Who should I go to?

Where to find an investor for a biotech startup in Russia

Maria Saltykova, Rusbase

New insulins, genetic tests, cancer drugs, anti–aging drugs are the most famous examples of biotechnologies. Dozens of years pass from the idea to the entry into the market of such startups. Who invests in such projects in Russia and how to attract the attention of large investors?

How much is invested in biotech in Russia

The share of biotech in the total volume of venture investments, according to the report The Russian Venture Investment Association (RAVI) for 2017, amounted to 7%. In 2016, it was 9%, in 2015 - 15%. Funds with the participation of state capital mainly invested in biotech.

The volume of investments in biotech in Russia has been declining in recent years, as evidenced by the annual reports of MoneyTree, a Russian venture capital Company (RVC) and PwC. According to the latest report, in 2016 the number of transactions decreased by a third compared to 2015. The volume of investments has halved: from 18.1 to 9.5 million US dollars.

The main sources of financing for biotech startups are state support institutions (the Bortnik Development Fund, the programs of the Ministry of Education and Science and the Ministry of Industry and Trade, RVC, Rusnano, Skolkovo), Ruslan Altaev, Director for the Development of biomedical Technologies at Skolkovo, told Rusbase.

According to him, the sources also include venture funds (Maxwell Capital, Primer Capital, FRII, RBV and others), corporate funds (Pharmstandard, RBV). In Skolkovo this year, Johnson & Johnson, AstraZeneca, and Bayer, three companies from Big Pharma, supported startups within the framework of corporate accelerators.

Where RVC funds invest

Funds specializing in investments in biotech have been created by RVC since the late noughties. The number of active funds is still quite large. "The mandate of about 10 funds created with the participation of RVC capital, including Bioprocess Capital Ventures and RusBio Ventures, involves investing in this industry. These funds actively analyze the market and trends, consider applications and take a proactive position on the search for new projects," says RVC Investment Director Alexey Basov.

As the company's press service clarified to Rusbase, these ten funds also include Maxwell Biotech, RVC Seed Investment Fund, RVC Biofund, DaVinci Pre-IPO Fund, High Technology Seed Fund, Accelerator Venture Fund, and Live Systems Seed Fund and the "ACIPI Seed Fund".

Most of them, judging by the portfolio of each fund on the RVC website, however, are no longer invested in new projects. The oldest funds, Bioprocess Capital Ventures and Maxwell Biotech, founded in 2007-2008, actively invested in the early 2010s. Now both have eight projects in their portfolio, the last time they expanded it in 2012 and 2013, respectively. This year, both funds can finish the work. According to Basov, the decision to close them has not yet been finally made. "We are considering the possibility of extending their work," explained the investment director of RVC.

The "Seed Fund of Biotechnologies" was last invested in a new project in 2015, the "Biofund of RVC", "FPI RVC" and "Seed Fund in the field of living systems of RVC and XivEnchurs" - in 2016.

After 2016, RBV Capital (a fund managed by Rusbiovenchurs) invested in biotech. It was established in 2014 with the participation of the capital of RVC and GC "Pharm". In 2017, he invested 44 million rubles in the Skolkovo resident Advanced Gene & Cell Technologies (AGCT, AGICITY). This company was the first Russian project in his portfolio, the previous three were foreign.

The ACIPI Seed Fund initially specialized more in hardcore startups than in biotech, but in 2017 it invested in Mereya Cosmetics, a manufacturer of "innovative gel for painless hair removal". In the same year, as part of one of its programs, she was granted an investment loan by the Moscow Seed Fund (a fund created in 2013 by the Moscow Department of Science, Industrial Policy and Entrepreneurship with the support of RVC).

Other RVC funds out of these ten did not invest in new biotech projects in 2017-2018.

Public-private partnership: how it works

There are practically no private venture funds investing in biotech in Russia. The volume of their investments in biotech, according to RAVI, in 2017 did not exceed 5% of their total investments in other industries.

