Building to Exit or Building to Go It Alone

Speaker 1:
Welcome to Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Yaron Werber:
Thank you for joining us for another exciting episode in our Biotech Dealmakers podcast series.
I'm Yaron Werber, biotechnology analyst at Cowen. I am very excited to be joined today by Jean-Francois Formela from Atlas Ventures, and Otello Stampacchia from Omega Funds, in this episode called Building to Exit or Building to Go It Alone. We will discuss the internal view on building companies from the ground up and how decisions are made to sell a company or stand alone. So JF and Otello, great to have you with us. Thanks so much for joining. It's always great to see you.
Otello Stampacchia:
Great to be here.
Jean-Francois Formela:
Good to see you.
Yaron Werber:
So I need to start by asking the obvious question. This is a Biotech Dealmakers podcast. Pharma is sitting on a sizable cash position, while their portfolios are aging and facing patent claims. We're dealing with questions about M&A volumes and why we're not seeing more deals literally all day long. Why aren't we seeing more deal activity? What's actually going on? And maybe JF, you start?
Jean-Francois Formela:
Well, M&A, it's not triggered yet, during one day or one week. It's not like pharma, all of a sudden say, "Okay, now it's time to do M&A." So you had a period of a very low cost of capital where I think there was less interest from management team and boards to be doing both, actually deals and M&A, because you had a massive amount of available capital. I'm not surprised personally. I don't think you should expect M&A to turn on all of a sudden, over a period of three weeks. I think people are going to double check their shopping lists. They're going to be looking at upcoming milestone. Pharma is always following a process. So I do believe that you're going to see an increase in activity, but it's not going to start over now. That's not a surprise to me.
Yaron Werber:
So it's really a question of process, and the big buyers can't react that quickly to weakening market conditions?
Jean-Francois Formela:
Yeah. Look, I mean, I think pharma has a lot of qualities, but reacting quickly may not be one of them.
Yaron Werber:
Yeah. I really like that answer.
Otello, you have a lot of input and view on how deal volume and deal sizes have been going on in the last 12 months, but what are your thoughts?
Otello Stampacchia:
No, I do think there's been actually a pretty healthy level of activity, all things considered. Again, like JF, we mostly invest in biopharma. As you and I were talking earlier, I think there's been 16 transactions over $1 billion dollars in that space in 2021, which is a pretty large number I believe, practically a record, as well as a smaller number, many more deals at a smaller valuation amount. So, I don't think the activity is being depressed.
I do think there's a bit of projection here in terms of a lot of people saying, "Well, market is now definitely in a bit of a distressed type of setting. So let's hope M&A steps up considerably." I still don't think the last year's activity has been very, very low. I do think it will step up, because in terms of your previous question to JF, I mean, these conversations are usually a dialogue where a seller needs to potentially be a willing seller. Certainly, when they're private companies and even in public positions, many of these companies have very close-held ownership stakes. And a buyer has its own process, as JF said, and valuation is a huge part of the process.
So I do think the last few weeks, in particular, though the XBI has been in the bear market pretty much since February of last year, but the last few weeks have been a pretty meaningful leg down. So I do think it's right that at least from our own conversations, a number of pharmas are doing this type of, let's check our target list. So I would expect a meaningful amount of activity in the next few months, but again, the baseline wasn't so low to start with.
Yaron Werber:
Yeah. That's a very good point. Are you expecting that more companies are going to be motivated to sell now that the market is down, or are they still fairly optimistic that they can raise capital?
Otello Stampacchia:
Yeah. No, I think JF has a very insightful point earlier, which is a lot of this is cost of capital. When you are a private company even, or a public company and there's capital available at a relatively low cost of capital, then the calculation of, okay, maybe I should think of selling the company, becomes a little bit different. Whereas if you are a private company, public markets are difficult and potentially shot, which I don't foresee will last forever, but it is what it is right now. Then dilution in terms of, "I need to raise this amount of capital. At what level of price should I raise that amount of capital?" becomes a very important consideration.
And again, in one recent example in our portfolio, Amunix that we sold to Sanofi, that was actually the consideration. Some platforms, some companies, some product development pipelines require substantial amounts of capital. And sometimes, a larger company is the place for the capital to be deployed. So again, that was an important a factor certainly in that deal, and it's probably a factor in many deals.
