A VENTURE-CAPITAL ADVENTURE
Thomas Tedder's journey started roughly two decades ago. As a principal investigator in the division of tumor immunology at the Dana-Farber Cancer Institute in Boston, he identified and studied molecules on B cells that control some activities of the immune system. In a healthy individual, a balance of B cells makes antibodies that fight off foreign matter. Overly active B-cell production, however, can turn on devastating diseases: cancers, including multiple myeloma and acute lymphoblastic leukemia, and autoimmune diseases, including lupus and rheumatoid arthritis.
While at Dana-Farber, Tedder developed antibodies that bind to CD22 surface receptors on B cells. In 1993, Tedder moved to Duke University in North Carolina, where he now chairs the department of immunology. There, his research team learned that CD22 antibodies might bring a wayward system of B cells back under control. In collaboration with oncologist Joseph Tuscano of the University of California, Davis, Tedder's antibodies also showed positive effects on human tumors in mouse models. Testing these ideas in humans, though, required funding to produce enough antibodies and then run clinical trials. Tedder wondered if everything would move faster by setting up a company to develop and manufacture the antibodies and other promising therapies evolving from his lab. Tedder says, "I had had collaborations with industry for a number of years. I had almost started a company before, and had licensed technology to a California company that was later bought out."
A TRAIL TO TRIALS
In early 2000, Tedder, Tuscano, and E. William St. Clair, a rheumatologist at Duke, set out to put these antibodies in clinical trials. As Tedder recalls, "I started asking: How in the world are we going to get these antibodies made so that we can get into the clinic?"
In 2003, a solution presented itself. An academic colleague and his business partner based in Boston got in touch with Tedder and offered to set up a company to produce the antibodies. Almost immediately, though, the process hit a roadblock. The CEO chosen by the colleague wanted to set up the company where he lived and where he could most easily arrange financing - a relatively common request in an industry that has few experienced candidates for senior executive positions. The problem was that the CEO lived in California, too far from Duke for Tedder's taste.
Then, another option emerged. To advise him on company development and biotech financing, Tedder had relied on Garheng Kong, a general partner specializing in life science at venture-capital firm Intersouth Partners, one of the few such companies in North Carolina, and, as it happened, a near neighbor of Tedder's. "I was happy to be helpful," Kong says. "Over time, I became interested in it from an investment point of view." So when the Boston opportunity faltered, Kong agreed to take over the project.
COLLECTING CAPITAL
Tedder decided to take on the lion's share of work to expedite the process. He notes, "It was faster doing it alone as all the intellectual property was owned by Dana-Farber Cancer Institute and Duke University." Still, he adds, "Bill St. Clair and Joe Tuscano were phenomenal cheerleaders." Through the Boston connection, Tedder had also met Paula Jardeau, senior vice president of biosciences at Prevalere Life Sciences and a former leader at Genentech. "Paula was instrumental in moving this forward, charting a path for clinical development, and convincing investors that this was a rare opportunity," Tedder says. "Dana-Farber Cancer Institute was also eager to move these therapies into the clinic."
The collaboration with Kong simplified things further. Traditionally, venture capitalists offer their investments only after the founders of embryonic companies have persuaded early investors to provide them with seed money and angel investors have come up with a slightly larger round of financing. However, Intersouth provided seed money that helped the company, called Cellective Therapeutics, to develop its business plan and to finalize licensing agreements with Duke University and the Dana Farber Cancer Institute. "In most cases, it makes sense for the scientist to focus on technology development and have a partnership with somebody else in which we help each other out," Kong explains. "I participated in the business formation and corporate strategy."
Intersouth didn't go it alone in providing the financial backing. "In biopharma, it always takes a team of financing partners," Kong explains. Late in 2004, he pulled together a syndicate that consisted of a mix of venture-capital firms and the venture components of large biomedical companies: Alta Partners, BA Venture Partners, Forward Ventures, Genentech, Latterell Venture Partners, MedImmune Ventures, and Sofinnova Ventures, in addition to Intersouth. "The process worked because we had something to go into clinical trials," Tedder says. "We had Series A financing of $27.5 million, one of the largest ever in the Southeast for a true startup. From that point everything snowballed. We went from the idea of a manufacturing company to having all the infrastructure to move molecules into the clinic."
Investors, however, don't just cough up the money and leave. Kong and Intersouth kept close watch on the young company. "I was a board member and very active with both Tom [Tedder] and the management of the company," Kong says. "It's important for active early stage investors to go to board meetings and be a resource for young companies as they are growing. You're part board member, part mentor, and part team member."
FOLLOWING THE LEADER
Venture financiers often help their clients find staff. So when a local manager chosen as Cellective Therapeutics' CEO failed to gain the confidence of the venture syndicate's members, Kong tracked down Arthur Mandell, an experienced biopharma industry manager as the new CEO. Investors welcomed the choice. "Even before he was on board, everybody wrote checks," Tedder remembers.
