Latest / BioSpace / Beyond equity: Why venture debt is reshaping European biotech
Transcript
- speaker-0: My name is Jennifer Smith Parker, Director of Insights at Biospace, and you're listening to Denatured. In this episode, I speak with Jen McMahon, partner at Soroba BC, and Joey Mason, venture partner at Claret Capital Partners. We explore how biotech and medtech companies are using equity and debt to fund growth, bridge key clinical inflection points, and navigate very different financing cultures in Europe and the US. Joey and Jen, thank you so much for joining us episode, especially where we have three Js. Joey, go ahead and just start off your introduction, please. speaker-1: Sure. Thanks, Jennifer. It's great to be here. It's Joey Mason. As you mentioned, I'm a venture ⁓ partner with the Clares Capital Partners. We are a venture debt fund based in London. We've just completed our final close on our fourth fund at four hundred and forty million euro. The company's been around since twenty fourteen. ⁓ and I joined about just under two years ago to focus particularly on life sciences. So we've made a big effort investing in life science companies recently. speaker-2: Great. Thanks, Jennifer. And Joey, congrats on the new fund. I'm Jen McMahon. Partner at Soroba, as Jennifer said. And my background is in pharmacology with a masters in biotech and business. And at Soroba, we are a specialist life science VC fund based in Europe. So headquartered in Dublin with an office in Paris and another in Milan. And we're investing in both therapeutics and med tech. So roughly seventy percent of the fund in therapeutics, the rest in med tech, typically across mainland Europe with some Exposure in North America too. speaker-0: Perfect. Well, let's go ahead and dig into this. So when we've talked beforehand, we noted that the US still commands about sixty percent of global life science investment, while Europe sits around seven percent. So beyond sheer capital availability, what structural differences like market depth, syndicate behavior, or tranching most shape how European companies grow? speaker-2: Look, there are some structural differences, and I think the sheer quantum of capital, as you pointed out, is the largest one. ⁓ and I think there's lots of different reasons for that. The US market is is an older or more established market, but also the types of limited partners or LPs we have operating in both markets is very different. For instance, pension funds typically allocate two to five percent in the US towards private equity. We're at Point zero two in Europe. So it's a huge difference. And this then means that we have a huge reliance on public capital in private equity and venture capital in in Europe. So it's not the best starting point. However, what we've found, and recent publications will back this up, that the science is on par. Publication rate, patent rate is on par. So that's really exciting as life science is investors in Europe. So there's great opportunity. What I think it sometimes means is you need to tap into a syndicate base in the US to really help to build companies and to scale companies. And also from a med tech perspective, we always look at the US market as the market to grow in. So typically when we think about launching products or even just having that commercial strategy ready when we're going through a Glencoe plan, we're all US focused. So there's a couple of differences. The main one I think is the funding difference. We can touch on personnel and the likes too. There's more experience typically in the US, but I'll pause there and let Joey come in with ⁓ some more points. No. speaker-1: I I agree very much, ⁓ Jen, what you what you're saying. I mean, I think if you go back to when Call Adventure and Innovative Investing started in Europe, probably late eighties, nineties, and kind of imported the whole US model, lock, stock and barrel, right down to the investment agreements. But there was a substantial difference in the US. I I I always think of it in Europe we're missing a third of the money, which is there's no university endowment funds in Europe, more or less. There are a couple Trinity in Cambridge, Oxford has started its one well It's gone about 10 years, but they're not vast. I mean, you're talking about Yale, Harvard, they just have resources at that are substantially larger, very well established, allocate very substantial amounts to alternative assets. And obviously vent ⁓ you know, our world is an alternative asset in venture capital and venture debt. And so that money was always missing. It just simply does not exist. And that has been that's i if I'm thinking of structural things, that's an enormous gap. And as Jen says, the the the public purse has been forced to sort of step in there. The other bit speaking of public purse, and this is more relevant probably prior to the recent administration, but the US had a very strong research base in terms of research funding, NIH, DARPA, BARDA, you name it. ⁓ I will almost say log orders greater than we w we have in Europe. And Europe w ended up relying on country ⁓ budgets, the likes of the Welcome Trust. Europe did get and has been very engaged with all the various Horizon programs and the next ⁓ you know, succeeding. But it's almost like catch up. We were never quite fully there. So again, we produce some amazing research, amazing number of STEM graduates, more like I think we're two to one in the States, but it's translating, it's having the capital then to translate those ideas into marketable. products and into companies has historically been a gap. Now there is an urgency to fix that. I mean you see it in the Draghi report and the mansion house accords here in the UK. ⁓ so people recognize it, which is great, by the way. So there's no no that that's not a negative thing. That is just great. Now we just need to get to try and get some some answers. But to to Jen's point on on the states, we always