Since 2020, in fact, the country has managed to significantly reduce the gap with the other European ecosystems, and the Life Science sector has always played a key role in terms of deals and size of rounds, to the point of accounting for almost a fifth of total investments (Growth Capital - Osservatorio sul Venture Capital – Italia Q4-23 & FY-23).
If we knew how to answer the first question, the matter becomes more difficult if we take a closer look at the Life Science industry. Since its foundation in 2007, Italian Angels for Growth (IAG) has seen this market evolve and expand both in terms of capital invested and number of specialized players.
Until a few years ago, the number of VC funds specializing in this market was very small, and this type of investor tended to invest only in established start-ups that needed capital for quite advanced stages, such as clinical phases. Today, however, the number of players who have seen the attractiveness of this segment and regularly invest in it has increased significantly. This new, higher level of competition among industry investors has prompted these players to look for investment opportunities in even earlier life stages of biotech start-ups.
But how can an investor ensure that he gets in touch with the best deals before its peers? By intercepting and supporting them before the company is born, before the team is established, before fundraising begins. In other words: by doing company building.
Company building for a biotech start-up involves a very precise process tailored to the specificities of the biotech vertical, which are largely different from those of any other sector - such as the long duration of the R&D phase, the high level of risk, strict regulatory requirements and the need for larger capital investments.
At first, this role of supporting the birth of start-ups was played by incubators and accelerators, but in recent years we have witnessed a clear shift in the focus of specialized funds towards this instrument, take Claris Ventures and Sofinnova Partners, among others. But it is not only a matter of winning the competition from other funds and intercepting deals before the others: this new approach has other, extremely important advantages for investors and entrepreneurs.
Let 's start with the basics. Italian research in the life sciences sector has always been appreciated internationally, thanks to the commitment and specialization of academies and institutes that guarantee a very high level of scientific quality. However, only in a few cases researchers aim to turn this research into start-ups, and entrepreneurial ambition is rare in academia. There are many reasons for this. Mainly, these professionals have a scientific rather than an economic or entrepreneurial background and come from contexts that in Italy still do not sufficiently favor business creation. This represents a limitation for the ecosystem but at the same time an opportunity for investors. The latter adopt the company building strategy because they will have the opportunity to create a start-up with a solid scientific basis and at the same time have a high percentage in the company's cap table. Thus protecting themselves from future dilution by subsequent rounds.
In simple words, it is a matter of building a start-up starting with the work of the researcher, building around the research project the structure and the people needed to turn it into a business, and of course the capital to invest. For example, to support the scientific project, it will be necessary to define the budget, collaborate with regulators, define an IP strategy, or talk to other investors.
Another major factor that leads funds to invest in earlier stages through a company building approach is the need for funds of a life science company. Being an extremely capital-intensive sector, a biotech start-up will need much more capital at an early stage than start-ups in other sectors.
An investment strategy of this kind allows the start-up to have the necessary financial backing to avoid interruptions and arrive without delay at the most important inflection points, which are also the main exit windows. By inflection points, we mean the scientific data obtained at the end of pre-clinical studies and those in the clinical phases. If life science start-ups run out of capital to invest in R&D before the planned time, the entire project is at risk. Thus, they cannot finish the studies to obtain the necessary data, which would allow the start-up to raise further funds and thus continue on the path of value creation.
The constitution of the entrepreneurial team is perhaps the most important aspect at this stage, particularly in the biotech field: if we are talking about a start-up in the very early stages of development, the team will have to have an almost exclusively scientific orientation in order to focus on research. If, on the other hand, we are talking about a start-up with a drug candidate already identified and on the way to the clinical phase, then the figure of a CEO who can build relationships with potential partners and potential acquirers will also be key.
Since its early years, IAG has always been at the forefront of the pre-seed and seed phase and has experienced this paradigm shift first-hand. The question therefore arose: how should a network of Business Angels behave following these market changes?
At first, angel investing and company building developed by specialized investors might seem incompatible, considering that a fund with more available capital and potentially more expertise operates in the same development phase that business angels have always been used to handling on their own.
However, as we will go on to analyze, a highly synergetic relationship can be established between VCs and angel investors in the company building phase.
Take, as an example, the need to conduct a Due Diligence on the technical potential of the project. A group of business angels can reach, through its extensive network of sector experts, the key opinion leaders best suited for this task. Another factor that confirms the importance of this partnership emerges when searching for new key people to be included in the start-up's management team: the pool of angel investors who hold key roles in pharmaceutical and medical companies can be of great value when searching for these profiles.
Two examples among all: Resalis Therapeutics and Alkemist Bio. In both cases, as a network of angel investors, IAG invested from the inception of the two start-ups and supported the company building strategy led by a specialized fund, Claris Ventures. Thanks to this, the start-ups were able to raise an initial round of around € 7 M and to build a complementary team over the years, e.g. the inclusion of a Budget Planner or a Chief Medical and Development Officer in the case of Resalis. This made it possible to support the first drug discovery phase without delay in the case of Alkemist and to reach the pre-clinical validation phase in the case of Resalis. Besides contributing some of the necessary capital, IAG also helped to identify the right people to fill key positions within the start-up. One example of the potential of this symbiosis is the appointment of the new CEO of Resalis. In this case, IAG was able to propose a member of its association and an expert in the life science sector who had already been leading the start-up for several years.
These are just a few examples of the role business angels can play in supporting company building and enabling effective value creation at critical stages of start-up development. In an ever-changing ecosystem, it is becoming increasingly important to consider how the roles we have become accustomed to observing are changing, leading to the development of new investment strategies for both small players and market leaders.
Riccardo Viola, Investment Analyst IAG