Scaling and Investing in TechBio ventures 🔬

baby vc - Healthcare & Life Sciences Masterclass Series - Key takeaways from Session on 03.07.24 - (Estimated read time: 10 min)

Written by Zeno Fox, Edited by Ghita Benjelloun Benkacem, Annika Bautista and Sarah Luna Mongin 🖤.

In this final session of our four-part newsletter series on Healthcare and Life Sciences investments, we turn our focus to 🔬TechBio. Having already explored Digital Health, Therapeutics, and MedTech, we now dive into the intersection of technology and biotechnology. 

As always, we aim to go beyond the basics, offering fresh insights and candid perspectives from industry leaders.

Here is what this final edition covers:

1. Speakers presentation

2. Understanding TechBio

3. The TechBio Model

4. Investing in TechBio

5. Outlook

6. Key Takeaways

7. Thank you!

1. Speakers Presentation

Manuel Grossmann is the Founding Partner of Amino Collective, one of Europe’s leading funds focused on Health & Bio. He has previously invested in Allcyte, Cradle, Enveda, and Seqera, among others. Before starting his own fund, Manuel was part of KRY and Earlybird Venture Capital among others.

Gregory Vladimer was the CSO and scientific co-founder of Allcyte, which he exited to Exscientia, one of the leading public TechBio companies. He is currently the co-founder and CEO of a new TechBio startup, Graph Therapeutics, in the immunology and inflammation space, and he is also a TechBio advisor for Merantix..

2. Understanding TechBio

Defining characteristics of TechBio, and how they changed

Manuel describes TechBio as “an umbrella term for founder-led, software- and engineering-driven innovation in biotechnology," encompassing pharma, material science, and agriculture.

📌 As the case of Gregory and Allcyte highlights, the essence of TechBio lies in the intention of the founding teams: to build a technology platform that is tightly coupled with advancing scientific progress in the laboratory, and geared towards disrupting drug discovery and development

At its core, TechBio describes companies that deeply integrate aspects that traditionally define technology companies (i.e., the classic tech startup world) with those that typically define biotechnology, pharmaceutical, and related companies (i.e., big pharma and small biotech startups). This can be achieved in various ways, from building computational tools and infrastructure only to developing fully integrated loops between technology platforms and wet labs (laboratories where scientists conduct experiments involving chemicals, biological matter, or other substances, typically requiring liquid handling and physical equipment). This is demonstrated by Amino Collective’s portfolio companies, with Seqera being an example of a purely software-focused company and Enveda Biosciences striking a balance between their software and wet lab components.

As Gregory noted, the definition of TechBio has evolved in multiple phases:

• In its 1.0 phase, pharmaceutical companies attempted to develop and integrate software platforms internally.

• In its 2.0 phase, companies like Exscientia and Recursion emerged to build horizontal tech stacks, but have biotech builds through internal pipelines

• The current 3.0 phase revolves around a synergistic integration of technology platforms and biology, creating a tightly coupled feedback loop between the two.
  

💡 Achieving these bi-directional feedback loops prevents cannibalization (diverting resources from tech development to therapeutics) of one over the other and ensures that both advance in lockstep.

Anatomy of a TechBio company, and how it evolves over time

As both Manuel and Gregory pointed out, TechBio companies look fundamentally different from biotech companies, especially in the initial stages.

Biotechs are oriented around fundamental science. From day one, traditional biotech tends to rely on a pre-defined set of tangible assets, like differentiated science and defensible intellectual property. Overall, the underlying scientific asset base usually remains relatively fixed. Furthermore, regulations restrict the biotech’s option space and pre-determine its path to a significant degree. As a result of the fixed asset base and the limited option space, the founding team becomes less relevant and is usually replaced with seasoned executives relatively early on.

This is very different for TechBio, which is dominated by software- and engineering principles in addition to fundamental science. Here, the technology stack and the scientific assets are highly dynamic and evolve over time. The developed technology platforms aim to generate novel scientific assets, resulting in an evolving asset portfolio. As a result, the strategic option space is much wider, requiring a founding team that is adaptive, agile, fast-learning, and decisive enough to make decisions and lead the company.

📌 Due to TechBio companies starting by focusing on building their technology stack, their initial trajectory looks closer to a technology company than a biotech.

However, for some TechBio companies, the trajectory can evolve drastically.

💡 This evolution occurs when a company decides to keep its platform for itself and create its own pipeline of therapeutic assets rather than providing its technology platform to third parties.

In this case, there is a step-function change where the anatomy of the company shifts from TechBio towards biotech, as its value is largely driven by the value of its pipeline of assets. In this case, a company may have raised its initial funding as a TechBio startup and then raised follow-on funding from more traditional biotech investors.

