Science? Management? Indication? Why VCs might say no to your Deal

Science or technology that fails to measure up and weak leadership make for sure-fire deal-killers in the venture capital (VC) world, but there’s more to it, said Jay Lichter, managing partner with Avalon Ventures in San Diego.

Cost as a thwarting factor is one that Avalon has “seen more of recently, in the past year or two, [where] in terms of getting it out of academia or an existing company, the price doesn’t correlate to the risk and the dollars required to get a good outcome,” Lichter told BioWorld Today. Immuno-oncology proposals are “all overpriced now,” he said, citing a would-be collaborator who recently approached and was turned down. “It’s a first-time CEO on the East Coast. Not in Boston, so he’s kind of isolated, he’s got no community around him. I don’t care how good [the technology] is, and I don’t care how good he is – first-time CEOs make mistakes. Not because they’re bad people but because they don’t have the experience. The way I mitigate that is, I bring my first-time CEOs to San Diego so I can meet with them once a month or every couple of weeks.”

The geography piece “is definitely an issue, certainly for us, and I think for others as well,” Lichter said, mentioning a prospect in Asia. “We loved the technology, and we think it’s going to be really important. Didn’t love the guy. He was OK, [but] difficult to work with.” On balance, “when you talk about something that’s going to be 10, 12 or 15 hours away by plane, it’s just not feasible,” he said.

Therapeutic areas matter much. Certain indications get nixed quickly “because the phase III trials cost $200 million, $300 million, and you can’t raise that as private equity or maybe even public equity,” Lichter said. “So that path forward is gone. All you have left is a merger and acquisition [M&A] opportunity, and without the threat of going public, the price of an M&A goes way down. If somebody wanted me to do a diabetes or Alzheimer’s program, I wouldn’t touch it. These are seriously expensive, long trials. It would be impossible, even if you’re successful in the first financing, with diabetes in particular. You get a little phase II trial to work, you lower HbA1c. That’s great, but when you look at the [regulatory pathway], you need a nine-month-to-a-year study, and then a cardiovascular outcomes study,” which make the effort less than cost-effective.

Lichter looks for first-in-class compounds. “I’m pretty much not interested in the fast-follower strategy,” he said. “You don’t get the pricing you need. You might be able to get some benefit from the product that’s ahead of you, if it’s in the same mechanism [of action]. You’d have some comfort that phase II trial would likely work out. But if you’re third or fourth on the market, your market share is going to be 10 percent or less, 5 percent.” He pointed to a recent pitch in the platelets/coagulation space. “There are plenty of products out there that people use all the time, and this guy comes up with an idea that’s 7 percent better,” he said. “I’m not going to spend time and money on incremental improvements on existing medicines.”

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