Yaron Werber:
JF, what's your view?
Jean-Francois Formela:
I don't have much to add to what Otello said. I think it's an interesting point to see if we're going to see some divergence between the public companies and the private companies, and I actually suspect we will. I mean, I would suspect that public companies, the public market will be affected potentially more than the private market, which is a bit paradoxical because historically, we all grew up on the wisdom that you can always access more capital when you're public than when you're private. But for some reason, I feel that the impact on public companies, particularly the ones that are behind on their milestone or might already have missed a milestone, is going much more pronounced than for the private companies, which essentially have still some of that expectation in front of them and on average, are backed by people that have a lot of money.
So certainly, for Omega, Atlas, and a bunch of other people from Flagship to TRV to ARCH to others, people have a lot of money on hand. And if they have a belief in the vision and the plan of a company at the private stage, they're going to continue to back it. There might be more openness to dealmaking. I'm not so sure that they will be instant openness to sell, because I think we all believe that good companies will access the capital market.
So anyway, I think it's a bit tricky because there will be different tiers in the public companies. I think clearly, there are public companies in that. And that's a big difference in that cycle versus other cycles, is that, look at the average balance sheet. It's a very different ballgame than it was, certainly in 2000, which is night and day, or than 2008 and then 2020. Although in 2020, first of all, it was a very short correction and the balance sheet were already pretty healthy.
Yaron Werber:
Let's go back and forget the market sell off in the last month, year-to-date. Let's go back even to 2021. I'm trying to get a sense. There's a lot of discussion; we're constantly debating this on Wall Street. Despite the healthy level of deals, are we not seeing more deals, just given how much there is a need at pharma, because of an arbitration on valuation? Or are there a dearth and a lack of willing sellers? JF, maybe to you first. What do you think?
Jean-Francois Formela:
Well, I think it's probably a bit of both. I mean, we've already rehashed the cost of capital point, which is obviously very important and I think was probably the driver of a lower amount of M&A, maybe to Otello's point, in a band of market cap where people may not have noticed. The trend may not be super obvious, but I think on average, people were probably less willing to sell for a given stage. The challenge is that you have to stage adjust it. And so, everybody looks at aggregate data, but it's a bit tricky because really, it should be seen at the state adjusted. So it's a different discussion. We can have it, but it's kind of a longer discussion.
The other thing is that I think pharma also, my perception is that they've changed a little bit, not so much their process, but their view or their strategy about acquisition, where I think they're more willing to implement and execute on the acquisitions they've made in the past. We're at a period of market where every time you have a new shiny toy, everybody was trying to buy one quickly. Now, in a lot of discussion and you see pharma companies saying, "Oh, we already have that. We bought the best company in that space and so on." And it becomes a little bit more sticky. But the counterpoint is that the evolution of technology is so rapid that what was a very exciting acquisition 18 months ago may not actually be that competitive anymore.
And so, the question will be for the pharma team, especially the interesting tension between BD and R&D, which is R&D may say, "Look, we did that. We're the best. We made that acquisition." And BD particularly, the technical BD team are saying, "Well, things have evolved quite a bit. You may want to think twice. Are you really sure that we're competitive?" So, I feel that there is a little bit of that process. So my point is that you can see a bit of an issue on both sides, where on the one hand, there is less incentive to sell on the seller side, because of cost capital. And of course, it's changing. And then the pharma people are a little bit more deliberate in jumping on the next thing.
Yaron Werber:
Is that-
Jean-Francois Formela:
I'd be curious to know what Otello thinks, but I think I've seen that a little bit.
Otello Stampacchia:
I don't disagree. I think there's a very insightful point there that is, if you look at all these acquisitions, or at least many of these acquisitions for both public and private companies, on the public side, it's very clear that for all these deals, there was really one credible suitor. I think at least on our data set, we had a couple of transactions just before Christmas, the same thing seems to apply as to the private. So I think pharma has definitely done their internal homework and say, "Okay, here's what we need." And some of that is also reflected in the speed of those transactions.
I mean, many of these transactions now happen literally within weeks. And that is also something that is a little bit jarring versus what pharma used to do, which is these incredibly lengthy processes. And it's because they know that this has to fit into already predetermined view of what they need. And once they get to the table, I believe those conversations seem to go a little bit faster. I mean, on average. There's always exceptions.