More information on the difference between Tech Bio and Biotech companies in this article from Bay Bridge Bio.

3. The TechBio Model

Archetypes of TechBio companies

TechBio can refer to many types of companies with different focus, the most prevalent being infrastructure to aid human workflows and computational biology for drug development.

📌 Their business models could include: SaaS models for externally-facing platforms, tailored services, Contract Research Organization-like models, and models focused on asset generation through internally-developed, proprietary tech platforms, partnerships between the platform techbio company and other players with deep expertise or IP and related areas like specific indications.

As Gregory pointed out, the companies that use their platform to generate their own assets can be largely defined by whether they advance their assets in-house, co-develop them with partners, or licence them out entirely.

Manuel noted that focusing on purely providing tools as products and services can often be challenging since the exit potential tops out in the low hundreds of millions in most cases, which can make a company misaligned with the VC model.

💡 He thus suggests  that companies consider an asset-heavy model that allows them to participate in the potential upside of their platform (like Schrödinger, which moved from tooling to building their own pipeline) or expand horizontally across different customer segments to manage a single, very specific workflow (e.g., Seqera). With this in mind, it is important to mention there are a lot of companies that don’t fit these two ways and are still successful. 

Fundamental methodology for building in TechBio

TechBio companies should emphasise speed, agility, and fast iteration cycles that are informed by engineering principles. According to Gregory, the goal of companies focused on generating their own assets should be to create a “lab in the loop,” where there is a bi-directional reinforcing feedback loop between the technology stack and the laboratory and insights from one fuel the other in a highly synergistic and direct way.

💡 To achieve this:

• Team → TechBio companies must create an aligned team of tech and bio talent that learns to develop a common language, starts to rely on each other, and operates as a shared unit that feeds into each other in both directions. 

• Tech Stack → Gregory mentioned how important it is to remember that building a robust and scalable tech stack can be crucial not just for product quality but also for potential acquisitions, as was the case with Allcyte when it was acquired by Exscientia. 

• IP → It is crucial for TechBio firms to protect their scientific assets and technology platforms.

Types of de-risking

？Why is it important:​ De-risking is particularly vital for TechBio ventures because these companies operate at the intersection of technology and biology, where the stakes are inherently high. By focusing on de-risking, investors can gain confidence in the venture's ability to deliver tangible outcomes and navigate the complexities of scaling both technology and biotech assets.

Scientific validation

Commercial validation is critical in TechBio, but academic publications matter, too, because they reflect scientific milestones that imply significant de-risking to investors, as has been demonstrated by Gregory and the case of Allcyte, and Graph. Scientific validation may generally take the shape of in-vitro molecular validation, models and simulations, publications, clinical studies, and literature.

Building partnerships

Developing relationships in TechBio takes time, but the frequent movement of talent within the pharma industry allows for the establishment of connections with various firms over time. Key activities for building relationships include publishing papers, presenting posters, and giving talks. Additionally, creating a community within your niche, even across different geographies, is crucial. This helps establish a compelling narrative around your company.

Balanced resource allocation, throughout anatomical change

TechBio companies must strike a balance between developing their technology platform and assets and revenue generation. They must deploy enough resources to continuously develop their technology stack to remain state-of-the-art while generating and advancing potential assets.

📌 Once TechBio companies have generated their own assets, they constantly face the risk of either cannibalising their technology stack or starving their therapeutic assets of necessary support.

In the past, TechBio companies often neglected their therapeutic assets. Greg recommended that companies clearly allocate resources for each area and make extremely data-driven fundraising decisions at this stage.

During this stage, it becomes extremely important to approach the anatomical change of the company from TechBio towards biotech strategically and consider different approaches to positioning the company and raise, according to both Manuel and Greg. Greg also laid out two different options:

1. Spinning off biotech assets from the main company that holds the tech platform

2. Keeping both the biotech assets and the tech platform inside the same legal entity.

💡 This decision will influence the types of investors and funding available to the company. Greg mentioned that, in any case, the most crucial part is ensuring that all shareholders are fairly rewarded when an exit of an asset or the entire company occurs, regardless of the chosen path.

4. Investing in TechBio

TechBio companies expectations from an investor’s perspective

While some companies consider spinning off their assets, Manuel pointed out that, from an early-stage investor perspective, one would want all the gains to be accrued in the same legal entity rather than have assets, except in the case of assets that are spun off or out-licensed for strategic reasons or resource constraints.

💡 Here, Gregory emphasized again that in the case of having a single entity for both the tech platform and the scientific assets, ring-fencing and continuously investing in the tech platform is crucial.

Capital efficiency and availability in Europe

According to Manuel, the assumption that European TechBio startups will be more capital-efficient than their US counterparts may not hold true in the longer term. He pointed out that valuations are already roughly the same when looking at London and major hubs in the US like Boston and San Francisco and that those companies are built with a very global perspective from day one. However, he mentioned that there may be a continued arbitrage between continental Europe and the US.

