Corporate Venturing is gaining in importance in the biotech industry

Researchers at the ETH Zurich have conducted a global study (Corporate Venturing Research Initiative) of 48 leading corporate venture units in collaboration with management consultancy Bain & Company in Boston. The results were published recently in Nature Biotechnology.
 
The results show the important role of corporate venturing: From January 1, 2011 to June 30, 2012, data from the National Venture Capital Association in Washington, DC, and consultancy PricewaterhouseCoopers in New York suggest that corporate venture capital funds were involved in 19.4% of all deals in the biotech sector, with $495 million invested out of the total $6.4 billion. The increased deal making is also signaled by the presence of 4 corporate venture arms in the top 20 of the most active venture capital investors as ranked by number of 2011 financings.
 
Those new investors replace in part traditional VCs. The authors of the study mention a new fund of Novartis as an example. Novartis BioVentures, based in Cambridge, Massachusetts, created an alternative venturing vehicle, the US$200 million Novartis Option Fund, with the scope to provide seed capital to highly innovative ventures during their earliest stages. The Option Fund, a limited-scope seed fund that also provides nondilutive investments in a secondary development project in return for a limited option right, represents a prime example of a new business model in biotech corporate venturing
 
Pharmaceutical firms have developed larger and more sophisticated venture units, which today take a more active role in syndicates and deliver greater value to co-investors and entrepreneurs. This is the result of a change in the last years: more than two-thirds of the established corporate venture units the researchers examined reported substantial changes over the past decade in their structure, strategic scope and human capital.
 
The authors of the study think that corporate venturing is the least understood (and appreciated) form of VC. Although some entrepreneurs appear to be overwhelmingly concerned about potential conflict of interests or IP protection, the study finds that many of the traditional worries are often misplaced.
 
The authors have also some messages for entrepreneurs regarding corporate venture funds:

• Corporate venture funds may provide biotech startups with strategic benefits beyond investment capital.  
• Corporate venture units are most often part of large established organizations that perhaps are slow and bureaucratic but are also resilient.
• Corporate venturing should not be considered on the basis of the expectation of receiving a valuation significantly higher than the average valuation of independent VCs.
• Biotech entrepreneurs should ask for appropriate firewalls between the evaluation team of the corporate venture unit and the parent company to prevent the unsolicited spillover of sensitive information about strategy or technology to the parent firm.