Four things to know about venture capital-funded spin-offs

Seeing the company I founded sell for a huge amount of money while personally making very little from it is, of course, frustrating

In 1999, I founded a spin-off company to exploit technology I had developed with a postdoctoral researcher in my laboratory at University College London. Twelve years later, the company, BioVex, was sold to the biotech firm Amgen for $1 billion (£600 million): $425 million upfront and another $575 million on reaching further milestones. It was one of the biggest buyouts of a UK biotech company.

The company’s lead product was a virus; a disabled herpes simplex virus that can replicate and kill dividing tumour cells but has no damaging effect on normal cells – in other words, a potential treatment for cancer. In addition, the virus carries the gene for a stimulator that causes the immune system to attack tumours at other sites in the body following the death of the tumour that was initially injected with the virus, allowing the virus to carry on its work.

BioVex had carried out phase one and phase two human clinical trials, using the virus in patients with malignant melanomas. Amgen has taken this further and has used the product in phase three trials, the final stage before a new treatment can be marketed commercially for human use. The trials recorded significant and durable tumour shrinkage and even disappearance in patients, and there were indications of an increase in overall survival in those patients treated with the virus compared with those given only the stimulator. It is likely that later this year, Amgen will apply for approval to market the product commercially.

Reading this, you might think that I would want to tell everybody I meet about this success. A company that I founded was the subject of a $1 billion buyout and a product it developed may help combat cancer. However, I have actually been very reticent about it. When I do tell people, I can see they are trying to calculate how much money I must have made out of the sale. Indeed, even several years before any buyout was proposed, a colleague of mine at UCL’s Institute of Child Health told me he had heard I had become rich through my company and asked whether I would like to fund his research. In response, I lightheartedly offered him a deal in which I would sell him all my shares in BioVex for one year’s worth of his lucrative private-practice income. Unsurprisingly, he declined the offer.

Had he agreed to the deal, it would have been financially advantageous for me, because the fact is that my total share of the upfront $425 million payment was $709 (£423). This is not because I ignored the small print or signed away the opportunity of a lifetime, but because of the many rounds of significant venture capital funding that are required to take a product for use in humans through the various pre-clinical and clinical trials required before it can be marketed commercially. At each stage, new investors come in and acquire equity in the company, significantly diluting the original shareholdings. Often the only alternative to accepting this dilution is to say “no” and find that the company is left without funding to continue its work. Hence, my original 25 per cent stake in BioVex shrank to an insignificant level.

So what have I learned from the experience and what advice can I give to those contemplating going down the commercial path?

1. If you want to maximise your chances of making money, stay closely involved in the running of the company.

When BioVex was founded, I had the option of giving up my professorship at UCL and going full-time with the company as its chief scientific officer. I opted instead for a role as a non-executive director and consultant, since I wanted to stay in the academy. But taking an executive role with the company, either full-time or for a significant part of the week, will certainly maximise your earnings potential. If you carry out this role well, the incoming and existing investors will see you as essential to the future of the company and will make sure that you are appropriately rewarded with share options and bonuses. But, of course, if the company fails, you will have to find another job or negotiate your way back into a full academic role.

2. Remember that venture capital funding is very different from research grants.

The amounts invested through venture capital are frequently considerably greater than what you might receive from a research council or medical research charity. This allows the work to proceed through expensive clinical trials in a way that could not be done with the amounts of money available from research grant funding – and this, in fact, was why I set up BioVex.

But you also need to bear in mind that venture capitalists are not funding your research for scientific or medical reasons. They are doing so in order to make money for their investors. It may be that you will cure cancer, but to the investors this is important not only in itself but also because it will yield large returns for those investing in their funds. There is nothing wrong with this. Venture capitalists flourish or fail on the basis of how good a return they obtain for the money their clients have given to them. But the inventor or founder of the company needs to keep this in mind at all times and not deal with the investors as if they were a research council or a medical charity, whose primary interest is the public benefit of your work.

3. Be aware that investors are buying your mind, not your idea.

You may believe that your company has the best idea in the world and that investors are flocking to it for that reason. However, I was very struck by the comment made by one of our early investors. She said: “We are not buying your idea for a virus vector, we are buying your mind. We think that you are clever enough that whatever problems there are, you will think of a way through.” Indeed, our company was originally set up to use disabled herpes virus vectors to treat patients with Parkinson’s disease. It was only after it was up and running that we hired a chief executive who, quite rightly, said that we would run out of money well before any regulatory authority would allow us to inject herpes viruses into the brains of people who had significant life expectancy. He suggested that we orient the company towards the treatment of terminally ill cancer patients with very little life expectancy. Using a different type of disabled herpes virus, the company was able to do this. So when BioVex was bought out, it had a completely different aim to that on which it obtained initial investment.

4. Understand the positive and negative value of different types of information.

Venture capitalists cannot be experts in your own particular area of work. They invest in numerous different types of companies and are intelligent enough to gauge the value of your ideas and your skills if you explain yourself clearly. This point struck me when a very knowledgeable venture capitalist asked me about the importance of the placebo effect in a particular animal experiment. So be clear and concise when presenting your ideas.

Less obviously, you need to be aware of the value of different types of information in the world of venture capital. In contrast to research grant applications, where published and generally available research information carries the most weight, venture capitalists will frequently give huge weight to snippets of anecdotal information that they pick up on the grapevine that appear relevant to your company’s likely success.

For example, when we were proposing to use a herpes virus vector containing the gene for the nerve cell survival factor GDNF to treat Parkinson’s disease, a venture capitalist who had come close to funding the company said he was unable to do so now. When asked why, he said that he had been told in confidence of advance information that a clinical trial involving the direct injection of GDNF itself had failed to benefit Parkinson’s patients.

I tried desperately to explain to him that this was exactly what we would expect and why we needed the virus to deliver GDNF with high efficiency and therefore allow it to produce benefit. However, he would not change his position and was absolutely convinced that this unpublished piece of anecdotal information that was known only to him and a few others absolutely indicated that it was not worth his while investing in our company.

So would I advise someone to follow the path of setting up a venture capital-funded company? Or do I think they would be better off seeking funding from large pharmaceutical companies to develop treatments – or else sticking to basic research funded by the research councils or medical charities?

Well, seeing the company I founded sell for a huge amount of money while personally making very little from it is, of course, frustrating. However, I do not regret the path that allowed me to remain in the academy and become master of Birkbeck, University of London, where I can promote and support our high-quality research and teaching. Perhaps the ultimate solution to the money issue is an idea that I believe is currently circulating in government circles: that the founders of a spin-off company (and the university that employs them) should never be diluted below 5 per cent of the total shareholding in the company. This might encourage more people to set up a company, while having relatively little impact on the attractiveness of the investment to venture capitalists.

As for me, I have the satisfaction of knowing that something that came out of my laboratory has reached the final stage of clinical trials and may ultimately be marketed as a new drug of benefit to human cancer patients. And, if nothing else, my involvement with BioVex made for an excellent impact case study, submitted by UCL and Birkbeck to the 2014 research excellence framework. With luck, that will yield a bit more than $709 in quality-related research funding.