look at the states as the essentially it's the market that pays most for everything. drugs devices, it's where the depth of knowledge of the equity markets. You'll have research analysts who understand just the differences between you know twenty different oncological products ⁓ and the nuances that were how the trials were run, you simply don't have that here. And that's because there's such an enormous pool of capital in the state. So the later stage products and companies always get drawn that way. That's just a fact. It's not that we can't fix it here, but it's the life we live. Yeah. speaker-0: That's quite interesting and it it definitely echoes a lot of the sentiments I've been hearing in this European financing series that I've been doing. The overarching concept that you're saying about having this more limited pool of capital in Europe inherently. and also the ⁓ talking about the pension funds was quite interesting because I've also heard this quite a bit. We've seen US companies raise sixty to eighty million Series A and even a hundred mil mega rounds while Europe remains far more conservative. So how does that disparity influence the willingness of US versus European teams to take on debt and ultimately their speed of execution? speaker-1: So I actually think over the last number of years you probably are seeing more larger Series A and seed rounds happening in Europe. Those mega deals have happened and they continue to happen because you think of the likes of I I'm also a venture advisor with with Soffanova in Ireland. and there is a lot of capacity among the larger venture funds, healthcare venture funds, to s to fund companies from day one. And they can potentially put together 40, 60, 80 million rounds. There's not a large number of them, but at least you're getting that ambition. You're also seeing companies that are addressing what I would call much ⁓ much more broad indications. I mentioned things like oncology earlier, but we're backing a company called Inventiva, ⁓ which is on the market for ash, liver disease, back to ⁓ an inflammatory bowel disease company. This is with with with my claritas. And these are very large markets requiring really large clinical trials at phase three, even phase two B into phase three. And they require a very significant amount of capital. That capital is available. It's just there isn't an awful lot of it. Once you run out of the kind of top 20 potential investors, the companies themselves are struggle to to to raise additional interest. Where where debt comes in, I kind of just think of it as the cost of money. When debt is much cheaper at a cost of capital basis than equity is. I can think of it as fourteen ish percent venture debt. Venture capital kind of in the mid-30s. And so venture capital is entirely the right money when you have a very high-risk business. You don't know if the market is there, you don't know if the technology is going to work. You don't know if you pulled together a full team. By the time you advance through the clinical trials, this is where we would step in on the debt side. You've de-risked very considerable amounts of it. And we'd see when is the right time to take on venture debt is when the risk has become visibly less. And that's where we would sit typically see in phase two, end of phase two, phase three. Because by the time you get to a c a drug gets to phase three, there's a 60 ish percent chance it will get approved. So that's significantly better than the less than or 30 ish percent you're gonna get a drug approved through phase two. And so that's just when we we step in and what we are very happy to do is then back Teams and syndicates who are they're still writing most of the checks on the equity side and we'll support the companies. Often as they get it's the extension, is the result has come through, and then the company needs another six to nine months. That's when debt is actually very useful because it fills that gap and then allows the company to prepare for the next round, because there's always a next round and it's it's an equity round. And so that's where you so we see from a from a debt perspective. Once the risk has become much more manageable, then the company shouldn't be paying equity price for that. And I and I'd say it's it's a mix. So the debt is part of the overall capital. And that's where we we would step in. Similarly in Med Devices, we typically step in when the companies have started to generate early revenues and it's just to release some of the burden of capital from the equity holders. And you're saying, Okay, well look, you can share the journey here now. The risk isn't entirely equity. And You know, you you overall pull the cost of finance down from the mid thirties to what call it mid twenties when you when you mix the two. So that's where we'd step in and say late stage clinical or early revenues on the med tech side. I speaker-2: Think if I may, I mean, the mega rands they really have just become a trend since about is it about two thousand and twenty-four, Joey. It was like off the back of COVID. And I think there's a couple of things that came to play. I mean, Joey mentioned larger funds in Europe and obviously across the States too. But in Europe you've got the likes of Sofinova, you've got Jaito growing and doubling in their second fund size. Then obviously Forbian growing hugely too. So funds like that need to put more capital to work. But even if I think back to 2023, we were involved in a Series A for complement therapeutics. And that was about a ninety million euro series A. So that was really large back then. And we've then topped that up to about 130. So there are light larger rounds happening on both sides of the Atlantic. I think the challenge is it's almost becoming harder to raise a 20, 30 million round than it is a sixty, eighty round. And and I wonder psychologically, Joey, is that a bit of an overhang from COVID too, whereby we're now concentrating