So, I would agree with that. They definitely have a clearer view of what they need. And at the same time, as you said, the evolution of the underlying technologies is now so much faster that there's really almost plan obsolescence into some of the platforms they're buying for products. That's a bit different, but those platforms after a couple of years get surpassed. And as you know, JF, we have a couple of companies in our collective joint portfolios that are exactly those next generations.
Yaron Werber:
Otello, I know that you've been very much attuned, and I know, JF, you too, to the changing FTC environment. There's a much greater scrutiny now in biopharma deals. What was previously a one-stage review, and now we're potentially getting a second letter. Even when you're talking about early pipelines, going to pharma, that has massive portfolio, might not even be in the same area. Any thoughts on that? Is that really going to slow down deals? Or is that just going to take a little bit longer to get a deal done?
Otello Stampacchia:
Yeah, I think it's going to be more than just slowing down deals when it comes to the mega-size transactions. Again, obviously there's always exceptions, but those are almost impossible in my mind to get affected in the current environment. I think for smaller deals, then it becomes more granular and that's going to be really about the potential of the acquisition to provide market dominance in a therapeutic area. And we've seen examples of disposals of that: BMS had to sell Otezla because of the presence in the TYK2 space, and there's going to be others.
That said, again, broadly speaking from a 30,000 feet view, I do think smaller deals, tuck-in acquisitions, pipeline enhancements are much less likely, in my mind, to trigger FTC rejection. I think when it comes to the mega-deals, well, first of all, I really think we should get past this type of financial engineering, large M&As that really didn't do anything for innovation. So I think, in a sense. I know a lot of people complain about the FTC when they look about the M&A environment. For the type of companies that we back, that we like to build, I believe this is a macro-positive, if anything.
Jean-Francois Formela:
Yeah. Look, I agree with that. We've done a couple of deals since the new regime, so to speak, at the FTC. And of course, everybody was a little bit concerned given the new head of the FTC and so on, and a regulatory and policy background. And so we've seen the processing on those, let's say small and mid-cap. We translate bio, for example. I mean, we did get the letter; it took longer. But what was interesting is that even from the FTC staff, you could see that the people who've been around were like, "Hey, don't worry. This is kind of crazy, but you have to go through it. We have to answer those questions that don't make much sense, but that's what it is." And so, I think you'll see mostly delays for the garden-variety, small mid-cap.
I think for the large-cap, I totally agree with Otello. That's very different, because that's a policy strategy and philosophy that is probably going to be different. I mean, I think there might be some deals that would still make sense in terms of where there is no true consolidation of one disease category, where there is less competition based on the analysis. But those deals, that's going to be a combination of process, which is going to be much harder, and stringency, and also philosophy where some of those deals may end up not being approved. So yeah, it's going to have an impact.
I may add, that might be a good thing for us. That might be a good thing for small and mid-cap, because if you can be driving the top-line, or at least the rate of slowing growth, if you cannot address it with maybe a merger, then you're going to have to look at promoting growth in other ways. So too early to tell, but I think it's going to be interesting.
Yaron Werber:
Right. I mean, there's a famous saying in BD, which I never understood until I left Wall Street and became an operator. On Wall Street, there's a sense that everybody's going to buy who they want to, but M&A is not a marriage. You sometimes buy who you can and not who you want to. There's an element of practicality.
I want to maybe shift over a little bit and talk a bit about, you've both been around for a long time, you've invested in late-stage, early-stage. Increasingly, you're both doing a lot of early-stage company building exercises. When you're investing early-stage, how do you decide whether you're going to build to exit or you're going to build to go it alone? Maybe JF, maybe we'll start with you on that one.
Jean-Francois Formela:
Yeah, so it's not how it works at all. And I know it's a bit of motherhood and apple pies. A company are bought, they are not sold, but it's actually fundamentally true. Look, our strategy at the early stage... I mean, obviously we're essentially primarily early-stage, whereas Otello is doing both. At the early-stage side, it's a stage, it's entirely science-driven. And it doesn't matter whether it's biology, i.e., it's a really attractive target or mechanism that we'd like to drug and we're willing to take the risk of drug ability, or whether it's a new modality, it's a big platform build. We're totally agnostic.