At that point, the issue of relocation emerged again. Mandell lived in the Maryland suburbs of Washington, DC. Unlike North Carolina's Research Triangle, suburban DC boasted a cluster of antibody companies and executives with strong resumes in the field. Since Mandell had extensive contacts among those groups, moving Cellective Therapeutics to the DC area made sense. "As the company didn't have many employees, it was easy to do from a logistical point of view," Kong explains. "We asked how important it was to have Tom's laboratory near the company." This time, the option of hiring experienced managers quickly won out. The company made the move, Tedder says, "and Mandell pulled together a great management team very quickly."
The move proved more successful than Tedder and his team had anticipated. It actually provided a rapid exit strategy. "After six months, people started making overtures to buy the company," Tedder explains. "At the one-year anniversary MedImmune [a biomedical company based in Gaithersburg, Md] bought it lock, stock, and barrel."
With the company created and sold, what lesson did Tedder learn? "You have to be cautious about the people you deal with," he says. "When people are out to make money, they won't necessarily share your vision." This lesson would help most academic scientists interested in raising capital for a start-up. It's important not to underestimate investors, however. "You have to have substance," Tedder continues. "These people can smell out fluff. The really good ones realize what quality is."
Tedder includes his venture partner among those really good ones. "I can't say enough positive things about Garheng," he says. "Our partnership meant the difference between success and failure. He was the most honest, upfront person I met during the whole process. We both made mistakes, but I never doubted his commitment and his integrity." Kong is equally gracious about his scientific partner. "Tom was very good at letting the business part be done by others," he says. "It can be difficult for scientists who have spent decades of their lives doing something to let it move beyond them."
Tedder also learned that no amount of work with venture capital guarantees the desired result. His CD22 antibody still hasn't made it to the clinic. However, Cellective Therapeutics - under its new owner - does have three antibodies headed in that direction. Tedder, meanwhile, continued his corporate career by helping start another company called Angelica Therapeutics, which also aims to turn antibodies into therapies. And Tedder's success in starting up and then selling Cellective Therapeutics earned him some fame in the financial community. "It's been over a year now," he says, "and venture capitalists still call me."
What VCs Want - and Don't Want
How do venture capitalists and other financiers judge proposals for funding biotechnology and biopharmaceutical ventures? What do they expect to see in the proposals? And what sets alarm bells off and red flags waving which lead to refusals to invest? Here, a group of venture capitalists explain what would-be entrepreneurs should and shouldn't do when they approach the financial community.
Having the Right People
"The people are always the most important," says Garheng Kong, general partner at Intersouth Partners, a venture-capital firm based in Durham, North Carolina. The reputation of the scientific team helps. "They don't have to be Nobel laureates, but we look at how they are regarded in the community," explains Terry McGuire, managing general partner and co-founder of Polaris Venture Partners in Waltham, Massachusetts.
Investors also critique team members outside the laboratory. "It's not just the scientists we look at, but the quality of the rest of the management team," Kong says. Entrepreneurs shouldn't worry if they haven't assembled a management group, however. "We're absolutely prepared to help build a team," McGuire says. "It's meant to be a partnership; we work together to find the right people."
Sensing the Investing Climate
A feel for the investment climate is also important. "It sets off the alarm bells if a presentation looks too much like an academic effort," McGuire says. "We're looking for things that are novel enough and credible enough to approach a significant enough market opportunity," adds Peter Barrett, a partner in Waltham, Massachusetts-based Atlas Venture. "People spend a lot of time over market opportunities and resumes, but they are not succinct enough about the investment opportunity. We want to know if the investment required is something we'll get a good return on." Thus, a possible treatment of a cancer will attract more attention than a potential cure for hangnails.
How about a formal business plan? Not really necessary, McGuire says. "There's no business plan for 80% of what we do," he adds. "We see good science."
Looking for the Red Flags
Several issues, though, give investors cause to pause. Again, people play major roles. Barrett sees trouble "when people are not transparent - when they'll make up an answer or pretend they know more than they do. If they don't give you that confidence of their ability to do the work, that's a big red flag." Arrogance and similar characteristics can also set the red flags waving. "We have run across a reasonable number of Nobel prize winners and National Academy of Sciences members whom you can't work with," Kong says. "There are so many ups and downs and unpredictable situations; if you can't work with the person, the quality of the science doesn't matter." Scientists who refuse to hand over responsibility for running their companies to a professional manager can also create doubts among investors. "We've had scientists who want to remain in academia and in control of their companies, getting the best of both worlds," McGuire says. "But it's hard to do. If they're not prepared to ever let their science go, they probably don't want to start a business."
Would-be entrepreneurs should also recognize that proposals submitted to venture capitalists have significantly smaller chances of receiving funding than prospects that the venture firms track down through their own networks. "The vast majority of opportunities come to us, soliciting for financing or advice," Kong says. "But probably only half of the companies we invest in come from that avenue."
