A brief history of venture building
Venture Building in its core is dedicated to systematically design companies from scratch by utilizing proven methodologies of creative digital business model innovation and design, e.g. Design Thinking (Brown, 2008, 2009), Lean Startup (Ries, 2009). Apart from methodology, this approach differs from classic founding scenarios in three main aspects; 1. financial resources 2. team setup and 3. equity structures. Corporate venture building further adds a partnership model to the picture that allows the leverage of unfair advantages, e.g. resources, assets, and networks.
Venture building, however, is not a new discipline. The early beginnings in Germany have been considerably shaped by Samwer brothers’ Rocket Internet (2007), responsible for highly successful ventures such as Zalando, Foodpanda, Lazada - relying on the execution and growth of ideas with existing problem-solution fit. This first wave was followed by uprising of operational venture capital funds such as Project A. With the foundation of BCG Digital Ventures (2014) and etVenture (2010), corporate venture building entered the stage, using corporate investment power and corporate industry advantages to create a competitive edge in the market. Early followers like Bridgemaker or finleap address a highly demanded market need by specializing in either envisioned business models, i.e. ecosystems, or industry niches, i.e. finleap - fintech.
Corporate Venture Building differs from digital transformation efforts of corporates in a substantial way; While digital transformation initiatives of corporates often constitutes a continuous process of change of an existing business by leveraging the momentum of digitization, corporate venture building operates independently from the core business, even though objectives of the new venture may still be aligned with corporate strategy.
With a maturing business model, existing venture builders now need to reconsider whether a broad and industry independent approach still makes sense. An increasingly competitive landscape demands for a clearer positioning and USP. We at Bridgemaker believe that, with our team of experienced founders and industry experts, we bring more to the table than just startup, digital and innovation experience. We add unique industry knowledge and backgrounds to set up for success. To provide a first glimpse, we want to share with you a first deep dive into venture building in the biotech industry, based on practical experiences of some of our bold team members.
The Biotech industry in Germany.
With new global challenges on the horizon and breakthroughs in latest research efforts, a momentum evolves for an industry that has long been regarded as inferior to its older brothers and sisters - the Biotech industry.
With its 25+ years of existence, Biotech is a rather novel discipline in Germany compared to incumbent pharma and chemical industries. In fact, transitions between these three areas have become increasingly fluent. The main differentiator of Biotech, thus, is the employment of living organisms and biological substances - instead of chemical elements - for the research and development of products and services for various application fields, e.g. therapeutics and diagnostics. Over the last 40 years, the global Biotech industry has evolved into a substantial driver of research and product breakthroughs, achieving major new FDA drug approvals and accounting for almost 40% of Big Pharma’s revenues from novel products today (McKinsey, 2018).
Successful biotech companies of the 80ies and 90ies, such as Qiagen (1984), MorphoSys (1992) and Evotech (1993) have proven the potential for Biotechs in Germany as a source of innovation for the national economy. The German Biotech market is characterised by mostly small and medium sized enterprises active in R&D activities and services, and makes up about 25% of the total pharma market with promising growth rates (BMWI, 2019). However, innovation efforts in Germany today are still lagging behind role models like the US, Israel or Canada. In terms of R&D budget and venture capital activities - which are important proxies for innovation in the industry - the US outperform Germany with a factor of 30 up to 50 (EY Biotech Report, 2018). Since the rise and fall of the “New Economy” on the German stock market (1997-2003), German investments have steadily flown towards more reliable pharma targets that carry less risk due to its diverse portfolio and product pipeline. A picture that currently experiences a substantial re-evaluation, as German Biotech companies, such as CureVAc, spread hope in the combat of COVID-19 and other rare diseases.
Current and future sources of innovation in Biotech.
Biotech is considered a rather young industry, that still needs to justify its hyped existence in the eyes of major PE investment funds. Innovation efforts are therefore often financed through risk capital investments, i.e. (corporate) venture capital - with further volume invests over time.
In 2019, more than 50% of global pharma VC investments (550+ bn USD, CB Insights) have gone into Biotech startups. Especially startups emphasizing R&D activities or supply chain optimizations constitute preferred targets of independent as well as corporate venture capital funds. Nowadays, Big Pharma VCs - such as Merck and Amgen Ventures - act as substantial contributors to the ongoing flux of capital, and thereby take advantage of new sources of innovation to fill their product and M&A target pipeline.
However, VC invests in startups and M&A activities are not the only sources of innovation for corporates in the Biotech industry.