One of the most active private biotech funds, Primer Capital, was founded in 2015. He supports projects at the early stages of research and focuses on three areas: drug development, medical devices and projects in the field of IT and medicine. The partners of Primer Capital are OCT Clinical Trials, the North-Western Technology Transfer Center, Skolkovo and VEB Innovations.

The Fund has started investing in biotech since the end of 2016; now it has six Russian projects in its portfolio. Among them:

• manufacturer of Russian insulin "Hemopharm";
• manufacturer of the drug for the treatment of tuberculosis "MT-Medikals";
• FC Laboratories – for the development of a drug for the prevention and treatment of thrombosis;
• Solo project of the Atlas biomedical holding – for the diagnosis of HIV by genome;
• Data Matrix (software development for data collection and processing for clinical trials);
• Botkin.AI and TeleMD are projects of the Intellogic company for the diagnosis of cancer by computed tomography and X–ray images of organs using artificial intelligence.

In most cases, the state participated in the investment rounds. Thus, the Ministry of Education and Science of the Russian Federation provided 33 million rubles to MT-Medicals for conducting preclinical studies of the drug, Primer Capital invested 25% of the round (11 million rubles). According to the public procurement website, they should last until 2019.

In the case of Hemopharm and FC Laboratories, the shares of the fund and the Ministry of Education and Science in the investment rounds were divided in the same way. The Solo project of Atlas Holding, before attracting investments from the fund in the amount of 5 million rubles, managed to receive a small grant from the Bortnik Foundation (920 thousand rubles) and the Institute of Chemical Biology and Fundamental Medicine of the Siberian Branch of the Russian Academy of Sciences (1 million 200 thousand rubles).

Data Matrix was originally a project of the founder of Primer Capital – Dmitry Sharov. The entrepreneur invested 10 million rubles in his startup in 2016, another 150 million was invested by the FRII at that time. At that time, the company had been operating for five years. According to Kontur-Focus, its net profit at the end of 2016 amounted to more than 28 million rubles.

The last two projects, where the fund invested 11 million rubles each – Botkin AI and TeleMD, belong to the company "Intellogic". Their activities are also more related to IT. Unlike traditional biotech startups, you can count on a faster payback here: Botkin AI has already started offering its services to clinics in June of this year.

Since 2018, the fund has started investing more in foreign startups. To the first two – from the USA and Israel, a third was added – from France. The search for startups abroad is connected with two reasons: firstly, the fund needs to diversify risks, and secondly, there is nothing to choose in the Russian market. "I see no more than two or three startups where I would like to invest," Elizaveta Rozhdestvenskaya, executive director of the fund, told Rusbase.

Domestic projects, when entering the market, now need to aim not at Russia, Rozhdestvenskaya believes. According to her, the Russian pharmaceutical market occupies only 2% of the world market. European projects, however, have the same problem. "In our reality, only American projects can afford not to worry and focus on their country of origin," the director explained.

What projects are other private funds and investors looking for

Other non-specialized private funds and investors are usually interested in biotech projects at later stages. Last year, projects that belong to two segments in biotech were most often able to attract investments: "medical devices and diagnostics" and "IT in healthcare". Basically, these were online services and projects in the field of telemedicine.

One of the new funds that is looking for biotech projects in IT is Tiltech Capital. This private foundation was founded in early 2017. In a year and a half, he invested in eight projects. One of them was the Neurochat hardware and software complex. In March 2017, the fund invested 100 thousand dollars in the project. Neurochat is a resident of Skolkovo, previously other investors also invested in it.

Other projects in the Tiltech portfolio are medical mobile applications, online services and various devices: such as a "safety bracelet" for the elderly and an auto-injector "Komarik", which allows you to do intramuscular and subcutaneous injections yourself.