💡 In particular, he stated that most TechBio companies require around 8 - €12M in funding to get to a significant Series A. Consequently, Amino Collective strongly emphasises building strong syndicates that can support companies  until their Series A and beyond.

📌 Additionally, it is important to note that capital requirements for platforms and pipelines are vastly greater than those for externally-facing platforms that are monetized as SaaS.

Why focus on TechBio now

Throughout the session, Manuel pointed to two main reasons as to why investors should focus on TechBio now: the trends inherent in the TechBio space and the perspective of Limited Partners (LPs) investing in VC funds.

📌 The TechBio space benefits from two fundamental tailwinds related to technological advancements and market demand.

On the one hand, Machine Learning enables fundamentally novel capabilities, the creation of new categories, and drastic productivity increases. On the other hand, pharma companies are increasingly adopting software platforms , resulting in significant demand and increasing budgets for cloud-based software platforms, making Amino Collective particularly bullish on infrastructure plays.

On the LP side, Manuel recounted that, before the COVID-19 pandemic, potential LPs thought that investing in seed stage bio ompanies would be a “bridge to nowhere,” as no investors would finance TechBio companies beyond Series A. However, Manuel stated that this has changed fundamentally, with LPs now being aware of the potential for TechBio in Europe.

5. Outlook

The next frontiers for TechBio

Gregory made a strong case that all stages of research need to be disrupted by tech - from the early pre-clinical stages to translational research.

📌 At each step of the way, we need to make sure that additional, meaningful data is provided to shed light on and de-risk major decision and investment points of drug development. For this, pre-clinical data must provide clinically realistic insights and clinical data must be fed back into the earlier stages so that a bi-directional feedback loop emerges between early- and late-stage research.

While Manuel is particularly excited about infrastructure-focused plays targeting pharma and biotech companies, Gregory is enthusiastic about precision immunology and creating a platform that generates immunology targets, which is also what his new company is dedicated to.

💡 Gregory also extrapolated that if current trends continue, Europe will soon move from existing platforms, i.e., entire companies, to exiting individual assets only so that the companies retain their platforms and continue to operate.

Ecosystem

As Manuel highlighted, the European TechBio ecosystem benefits from several tailwinds.

• A number of translation and TechBio-oriented scientist communities focused on teaching scientists how to spin out their research have emerged. Examples of those communities are Nucleate, Bits in Bio, and iGEM.

• In addition, talent is starting to leave successful Techbio companies to start their own startups i.e.  Owkin, Oxford Nanopore, and Exscientia.

• And lastly, London is becoming a global hub for AI + bio, with many companies being present in the London ecosystem and a number of acquisitions having taken place there.

6. Key takeaways:

☂️ TechBio has become an umbrella term for founder-led, software- and engineering-driven biotech companies. It combines defining aspects of both tech and biotech companies.

📈 A TechBio company developing an internal therapeutic pipeline will need to undergo a fundamental change to be venture-backable. It starts as a tech company building a software platform and becomes a biotech company upon creating an internal therapeutics pipeline, presenting a challenge to founders and investors.

♻️ Startups that combine a wet lab and a software platform should create a “lab in the loop,” where the platform and lab are tightly coupled to form a bi-directional feedback loop.

⚖️ TechBio companies need to create synergies and strike a balance between investing in the technology stack versus the internal pipeline, ensuring that each isn’t resource-starved.

❓ It is yet unclear whether companies should keep their assets as part of the main company or spin them off into subsidiaries. However, alignment between founders and investors is key. Investors must understand whether a company will predominantly accrue value through its tech platform or scientific assets before they invest.

🇪🇺 Europe’s TechBio ecosystem is gaining traction, as demonstrated by the emergence of communities like Nucleate, Bits in Bio and iGEM.

Room for Discussion:

👉 Manuel closed the session with the following question: “How can we make sure that scientists want to launch companies instead of joining existing companies and labs? We invite you to have a think of it and leave us a comment of this newsletter!

7. Thank you:

This was the final edition of the series. With those 4 special newsletters on Digital Health, Therapeutics, and MedTech and TechBio, we did our best to share with you fresh perspectives from some of the best VCs and founders of the sector. We want to emphasise our gratefulness for them taking the time to participate to this series.

😌 We hope you found the series useful and also thank you for your consistent interest in the content we produce!

🔜 Don’t hesitate to share one or more of these editions to people that might be interested and to subscribe to this newsletter to stay tuned with the next deep-dive we will be publishing in the coming months.

In the meantime, you can already visit some of our previous editions here.

The baby vc crew 💛