For us, it's really the attractiveness and the quality of the science. And also, what we call translatability, which is the likelihood that you can convert that science into a program that is relevant and Has a shot from a regulatory standpoint. So obviously, I mean, it's proverbial TPP. I mean, even if you're on your early-stage investor, you've got to be thinking about at least some rough construct of TPP, whether it's actually a modality or it's a new target. And then, the rest happens. So, the exception to that is that... And we've done a couple of those deals.
Remember, we did art Arteaus with Eli Lilly in CGRP class. We actually are the one which generated the first proof of concept to data with Emgality. And then, Lilly bought it back. So that was a clear example of build-to-buy. But I'd like to point out that those were very different capital markets, where we were looking for very, very capital-efficient play because the cost capital was much higher. And furthermore, the size of our fund, or because we were still a tech and biotech fund, our biotech allocation was much smaller. So you had a double whammy, not only the cost of capital was higher, but we are a smaller allocation as an investor. So, we were looking for transactions that were very capital-efficient and very focused. And we still do the platform, but we have to limit the number of things we're doing in that setup.
So, I think I'm done. Yeah, we are not thinking about, "Oh yeah, this one is going to be great to go public. And this one is going to be great to sell." Obviously, we're aware of the difference of probability based on, let's say single asset in platform, but we were not deciding the day we're funding it that one will go the one way and the other will go another way.
Otello Stampacchia:
No, yeah. I don't have much to add. Perhaps to put this in a slightly more, if you will, prescriptive framework, I think it's an interaction between, as JF said, the cost of capital, which is driven by both fund sizes and public market conditions and just general funding environment, that's one factor. And then the obvious difference between single-asset, which have a clear shot on goal in the clinic and a very well-defined indication. We love those, by the way, but they don't come around every day. Versus the broad platform, we still need to figure out which mouse trap will work better here, which require usually some exploration of the biology and some buildup. And then the rest is just in between. These are the broad goal posts, but obviously there's a lot of room in the middle in terms of a spectrum.
I do think it's important to remember what JF mentioned earlier, which is there's a lot of capital still available in the private markets. It was a very insightful observation about the potential flip of the transactability on private versus public. And actually, if you take just two random examples of the two largest preclinical M&As to date, which are Vividion and Immunic, both companies were filing to go public. And there was a very motivated buyer who came out of the woodwork and said, "Okay, let's do this before you go public. Because once you're public, who knows what your valuation would be?"
I'm not entirely sure the dynamic would reproduce itself in the current exacting right now environment, but that was an interesting dynamic. And I have to say that one of the calculations from the board of Immunic without revealing too much confidential information, was, okay, we're going to need X-hundred million to build this company through clinical proof of concept, at which stage you do another leg up in the value, versus the offer on the table. And obviously, the offer on the table won.
Yaron Werber:
And so, what exactly happens at the board level? And when does the decision to sell really get crystallized? Is there one moment or is it usually a flurry of thinking and strategic evaluation that leads to a sale?
Otello Stampacchia:
Yeah. No, listen, there's a continuum there as well. I mean, obviously boards are multi-component entities with, in some cases, financial investors like ourselves, plus independent board members and obviously management. So management obviously has a big say in this. I mean, I got to tell you, there was actually one of the two transactions that we announced, not Immunic, the other one that we announced before Christmas, I was actually very happy to continue investing in the company. But management, for them was a big deal. It was a great multiple for us as well, but I still felt that there was a bigger prize at the end of the clinical pathway. So management has a role.
I think the rest of the board has also a very important role, obviously in terms of decision. I mean, it's very hard to push management really hard to sell a business if they don't want to. First of all, we're not the type of investors. I mean, when it comes to the financial investors, the motivations are fairly simple. I mean, I don't claim to say that we are complex creatures. It's really about, okay, again, we're going to have to put X amount of money into this company to get to the next stage, which is usually a clinical endpoint. What's the potential risk associated with that? What are the capital market conditions? Where are our funds? What point of life are we in our funds? Is this now year 10 or year 2? And that changes quite dramatically, the calculus. And then it's about, okay, let's weigh the pros and cons.