The Biotech industry draws innovation from multiple sources:
1 ) R&D activities
R&D efforts derive from two main streams; First, from internal - commercially driven - research and development, e.g. corporate R&D departments, and second, from external institutional research & development activities, e.g. universities, institutes, NGOs. Further analysis highlights, however, that external R&D is no longer solely considered as source of product discoveries, but also as driver for business model innovation. See the example of Sartorius in Breakout Box 1.
Breakout Box 1 - Research co-operation with national institute:Sartorius joined the community of the National Institute for Innovation in Manufacturing Biopharmaceuticals (NIIMBL) with the objective to foster external research as new source of innovation. This step is valuable due to multiple reasons; 1. to enable new sources of ideas 2. to allow “out of the box” research that would lack financial support in an internal setting 3. to get access to new talents, as well as complementary competences. However, once new a technology is discovered and found to be beneficial, additional skill-sets are required to build innovative business models around the technology, in order to leverage the market potential and drive commercialization.
2 ) VC investments
Venture capital investments lead the way to kickstart externally driven innovations. This allows to scout trends, anticipate market dynamics and keep track of the competitive landscape. Furthermore, corporates, such as Merck and Amgen, leverage VC activities as an important mechanism to fill their M&A lead funnel.
3 ) Spin-off startups
Often innovation happens inside-out (push from internal R&D) or outside-in (startups, external R&D etc.). However, innovation is not necessarily deemed to be a one way street. Examples such as Zageno show how new entrepreneurial opportunities can be successfully executed by combining corporate unfair advantages, i.e. superior industry knowledge of Qiagen, with external capabilities (talent & skill-set) and a setup that allows speed (independent entity, infrastructure & culture). Spin-offs like these, on the one hand, allow a rapid learning curve in the market to examine whether a new idea can reach a product-market fit. On the other hand, corporates have the opportunity to build up an attractive portfolio or M&A funnel - depending on the deal structure of the spin-off venture.
4 ) M&A activities
M&A is a renowned instrument to facilitate inorganic innovation & growth, as all major strategy consulting firms point out in their latest publications. M&A in the Biotech industry is a major source of innovation to fill the product pipeline (e.g. Merck acquisition of Peloton Therapeutics, 2019), and to optimize the highly regulative supply chain. However, this approach appears to be more controversial when it comes to the acquisition of software providers. In the past, M&A has worked well for the implementation of software solutions close to the core value chain and existing workflows. Nowadays, thus, with the impact of digitization, the demand for more efficient workflows increased, and so did the need for novel business models that would accompany digital solutions. Efforts of traditional companies to implement new software on their own often leads to costly failures caused by a lack of experience in evaluating and selecting the right solution, as well as of the necessary skill-set to design, validate and execute novel business models (see Breakout Box 2 as example).Breakout Box 2 - Failing Investments in digital solution providers:With a quickly growing market for digital products in biotechnology a European based leader in traditional lab focused biotech products decided to explore investments in digital focused players. Following a classical M&A approach investment banks were asked to analyze the target market and identify ideal target companies for an acquisition. After analysis and internal discussion over the course of three years two market leaders were acquired and integrated with typical post merger processes. Three years after both integrations, a majority of former employees of both companies had quit their jobs and neither the biotechs sales team nor the R&D team was able to integrate the products into their portfolio. Even after implementing a completely new business area for better strategic focus the situation did not improve. The traditional biotech corporate simply did not have the internal structure, processes and personnel to cope with the completely new business model of developing and selling software. The very successful internal digital transformation did not focus on installing new business models. This ability thus was not developed.
5 ) Co-development
In the past, companies often invested in digital solution providers to drive innovation in their core business, as outlined in the previous section. Today, companies more and more rely on co-development partnerships that are formed for the development and implementation of new software solutions with the aim to optimize core business and adjacent to the core activities (see Breakout Box 3 as example).
Breakout Box 3 - Co-development with manufacturing partner:A major Big Pharma player recently teamed up with its contractual manufacturing partner to tackle challenges along the complex pharma supply chain, by leveraging digitization and novel technologies. Thereby, decision makers aim to create synergies through sharing assets, costs and risks to overcome market entry and market penetration barriers. After an initial analysis of the setup, two major white spots have been identified; 1. lack of digital competencies in the teams to evaluate, define and select the right digital solution, and 2. lack of skill-sets within both organizations to design, validate and execute novel digital business models. As a consequence, a third, external partner has been onboarded to complement their co-development efforts with the missing competencies and skill-sets.
New business models and startups in Biotech.