The ceiling of investments in projects at the stage of the growth hypothesis (seed) is 6-10 million rubles, investment analyst of Tiltech Capital Ilya Kobyakov told Rusbase. For projects that come at the stage of testing the value hypothesis (pre-seed), the amounts are much lower – from 500 thousand rubles to 1.5 million rubles.

According to Kobyakov, 80% of the fund's projects are companies "that will reach payback in the near future." The fund tries to recruit no more than 20% of such projects as Neurochat. "Projects with long–term clinical trials are not included in the area of interest," the investment analyst explained.

How to attract the attention of investors

Of course, there is a trend for developments related to digital technologies in medicine. However, it cannot be said that one area is more attractive to investors than the other. It depends on the fund's mandate and the attractiveness of the project. And attractiveness, in turn, is determined by such factors as the advantages of the technology proposed for development over existing ones, the stage of the project and the availability and quality of the "evidence base", the availability and "purity" of IP, an understandable and implemented commercialization strategy, the professionalism of the team (not only scientific and clinical expertise, but also readiness for effective interaction with investor).

The larger size of the potential market does not necessarily mean that one project is better than another. Having an excellent development with good prospects for commercialization and a well-thought-out development plan for a small market is better than a dubious development with a huge number of competitors already operating in a large market.

Over the entire period of the foundation's work, we had to review more than 5,000 projects. Most of our portfolio startups were selected through incubators, accelerators, competitions and with the help of partner universities.

Three people are engaged in the selection of projects in the fund, 55 external experts are involved in the evaluation. In order to make a decision on the validity of the scientific concept of the project, it takes about a month. It depends on the founders themselves: on how quickly they answer questions and provide all the necessary documents.

We ask for everything: down to the initial research reports. Scientific articles, patent applications, research, market assessments, patenting strategies, etc. We look at how saturated the market is, whether there is a need for a drug of this type – is it the "38th aspirin".

We reject most startups because of the failure of the scientific concept. It may be "bombed", but they cannot prove it in any way. And we see that the existing team will not be able to implement the project. Either this project is insanely expensive – some kind of cell therapy, for which there is no market in Russia - that is, you need to go to Europe right away.

A mandatory selection criterion is the presence of growth potential in the market. The volume of the market itself does not matter at the same time: the market may be large, but there are 135 drugs there. Or maybe it's small, but there are only two drugs on it, they are purchased by the state and this ensures annual purchases for a certain amount.

Now a very large number of different competitions or acceleration programs are being held in a variety of areas and for startups at different stages of development. At the same time, in my opinion, participation in such competitions primarily gives a startup the opportunity to show itself to industry partners and investors, and cash prizes are rather secondary.

Most large pharmaceutical, biotechnological and biomedical companies are interested in finding startups and working with them in one way or another. For example, Bayer is actively developing the Grants4Apps program, where it collects projects and developments in areas of interest to the company. And now there are more and more such examples when a large company creates its own acceleration program or actively participates in infrastructure events.

Another good example is the AstraZeneca accelerator, Skolkovo Startup Challenge 2018. Startups at early stages are supported not only by the Bortnik Foundation, this year we participated in the organization of the Startup Rally 2018 competition, which accepted applications from teams with projects at an early stage. This competition was initiated by the Project Office of the Ministry of Industry and Trade of the Russian Federation, which underlines the interest of the state in the development of new biotech startups. So it is not difficult for every startup to find interested industry partners now.

I would recommend that young teams work out all the components of the project more efficiently: first of all, the business plan and intellectual property issues.

Where to find a grant to a startup at an early stage

In the list below you can see descriptions of grant programs of state funds. Private international medical companies that have an office in Russia also sometimes allocate financial support to biotech startups in various areas. So, in 2018, Bayer provided 25 thousand euros each to three projects selected during the "Collaborator®" program launched in 2017. Participants of the G4A international accelerator in Berlin receive financial support from Bayer in the amount of up to 50 thousand euros.

It is better to specify information on the amounts of investments and their conditions in other large medical companies individually: they depend on a particular startup.

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