{"id":901,"date":"2021-09-08T19:26:46","date_gmt":"2021-09-08T19:26:46","guid":{"rendered":"https:\/\/mitcommlab.mit.edu\/be\/?page_id=901"},"modified":"2021-09-11T01:56:09","modified_gmt":"2021-09-11T01:56:09","slug":"vc-blog-post-1-structure-of-a-vc-firm-how-the-investment-process-works","status":"publish","type":"page","link":"https:\/\/mitcommlab.mit.edu\/be\/vc-blog-post-1-structure-of-a-vc-firm-how-the-investment-process-works\/","title":{"rendered":"VC Blog Post 1 – Structure of a VC Firm + How the Investment Process Works"},"content":{"rendered":"

Welcome to the first blog post of our series on life sciences venture capital! In this entry, we will be discussing three main categories:\u00a0<\/span><\/p>\n

    \n
  1. The organization of various firms.<\/span><\/li>\n
  2. What type of companies they invest in.<\/span><\/li>\n
  3. The investment and company creation process.<\/span><\/li>\n<\/ol>\n

    Through our research, we found that there are primarily two kinds of VC firms: ones focused on investment (into existing companies) and ones focused on company creation (creating their own portfolio companies from scratch and spinning them out when successful). However, there are many other nuances that distinguish firms from each other. They may have varying cultures, organizational structures, and investment ethos. We will start by looking into the organizational differences!<\/span><\/p>\n

    1. Organization<\/span><\/h2>\n

    Most organizations have two main focus areas for work: sourcing and diligence. Sourcing refers to identifying new companies to invest in, and diligence refers to finding information on a specific industry (or company, or scientific topic, or people, or any of the myriad of considerations that go into an investment). Large companies, of say hundreds of people, may have dedicated teams for diligence and sourcing. Smaller firms on the other hand usually have everyone working on both simultaneously.<\/span><\/p>\n

    In terms of positions, most people join as analysts\/associates. After proven success, analysts can be promoted to principals who have more responsibility. Above the principal we have managing directors and partners, with partners leading the investment directions of the firms and finding the money to invest with. Partners can be looking at upwards of 20 companies at a time. Promotion from analyst all the way to partner may take decades. The criteria for promotions vary by firm. For example, company creation firms may require you to successfully create and spinout a firm to be eligible for promotion.\u00a0<\/span><\/p>\n

    The team structure and work responsibilities vary as well. In larger firms, there may be structured teams composed of a partner, a principal, and several associates, whereas in smaller firms teams may form more loosely and everyone is involved in diligence and sourcing work.\u00a0<\/span><\/p>\n

    Culture also varies by firm. Small companies may have a more close-knit feel where you know everyone else working there, and people hang out and chill together on the weekends. Other firms may be more competitive, e.g. employees having to compete for their projects to get attention from partners. Multiple people we talked to mentioned the importance of having good mentorship available. Some firms invest in soft skills training and leadership programs!<\/span><\/p>\n

    2. Types of companies<\/span><\/h2>\n

    In terms of picking companies to create or invest in, different firms have different criteria and goals. For example, some firms really care about being innovative, e.g. being the first to achieve something in a field. These firms may dig deep into the science and literature to search for very high-impact, new insights. Other firms may not be deterred by existing competition, so long as they think they can still succeed and bring value to patients.<\/span><\/p>\n

    There\u2019s also a wide variety of verticals within the biotech and life sciences industry. For example, some firms may prefer to focus on medical devices, whereas others may prefer to focus on biologics. Some may even be in the healthcare space and invest in companies that dabble in insurance or patient health record management. There are also firms that solely focus on life sciences-related companies and others that are large and have a diverse portfolio (for example, half software\/technology and half healthcare).<\/span><\/p>\n

    3. Investment\/Company Creation Process<\/span><\/h2>\n

    Each VC firm has their own pipeline of sourcing companies\/ideas and evaluating them, however, they all follow a similar structure.<\/span><\/p>\n

    Sourcing<\/span><\/h3>\n

    Ideas for a new company can come from everywhere! Associates and analysts at the firm often get inspiration from reading lots of scientific papers, keeping up with science news, and conversing with experts. After coming up with an idea, it\u2019s important to research its \u201clandscape,\u201d or how developed our current understanding of the scientific principles are, in order to assess how promising the idea is.<\/span><\/p>\n