Now, some transactions have very complex structures. We shouldn't forget that. Are earnouts, milestones, and so on. I don't have the exact numbers, but we did a study a while back on how many of these milestones get paid eventually by pharma. And I have to say, the probability of full payment of milestones is a little bit tricky. So you got to really calculate that into your deal structure. But again, I don't think these are super complex discussions. It's really, once you have an offer on the table, it's fairly clear if it's viable or not for the shareholders, which ultimately should have a big say in this.
Jean-Francois Formela:
Yeah. I don't have much to add, I would say. I mean, the question of the board is an interesting one. And it could be a much longer discussion in terms of the different type of boards. I think we're better off avoiding some being too candid, but maybe I can't resist and maybe I'll touch on a couple of those points.
But in our case, particularly for private companies, and I suspect it's the same for Otello and Omega, because 90% of the time we've been the lead investor in the last round if not all the rounds, which we're typically company co-founders, so obviously, at the private stage, we tend to play a pretty important role on the board. But at the same time, we do believe in governance. So we don't believe in one-firm boards, because that's not good governance. So we tend to syndicate with like-minded people, certainly, including Omega and a few others. And that resulted to what I call a pretty healthy and very seamless board dynamic, where we look at an offer and everybody comes more or less to the same point very quickly, which is, it does make sense under a certain number of parameters, or it does not make sense, and/or it's unlikely to result into a transaction.
When you go to public, you have a lot of different type of boards. So the two broad categories would be dysfunctional boards and mostly functional boards. The dysfunctional boards, then you can't... It's a question of how does the board handle that? I can't help you. It's dysfunctional. It's like, God help them. The functional board, typically, the management team, to Otello's point, will probably have an important role for a very simple reason, is that if you have a functional board and you have a management team in place, you would assume that that's the right management team if the board is good and functional. So it's kind of a simple decision tree and logic, and then deals will fall in different category. But yeah, I mean, on some boards, I'm sure it's a very interesting process to go through that analysis, some of which is a waste of time because in a private company you'd know very quickly if it makes sense or not.
Yaron Werber:
JF, what are the biggest challenges now to new company formation? Is it trying to hire people? Is it finding technology? Is it bidding for technology and spinning it out of an academic institution?
Jean-Francois Formela:
So, it's very simple. The most scarce resource is talent. And I would say beyond talent, because that's kind of an obvious statement, it's talent where there is a relationship, where there an ability to be up and running very quickly because you have worked with the people both ways or you're very close to people who've worked with them, which is where syndication is very important. So again, whether it's with Otello and his team and other early-stage investor, typically, we are going to have overlapping network, but not totally overlapping network. And together, when we do a search, it is very likely that we can reach pretty much anyone in the marketplace. It doesn't mean that we win, because you've got a competing syndicate with also very good investor.
And then, that's the reality is that relationship is what's going to make the difference. Your ability to actually pick the right talent and to get people to move is going to be based on longitudinal relationship. And it's not going to be based on the transactional discussion where you're coming to the table saying, "Oh, we're an XYZ venture. We have a lot of money." Who cares? Everybody has money, at least all the good firms. "Oh, we have a lot of expertise and we have a great track record." Yes, this is great. It's required, but it's not sufficient because there are a lot of other people who have a great track record. So the next step is, well, what is the quality of the company? Which would be a pretty important one. So the quality of what you're investing will make a difference, but here again, it's not entirely differentiating because the other smart investors are investing in good companies.
So what's going to make the difference in the end? The difference is going to be, do I feel as a human being that that's going to be a good place, that I like the science, I like the people, I like the board and the investor philosophy? And that's the one I'm going to do. And I'd be very curious to hear Otello on that, but that's where most, I wouldn't call it competition, but that's where most of the challenge and the scarce, the special sauce is at that level.
Otello Stampacchia:
I mean, listen, 100% in agreement. That is the scarcest resource, talent. I completely agree with JF that a lot of the winning factors here are no longer relevant to capital. I mean, yes, capital is always important, of course, but it's really about the positioning of the firms themselves.
I think in terms of the technological progresses, that they've being absolutely mind boggling over the last whatever decade. And what I think has also become better in terms of our own firm's software, if you will, is then identifying more senior-appropriate people for running these companies, but the firms have also done that as well. And that kind of competition for talent is absolutely insane, particularly in clusters like Boston, which again, for our target markets, which is mostly biopharma R&D plays, it's crazy.
