Micro-companies, extreme virtuality and the portfolio entrepreneur

The recent fashion for asset-centric micro companies focussed on one development project is the logical end point for the strategy of virtuality, begun some 15 years ago and, dare I say, partly through my book ‘Towards the Virtual Research Company‘.

Along the way, there have been many naysayers, and I do not wish to deny the validity of some of the criticisms; nor do I suggest that this is the only valid model for product-focussed biotech companies. However, the progress towards a world of suppliers and integrators, is similar to the more mature industrial sector of construction, which is composed of specialist trades and professions from bricklayers to town planners. And, as I laid out in an architectural analogy of R&D in 1997, this arrangement theoretically offers significant economies for the drug discovery process — provided everyone knows what they are doing.

The doubts expressed by many included a number of venture capitalists, and one salient reason why we have not until recently witnessed the one-drug, micro-team model is that many VCs tended to believe in the committed team. In practice, in order to achieve the full time commitment that investors required, it was necessary to have more than one development asset. In my view, a minimum of three projects is necessary to justify such a team. These projects can then be managed through a highly outsourced process, but, as David Grainger elegantly points out, the weaker projects can poison the overall enterprise if they are just there to make up numbers.

With the move to an even more virtual environment comes an important change in the position of the management, since part-time and consultancy arrangements should become the norm rather than the exception in such companies. This flexibility should be welcomed, since resources can be added and subtracted with time and development stage of the asset. For instance, clinical development will be de-emphasised as a planned exit approaches, and business development is strengthened.

But it also means that investors need to be comfortable with founders and management operating a portfolio of projects and companies. With that change, there must be carefully drawn boundaries to properly (but not overly) restrict external activities.

Finally, despite the obvious logic of selecting ideal projects and ruthlessly abandoning those that fail to meet the grade, the selection is not always clear cut. Some of you may be familiar with the story behind PowderMed, which was ultimately sold to Pfizer in one of the best exits of its time (reported to be a 5x return). What is less well known is that of the n projects set out at the beginning of the investment process, one was explicitly disfavoured for funding by at least one investor. Despite the edict, that project was nevertheless progressed, and turned out to be the basis for the trade sale to Pfizer, for a price that valued the company at circa £170m. And that was in real, not virtual money!

This entry was posted in Uncategorised. Bookmark the permalink.