capital in larger bets. It's kind of the FOMO. No one's really putting a turn sheet around till loads of people are looking and then we're flooding into the one deal. There's that is a larger funds needing to deploy larger tickets. But it's certainly a feature now of both early and late stage investing across biotech and also coming into med tech too. speaker-1: It's interesting. It's I think it's a really good point. I was actually ⁓ talking to a company who who full of experienced executives ⁓ who were doing the first round. ⁓ and the amount needed to get to a valuation inflection point was something like twenty-five, thirty million. And they'd kind of been beaten up by the market enough to sort of say, ⁓ God, we'll well would you take five? And I had a kind of conversation. It's like, ⁓ where are you gonna go with five? Like it's not like that's just not enough. That's a bit of a kind of extreme on one one other end. But You basically have to be have visibility of capital to get you to an inflection point. And I think maybe, Jen, that's part of it. FOMO to me is typically a measure of, well, if a deal is going to be done, that's a very strong signal to the market. Here's a deal that's going to get done. You better look at it. You can choose not to do it. That's fine. But if you think it if a deal is going to happen, you really should look. Because it's not like there's fifty deals happening every week. It's you it the signal is like there's something here. Whereas the inertia of lifting What you might think of as an interesting deal, and you're waiting for the two or three others to be similarly convinced that this is okay, this is a good company. I think that's part of all of that. But there's a realization that spreading the money very thinly across funds that are regional, who have particular interest in at one university over another is a very good way to lose money. It's just it's impossible for the companies. to to raise money. So we're actually thinking perhaps more on a European scale, which isn't a bad thing. I mean, American companies don't think of themselves as Californian or New England or whatever. It's just that's where they are. In fact they're all Delaware corps. speaker-2: True. Yeah, I agree, Joey. And I also think just lastly, the thing that came to the forefront in COVID, it wasn't just as high early stage high risk investors. You take scientific, medical risk, technology risk all the time, syndicate risk, financial risk became a real problem during COVID. So portfolio companies that were performing well, they were working to plan, generating compelling data, struggled to raise capital. And I think all of us, everyone kind of went into portfolio preservation mode. Which then meant that there wasn't capital being deployed into new entities. And it it almost changed the mindset a little bit that you're also trying to protect, you're trying to get to the next value inflection point, but you're trying to have a large component of the next round soft circle circled with internals too. So that probably has also catalyzed the the mega rounds too, or their continuation over the course of the last couple of years. speaker-1: Yeah, I I agree. I mean, I think go back to this whole call it the capital gap. I mean, the the European Life Science Council or this committee, which is part of Invest Europe, is promoting very aggressively the the whole message to the to the Council of Europe and to the European Commission, say, look, you've gotta do things at a European level, a al and enable money to become available, you know, remove the barriers as to why financial institutions can't invest, won't invest, why even get the public access to funding? The answer can't always be more public money. Everyone firmly believes it's not public money. It's actually private money. And you can kind of turn it on. We have turned it on said and say, you're not allowing European citizens to get the benefit of all of the funding that has already gone into these companies and for the innovation and wealth that they're going to create by actually stopping them funding them. through their pensions or through their insurance companies, et cetera. I mean it's kind of totally perverse. And I think that message is slow, it's slowly getting through. But it once that kind of unblocks a little bit, I think you then get into the kind of realm where Jen is talking of being able to see companies within their entire financing need and say, okay, this is a 50 million journey. This is a 500 million journey. Where do we all fit in? It's not 20. It's never 20. And so To be able to have enough funds and enough capacity around the table from day one that you can do at least two thirds of the journey together. I think that's where the kind of whole covet thing gen comes. I completely agree. It's like we've got to look after our chickens here with finite bullets. But ⁓ that's the wrong analogy. speaker-0: It's a great I love it. I mean I think I think if we can discuss chickens within like fundraising context in a podcast, I think it's great. So I'm gonna go with it. Well, we're we're running short on time. So the final question I have here, and this is something we discussed in our our original phone call, is that both of you touched on a cultural difference where in the US time is valued over money and in the Europe money is valued over time. So how does that mindset shape speaker-1: Deep. speaker-0: company building and what would need to change for Europe to operate more with a US style urgency. I go speaker-2: Yeah, you find. speaker-1: So yeah, th th this this is where I believe well, I I think Europe has grown up with far less capital. So we've already talked about that. And so there's a history there of just doing things cautiously because we don't have money. And I believe we've forgotten the value of time. It's it's fine doing things very cautiously, but if you're five years too late and somebody else is in