And you see this in the statistics. I believe in 2021 there have been over $12 billion, I think that's about right, of new biopharma investments in the Boston area. That's a huge figure. And I think it's bigger than the entire rest of the U.S. combined. Now, okay, that's a single year, so let's not take it as a huge parameter, but that is still meaningful. And the thing about Boston is that it is an incredibly connected ecosystem. So again, this goes to strengthen once again, the point that JF made, which is, okay, it's very important our firms, our way of behaving with these individuals is position in the market.
Yaron Werber:
So maybe last question, and we'll do it quickly. The next five years, how would venture change, JF, in 30 seconds?
Jean-Francois Formela:
Just one minute on the previous point. So we're saying money is not the differentiator, but it's led to an interesting trend, which is some firms have actually pushed the envelope and done super-mega round. In some ways, you could look at it as an attempt to differentiate along that line. The question is, is it actually a positive selection or an adverse selection phenomenon in terms of essential actually taking almost entirely the financial risk out of the equation? I see the merit on the one hand, I also see some pitfalls on the other hand, because at the end of the day, that business is entirely predicated on disciplined allocation of capital.
So, longer discussion, but I wanted to point that out because some people who listen to the podcast will say, "Well, that's actually not true because I can put $200 million in the company and those guys can only put $100 million." Okay. I mean, it's an interesting philosophical discussion to know if it's a true differentiator. So we can put that on the side, maybe another podcast with other people.
Okay, the next five years, I actually don't see a lot of changes in our segment of the market in the next five years. The company creation segment of the market has been pretty inelastic for number of reasons that goes back to the previous point, which is, you have a limited amount. The talent pool has grown, but the talent pool, in my opinion, is probably not growing as fast as the technology pool, because we didn't address your technology point last time. There is almost unlimited supply of new biology and new technology, i.e., by that, I mean modality and other tools. And so, you can almost iterate endlessly on innovation. And the question is, how much innovation is enough?
You don't want to be just incremental, even though people have done that. Everybody have jumped on some kind of platform. I would argue right now that in some segment of gene editing, you see people coming in with different nucleases or a slightly different delivery system, but it's kind of incremental. And they're piling up in the same indication. Sickle cell would be a case in point. I mean, how many more companies do you need going after sickle cell with technologies that are not clearly differentiated?
So I think maybe one change... I said not much. And our model fundamentally won't change. We're starting companies based on great science, starting to integrate great people. Pretty simple. It's not that obvious to do, but you can do it. The one thing maybe that might change is the criteria for defining what's incremental and what's actually really next-gen, I think, are going to evolve. And they will probably include incorporating the thinking about indication in biology early on, even in platform companies. Which is, by the way, great news for our industry and our business. I should say, for our industry in medicine because it means that more and more, even for new modality, we're going to tend to very quickly try to see where you can differentiate our own indications. So, that would be the one thing. And I might be missing something, but that's the one I can think about right now.
Yaron Werber:
Absolutely. Otello, what about you?
Otello Stampacchia:
Yeah. I need to, just for the sake of the interest level in the podcast, try to disagree with JF. So, I don't disagree the fundamental of our business. And again, at the company creation, early-stage part of the spectrum are unlikely to change dramatically in the next five years. However, and some of this actually follows from some of the points that JF just made, is the need to really figure out how to scale our businesses. And I don't mean scale in terms of, let's raise these billion, multi-whatever-billion dollar funds, but by really having a fundamental understanding early on, before we start these companies, of exactly what JF said, which is what is really the full breadth of these competitive landscapes? And what are the pitfalls in clinical development strategy? I mean, that is something that is extremely hard to do, even for, I would say large companies.
I mean, you just saw today that Regeneron and Sanofi are to withdraw Libtayo for second-line ovarian cancer, notwithstanding what I thought were phenomena clinical data. And it's just because the moment they submitted data to the FDA was just after Keytruda and chemo became first-line. So I mean, that stuff needs to be predicted years in advance to make sure you still have a viable product. Now, that's going to be impossible to get right 100% of the time, but I think it's going to be incredibly important for firms like ours to incorporate some of that thinking. And I have to say, from the little world of us, Omega, I think it's something we are incredibly concerned about. How do we build those algorithms, if you will, within our decision making process? That is not something that is easy to do without scaling the organizations in a very fundamental level.
