62

Capital Efficiency + Injection

Convert CapEx to OpEx, KFE

Risk capital at PoC, seed stage

Business Development

Active customer discovery

Channel & biz-dev partners

Startups, SMEs vs. Spinoffs

R&D + Capital in existing SMEs

Risk appetite, business sense

India → Global →India

Make in India, scale outside

E.g. SaaS, biotech startups

Strategy to Scale R&D Spinoffs

63

Skin in the Game

• Founders

– Full time!

– Equity split, Cap table planning

• Advisors

– Investment?

– Equity/Success Fee Deliverables ?

• Employees

– Opportunity Cost

64

Exiting a Science Startup

65

Create → Realize Business Value

66

Start ₹ PoC ₹Prototype

₹Pilot / 1st

Sale₹

Customers

₹ … IPO

₹ - Own, Grants, Angels, VCs, Banks, …

Realize Business Value

• Share sale (IPO)

• Dividends

• Secondary share sale (VC/PE/Bank)

• Company sale (M&A)

• Early Exit

Odds?

67

Skin in the Game

68https://www.svb.com/ma-analysis-2011/

• Structured deals are the norm (vs. ‘all-in’)

• Creativity in BizDev– an equity-only transaction

– an option to acquire

– an option to license

– a traditional licensing deal

– a services sale

– an intricate multi-asset development collaborations

Work Backwards

69

Early Exit @ ₹100+ crore in 5 – 7 years

Revenue Target @ ₹20+ crore in 4 – 6 years

Revenue of ₹2+ crore by Year 3, growing at 100%+ p.a.

ASP of ₹5 - ₹25 lakh * 10s of new customers / year

Investment of ₹15 - ₹40 crore over 3 years

A Drug Discovery Startup

70http://www.the-scientist.com/?articles.view/articleNo/26630/title/Detailing-the-biotech-life-cycle/

Value Inflection Points: Therapeutics

71https://steveblank.com/2013/08/19/reinventing-life-science-startups-evidence-based-entrepreneurship/

BugWorks

72http://bugworksresearch.com/our-business-strategy.html

Value Inflection Points: Devices

73https://steveblank.com/2013/08/20/reinventing-life-science-startups-medical-devices-and-digital-health/

CE Mark

Probabilistic Thinking

74http://slideplayer.com/slide/5681592/

Expected Value Thinking

75

Start

Seed $ (PoC)

Series A (Pre-clinical)

Series B (Phase 1)

Series C (Phase 2a)

Phase2b →M&A

Bust / Exit

Bust / Exit

Bust / Exit

Bust / Exit

Bust / Exit

Probability

1

0.3

0.1

0.025

0.005

0.001

Exit

$

$$

$$$

$$$$

$$$$$$

$$$$$$$$

Time

Y0

Y1

Y2

Y4

Y5

Y8

Escape (Velocity) or Exit

76Credit: Maneesh Bhandari, CIIE Pune, Bharat Innovation Fund

http://techcrunch.com/2014/03/15/avoid-stagnation-why-acceleration-trumps-incubation/

Odds of VC $$$ + big exit are lowand incentives are misaligned,

butLifeSci entrepreneurs can build, control the option for early exit.

77

What is an Early Exit?

• Valuation < ₹ 50 crore

• Founder RoI < 10X, including opportunity cost

• Partial exit

– One candidate out of a pipeline

– Licensing vs. buy-out

• Build to Buy

– One & only ‘customer’

– Strategic investor

78http://www.exits.com/blog/exit-strategies-for-european-tech-life-sciences-companies/

(Early?) Exits in India

79

Whole bunch of ‘PE’ exits in big pharma, API, hospital chains, path labs, CROs, vaccines, etc.

1. CuraDev→ Roche, Immuno-oncology, $555M• Upfront = $25M, pre-C!

2. Sushrut-Adler Surgical → Smith & Nephew, $70M• 40-year old, Pune company

3. Stanford AIIMS BioDesign grads• Chinmay D. (Croleon) → Intuitive Surgicalvs. Consure Medical

Surf a Wave & Exit!

80https://lifescivc.com/2016/06/io-strategic-supernova-cancer-today/

Curadev

“A healthy venture creation process begins with the endgame in mind: how do you build a company around science that people will want – either investors or pharma (or both)”.

Nature of WW (Early) Exits

81https://www.svb.com/ma-analysis-2011/

• >50% exits are at pre-clinical / Phase 1

• Biotech vs. MedTech

– Quick & smaller vs. Slow & bigger

• US >> EU >> Asia

– Indian startups: Think cross-border from Day 1

Sweet spot: Late pre-clinical stage

Skin in the Game

82https://www.svb.com/ma-analysis-2011/

• Structured deals are the norm (vs. ‘all-in’)

• Creativity in BizDev– an equity-only transaction

– an option to acquire

– an option to license

– a traditional licensing deal

– a services sale

– an intricate multi-asset development collaborations

Milestone Fee$ can be Lucrative

83www.chandb.com/resources/20080617_Report_GigiDissertation.pdf

Reality Check on ‘BioDollars’

• Upfront ~ 20% of total deal value, trending down

– Curadev: $25M of $555M = 5% !!

• Only 1/3rd chance of earning milestone fees, for pre-revenue life sciences startups

– Delays, disputes, change of priorities, renegotiation, FDA approvals, lack of funds, …

• Total deal value is for PR only!

84https://www.mwe.com/files/.../LSRT-Presentation-Handouts-0615.pdf

Strategy to Exit R&D Spinoffs

85

Current Scenario: Analysis of 40+ Science/Tech Business Exits in India

Improve Outcomes: Actively Work Towards Quicker Exits

Businessstrategy

Started as trader/importer,distributor, services company

Focus on products (materials, chemicals, biotech, instruments, …)

Exit valuation

Exit valuations range from INR 5 crore to INR 500 crore

Target INR 50+ crore revenue & INR 200+ crore valuation

Exittimeline

10 - 20 years from founding to exit

Accelerate via injection of risk capital, lab R&D

Exitmechanism

Promoter/company buyback, M&A, Secondary sales

Early, strategic relations with corporate investors, acquirers

Valuation: B is in the of the B

1. Discounted cash flow (NPV)

2. Market comparables (Similar, recent exits)

3. Cost to replicate

4. Opportunity cost (What else can I do with $?)

5. Returns-based valuation (VC IRR)

86

Build to Flip

87www.chandb.com/resources/20080617_Report_GigiDissertation.pdf

Corporates Early Exits

• Ideas / Innovation / Disruption / New Products not their strength

– Scaling is their forte!

• Small ticket size ➔ Easy approval

– M&A budget > R&D budget

• ‘Corporate Development’

88

VCs’ Investees Early Exits

• दो और दो पाांच– Greater fool theory

• Don’t just sit there; do something!

– Cash burning a hole in the pocket

89

Thank you.

Kaushik Gala