Biotech companies are often driven by the pressure to enter the market with highly limited financial resources - and therefore limited time - and a lack of commercialization experience. This is especially true for startups that need to gain speed in order to survive. On the other hand, technology and digitization trends transform the way business is done and opens up new opportunities to reduce costs and commercialize ideas. This does not only have a substantial impact on new business models in the startup ecosystem but also affects industry incumbents such as Thermo Fischer, Merck, and other big and medium sized (bio)pharma players that increasingly feel the need to change the way of how business is done.
As a result, new business models in the Biotech industry evolve around four major trends:
1 ) Facilitate discovery and R&D efforts.
Startups increasingly leverage new technologies, i.e. machine learning, AI, data analytics, cloud computing, to improve speed to market and comply to rapidly changing regulatory requirements in the development and approval processes of new treatments and diagnostics. Solutions range from AI empowered analysis of data (e.g. Labtwin, HelixAI), over virtual design and simulation of experiments (e.g. immuosciences, exscientia) to the actual development of living organisms through computerized engineering platforms (e.g. inscripta, asimov). Revolutionizing the way how discovery, research and development is done, however, also gives rise to controversial ethical and data security implications that need to be taken seriously and should be a central thought in every new business model development effort.
2 ) Digitize steps along the supply chain.
Digitization opens up new opportunities to increase efficiency along the existing pharma supply chain, reaching from the procurement of materials, supplies and equipment in R&D and manufacturing all the way to the distribution to warehouses, pharmacies, hospitals and other retailers. A supply chain characterized by high complexity due to its highly regulatory nature and involvement of numerous stakeholders along the way. Startups, like zageno, scientist.com and quartzy show how the potential of digital business models (marketplace, software-as-a-service (SaaS) etc.) can be leveraged to transform a specific niche, i.e. R&D procurement and inventory, along this highly complex supply chain. However, there are also brave players in the market that took on the challenge to disrupt the bigger picture of pharma supply chain by tackling the single chain of custody paradox, e.g. chronicled (US).
3) Ease diagnostics
New technological advancement and digitization does not only change the way new products and services are developed and delivered, but also how and where diagnostics are done. Whether it is Lykon - COVID-19 antibody testing, mysugr - diabetes blood test or My Heritage - DNA check - the industry is gets more crowded with point of care (POC) solutions, that often connect a digital business model with a hardware device. However, B2C is not the only market benefiting from new solutions. AI empowered SaaS solutions, such as Google Health - intelligent image recognition, further allow fast and reliable diagnostics support in a clinical and research setup.
4 ) Construct digital DTC interaction.
Rapidly changing consumer needs and advanced data analytics increase the need and opportunity for companies to be closer to their end-consumer than ever before. As a results, more and more new business models are evolving that facilitate the direct interaction with customers, i.e. patients. This can range from leveraging smart packaging for customer feedback (e.g. QR code / RFID enabled feedback) to cutting out intermediaries, e.g. for patient recruitment (e.g. citruslabs) or direct sales (e.g. GoodPx, hims, teleclinic).
A new approach to business model innovation in Biotech.
So, how can corporate venture building be a convincing answer to the search of novel sources of innovation to tackle major trends and challenges in the Biotech industry? As outlined in the chapters above, Biotech companies are confronted with a high level uncertainty. However, this is not only due to external market dynamics, long development cycles and changing consumer needs, but also due to internal factors, such as lack of available experience, skill-set and infrastructure to handle digitization, new technologies, and new business models appropriately. Initiatives with insufficient strategic alignment, costly failures, and missed opportunities are often the consequence.
Venture Building offers the opportunity for greenfield digitization, while providing the necessary experiences, skill-sets and the setup needed to enable a competitive speed to market. Imagine small speed boats that explore the wide ocean before the big ship decides which direction to go, when the time comes. Through constant screening of the competitive ocean, potential M&A targets are discovered earlier on. New business models can be validated in the market without the need to change the direction of the big ship. And speed boats may become highly attractive M&A targets themselves. Thanks to is broad and flexible nature, Venture Building might become an essential innovation instrument, complementing the innovation portfolio and filling white spots in the existing organisational setup of corporates. A balance of optimizing the core and exploring the outside is necessary to not oversee the iceberg ahead, even though this often means diving into the cold water first.
In the last 18 months, we have experienced an acceleration within the biotech industry, as well as we have seen that outside industry players more and more frequently enter the biotech field with the help of corporate venturing. We at Bridgemaker alone have startet three major innovation journeys with non-biotech corporations in the biotech industry in the same period of time. In other words: Even though the biotech industry is picking up speed, it still needs much more of it to make sure biotech companies do not lose their competitive edge in their own backyard.
Feel free to contact us any time to discuss this topic further.
Author: Kilian Veer (Partner) & Elisabeth Sabeditsch (Senior Venture Architect)2020-07-16 08:26