Now, the other issue, to be honest, is that we are just about entering what I think is a new, perhaps age is a big word, but a new timeline within a venture in our space. I mean, used to be that you could do a phenomenal job with somebody that looked like JF and perhaps to a certain extent me and build a very successful firm around us. I do think five years from now, that's going to be very, very tricky because it's impossible to clone the phenotype of these investors who have the connectivity, the understanding of the science and in some cases, of the clinical development, at a scale that allows you to be truly agnostic. And I think having too narrow of an investment focus doesn't work well for our firms either.
So I think we might start shifting for perhaps more of a, let's say one individual soup-to-nuts approach to investing to a more teamwork-oriented. I think it's going to be interesting to see if that happens, but I do see it happening. And we're trying really, really hard to make it happen within our firm, but it's an interesting transition.
Yaron Werber:
Let me ask you-
Otello Stampacchia:
Now, the experiment still hasn't run its course, so we'll see. Sorry, Yaron.
Yaron Werber:
Yeah. So let me push back or rather bring up the question, in the last five years we've been in the most hospitable public markets ever, which allowed you to scale your investment quickly, get a quick return. It also created this incentive to iterate and incrementally innovate. And there's way too much therapeutic density in certain targets, which is an issue which we then face and inherit on my side of the world, right? On the public side.
Otello Stampacchia:
Yes.
Yaron Werber:
When you think about the capital markets getting potentially more challenging, and let's see what really happens from now onwards, how does that change your investment horizon and how much capital you can deploy as well, before you really get to an inflection point?
Jean-Francois Formela:
I mean, look, that kind of equation or algorithm has been demonstrated for decades. It's like holding periods. A holding period in the asset class tends to vary with the capital market and the cost of capital. I mean, if you look at the NVCA data, for years and years, the average holding period, actually both in tech and biotech, also I don't follow tech as much as this, but it was, let's say 7 to 10 years. And the average time to IPO was probably also 7 to 10 years in some cycles. And then, in the past 5 years, it literally shrunk by half. At least in our portfolio, I think at the peak or at the bottom, we were probably at 3.5 years average holding period, which is why you saw that velocity of funds and capital and deals, to your point.
So you would expect that in a market that is less bullish or maybe more steady state, or maybe even in a bearish market, holding periods are going to go back up. Is it a bad thing? It doesn't necessarily have an impact on the multiple. Obviously, it has an impact on the internal rate of return, which to a certain extent, the LPs are also taking into consideration, but the internal rate of return tends to move as an index. It's very rare for someone to be able to distinguish themselves in the same cycle, because then it tells you they're doing something fundamentally different about the investment strategy, might be a good or bad thing.
I would say that typically, the late-stage investors are the ones who are going to try to focus on internal rate of return in a market that is at steady state, because that's a way to differentiate. I would argue that as early-stage investor, we should continue to focus on multiple, because you all know the famous saying, you don't eat IRR. You eat multiples. So, we want to be conscious of both, but that would be my answer to the question.
Otello Stampacchia:
I don't necessarily disagree. I mean, obviously, there's a lag function between a period of public market turmoil and a fundamental reset of investment strategies in terms of capital allocated and so on. And the lag function works both ways, works on the positive feedback loop going up and on the negative feedback loop coming down. So I think again, 2021 and 2020, I believe there were almost 100 companies public, going public every year. And now, many of those are colossally underwater. So I think there's still a lot of capital available on the private side. I haven't seen fund sizes shrink.
The moment you start seeing fund sizes shrink, which in my mind will only happen with a meaningfully prolonged downturn in the public markets, I think that to me would be a very clear sign that we need to shift back to very, very conservative ways of investing. But again, as JF has said, there's a lot of ways of making money, even being capital efficient. So I don't see that necessarily as a challenge. I do think, and JF is also right there, that that's more of a challenge for what I would call the latest-stage, more opportunistic, mezzanine type of investors, of which we have seen many new emerge over the last couple of years.