the market, you're just too late. It's over. And so What we have to get to understand is how quickly can you get to the inflection points, the value inflection points. That's important. I I in fact I was talking to a company again during the week where they were getting some grant money and they needed to do some screening and they knew the amount that they were was considered was out, they were going to be able to do a tenth of what they would need to do screening wise if they were gonna go on, be a company and s and have properly screened. So I was saying to them, Well, the answer is you can't do this. Like you if you start already handicapping yourself. At only looking at 10% of what the available landscape is, you need to do the other 90%. And that's going to cost X amount of money. That's your table stakes. You have to do that. And I think in Europe we've always made decisions that will let's just do the minimum. Let's just about get there. Because that's conserved capital. But it means you're making choices all the way along about not essentially having a proper data set that you would want to sell. So I think if I'm thinking about it, so you start at the end, it's like, Well, what will allow this company to be sold either in the next round to investors or ultimately an exit to corporate or whatever? And how do you get there as quickly as possible? And that means we'll be ending up with companies that yeah, some will fail faster. And that's okay because we now have funds of a sufficient size that can absorb that. They just can't have 10 failures in a week or in a year. But they can certainly have two or three. Whereas that would have been if you've companies that have raised a hundred million and they've gone bust in, you know, call it eighteen months gen, that is that would have been catastrophic ten years ago. It's probably not now. And that's that kind of helps feed that. It's like properly fund, get the answers faster. And then and if the answer is no, then move on. And I think the LPs actually understand that too. And again, it's been an education over the last thirty years. So I would say that to me is the How do you get it to change? And and I I would just urge people to put up a clock that is your peak sales ticking away for every decision you make at the board. ⁓ we'll delay that. That's gonna cost you two hundred million of peak sales. Think about it. speaker-0: Great friend great luck. Yeah, that's a great words of wisdom, gentle educative. speaker-2: Yeah, so I was gonna say, I mean, does it need to change? Play devil's advocate, there are benefits to being capital efficient, but on balance, I think it does need to change. But I think that there are aspects of the European style that lend itself well to VC style investing. So capital efficiency, laser focus, in some instances raising the capital you need now at the valuation you have now and raising more later. And ⁓ that goes a little bit back to the mega rounds, which we won't get into again. But I think There are definitely massive differences. One of the things I find quite striking when I'm looking at US versus European term sheets would be the European ones tend to be very milestone and tranched heavy. So we might put in three different tranches and associated milestones. There might be three points they need to achieve before they can draw down subsequent tranches. Sometimes that's overkill. Now, I've never been at a situation whereby at board level A milestone hasn't been met and there hasn't been an adult conversation about the achievements that have been made and the milestones being waived and the tranche being invested. But I do think that it's a mentality shift that probably needs to tweak towards the US style. But I guess on the other side of things, on many of the US termsheets I've seen and some of the boards that I've been part of, the requirement to draw down a next tranche has been a threshold of capital left in the bank account, which I find strange because that to me is not a measure of success. So I do think that there are you know. speaker-1: Could I could argue the toss there and the reason I do it is if you think of the traunching bit, that's basically you're back in school. Have you done your homework? And if you've done your homework, we'll pay you or we'll reward you. And that's great when you're training managements. But we're now able to see instant management teams brought in who know what they're doing. And the traunching essentially is like, look, if we're on track doing what we need to be doing, then it is just a capital discussion. Because you're hiring us to do the job. You don't have to train us. We know more about doing this than you guys do. Whereas again, twenty years ago that wasn't necessarily the case, right? Now you have teams that are basically brought in to run the project. And you're not backing an academic who has never done this before. None of us do that anymore, right? They may be part of the team, but they're actually you're actually backing a professional team who are perhaps dispersed and they have access to everything they need. And so you are mana you were observing them as a board or managing as a board as a fully functioning management team. ⁓ and I think that maybe is again is it it is a different that's why, you know, if I were them if I were the CEO in those places, it'd be saying, okay, well, yeah, okay, I get it. You don't want to give me all the money up front. But like if we're executing on the team, just give me the money. You know, it's like that's ⁓ speaker-0: Joey and Jen, sorry, we are way, we are way over the point. This was a great, great discussion. So thank you so much, Jen and Joey, for joining this episode of Denatured. It's been a fascinating discussion. So if you'd like to listen to more episodes, please turn to biospace.com. And if you'd like to send me a pitch, please send me an email at jennifer.smith hyphenparker at biospace.com. Thank you.