    On the investment side, companies are usually introduced to investment firms via personal connections. These connections can be made by networking at conferences, talking to tech transfer groups at research institutions, and even conversing with pharmaceutical companies about potential spin-outs.\u00a0<\/span><\/p>\n

    For labs and scientists who are trying to commercialize their research, the PI usually goes to the investment firm with technology backed by peer-reviewed papers and patents. On the other side, pharmaceutical companies and VC firms have specialized scouts who read papers and look for new investment opportunities.<\/span><\/p>\n

    Diligence\u00a0<\/span><\/h3>\n

    When evaluating an idea or start-up seeking funding, life science VC firms spend the majority of their initial efforts on scientific vetting and determining whether the proposed technology is feasible, or at least not unfeasible. One interviewee mentioned that 70% of the time at the first meeting with a prospective company is spent asking questions about the science, such as \u201cwill this therapy work?\u201d rather than questions about the market size. Analysts will also talk to scientists in the field in order to narrow the landscape of potential investments.\u00a0<\/span><\/p>\n

    After evaluating the scientific principles behind the company, it\u2019s important to look at the logistics. What experiments or clinical trials need to be done? How do you demonstrate proof of concept to investors? What would the financing timeline look like? What goals does the company need to achieve to raise the next round of funding? Investment firms in particular need to also look at the leadership team of the company and their backgrounds.<\/span><\/p>\n

    What\u2019s Next?<\/span><\/h3>\n

    Once all of that is planned, the team needs to actually begin business development, which means hiring people, finding lab space, and coming up with a budget. They may even launch a prototype company (as Flagship Pioneering does<\/a>) for a few months or years to start initial experiments and then decide whether or not to give them a larger investment to form a proper company.<\/span>\u00a0<\/span><\/p>\n

    Lastly, a company cannot stay in a VC firm\u2019s portfolio forever. It will eventually need an exit, in which the VC firm gets rid of its stake in the company. Some possible successful exit strategies include an IPO (initial public offering) in which the company goes public and starts selling shares on the stock market or an M&A (merger or acquisition) in which the company merges with or gets acquired by another company.<\/span><\/p>\n

    Risk and Reward<\/span><\/h3>\n

    The process of applying for funding from VC firms can be very discouraging. Hundreds of start-ups apply for funding each year and investors have to say \u201cno\u201d a lot. According to one interviewee, that\u2019s one of the worst parts of the job.\u00a0<\/span><\/p>\n

    For venture creation firms, bringing an idea from conception to fruition as an actual company is very difficult. Most projects die early on when analysts are assessing their logistical feasibility, even after it\u2019s deemed that the science behind the technology is valid.<\/span><\/p>\n

    However, ultimately, the few companies that survive this process (such as Moderna, a company created out of Flagship that you may have heard on the news) and make it out are able to bring revolutionary potentially life-saving technologies to the world.<\/span><\/p>\n

    From all our interviews, there is one thing we learned: there is no one way to run a VC firm. In our next blog post, we will talk more about the key experiences that led people to the firms they\u2019re at now. 🙌<\/span><\/p>\n

    Go back to the landing page<\/a> or blog post #2<\/a>!<\/p>\n

    Blog post written by Emily Han and Ellie Feng<\/em><\/p>\n

    Published Sept 2021<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"Welcome to the first blog post of our series on life sciences venture capital! In this entry, we will be discussing three main categories:\u00a0 The organization of various firms. What type of companies they invest in. The investment and company creation process. Through our research, we found that there are primarily two kinds of VC… View Article<\/a>","protected":false},"author":10,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"class_list":["post-901","page","type-page","status-publish","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/mitcommlab.mit.edu\/be\/wp-json\/wp\/v2\/pages\/901","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mitcommlab.mit.edu\/be\/wp-json\/wp\/v2\/pages"}],"about":[{"href":"https:\/\/mitcommlab.mit.edu\/be\/wp-json\/wp\/v2\/types\/page"}],"author":[{"embeddable":true,"href":"https:\/\/mitcommlab.mit.edu\/be\/wp-json\/wp\/v2\/users\/10"}],"replies":[{"embeddable":true,"href":"https:\/\/mitcommlab.mit.edu\/be\/wp-json\/wp\/v2\/comments?post=901"}],"version-history":[{"count":0,"href":"https:\/\/mitcommlab.mit.edu\/be\/wp-json\/wp\/v2\/pages\/901\/revisions"}],"wp:attachment":[{"href":"https:\/\/mitcommlab.mit.edu\/be\/wp-json\/wp\/v2\/media?parent=901"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}