I still don't think this, and I hope to be not to be wrong, I still don't think this market is going to be a ridiculously low bear market for a very prolonged period of time. And there's a couple of reasons why I'm saying this. One is that there's still meaningful inflows into healthcare funds. Now, those are going mostly to the large-caps, because they're seen as a more defensive heaven, but it's still inflows. And the other one is that I don't think this is a fundamental downturn driven by fundamental reasons. I think it's driven by the fact there's a lot of ETFs that are unwinding. So you can think, okay, they would, I guess. Now, who knows? But I don't think it will last for a very, very long period of time.
Yaron Werber:
Let's move into the lightning round. My favorite part of the podcast, something a little bit more personal. Otello, I'm going to start with you. Tell us one thing about you that no one knows.
Otello Stampacchia:
I'm an excellent cook.
Yaron Werber:
Otello-
Jean-Francois Formela:
Well, a lot of people know a lot of people know that.
Otello Stampacchia:
A lot of people know that. Okay. So, something else then. I used to teach Merengue when I was doing my PhD to pay for it.
Jean-Francois Formela:
All right. So, I didn't know that. That's good. That's a good one.
Otello Stampacchia:
There you go.
Yaron Werber:
Were you any good?
Otello Stampacchia:
Well, if I used to teach it, I suppose I'm kind of decent at it, yes.
Yaron Werber:
JF, what about you?
Jean-Francois Formela:
Okay. One thing that most people don't know, I think some of my partners know, but you probably have forgotten, but when I was in, I guess pre-med, or just starting college, I was signed as a singer in a pub group in Paris. And we actually did the one fixed single that was released in Germany and didn't go very far. And that was it. It was kind of fun. I mean, I was like, I don't know, 20 years old or something. But it's all good.
Yaron Werber:
I got to find this now. I'm going to dedicate my life to finding it.
Jean-Francois Formela:
I can tell you, the title of the single was [foreign language 00:43:20], which was supposed to tell you how profound I was. That's all I remember anyway.
Yaron Werber:
It's something-
Otello Stampacchia:
I've known this man for over 25 years and I never heard about this. So, this was very useful. Thank you, Yaron.
Jean-Francois Formela:
Awesome.
Yaron Werber:
What made you successful in your career, in your non-singing career, JF?
Jean-Francois Formela:
Well, I mean, look, it's a very... Success, in my opinion, is very multifactorial. I think some luck is always a factor. And I'm not saying that to discount whatever achievement I may have made. I would say, I certainly don't think I'm the smartest person in the business. There are a lot of super bright people in the business.
I would say maybe the differentiating factor for me has been relationship. I mean, just the ability to have good and lasting relationships, that would be a differentiator. It's not the only factor. But many factors, we all have them: we're all reasonably bright; we all work reasonably hard; we all had reasonable amount of luck; we all went to reasonably good schools. So, just like we were talking about a differentiator for funds or for a strategy. So, then you look at what are people's maybe differentiating element? I mean, in my case, it's probably a relationship.
Yaron Werber:
Otello, what about you?
Otello Stampacchia:
Yeah. No, it's hard to disagree with the fact that there's a lot of common factors, of course, in terms of people who've been successful in our industry. In terms of my personal case, yeah, relationships are important for me. I mean, I'm Southern Italian, so that's kind of genetics. I speak a few languages, so I think that's helped me build closer personal relationships with a few people, notwithstanding my Southern Italian origin.
I'm actually incredibly disciplined as a person. And I believe in this compounding capacity of accumulating information. And at some stage, I was actually learning how to memorize things better and that served me well for my life. My wife is still shocked when I remember stuff that happens 23 years ago.
And then, I'm extremely intellectually curious. That's the thing that I think is important for many people in our business is, I think there's a fundamental drive in what we do, which is success not defined as capital or capital creational accumulation if you will, but really defined as understanding things better, working with great people. And I think when I see people who have that similar intellectual curiosity, JF absolutely being one of them, it's just a pleasure to work with these individuals. Being one of those, I think it helps also with the relationships side, because fundamentally senior people in our industry and in our business are, yes, bright, accomplished, but they also want to really work and interact and have personal relationships with people who know stuff and can challenge them and help them grow as individuals. And I think they have this kind of silly capacity of retaining information, and I think that's really helped me build this great group of friends in our industry. And I really consider them friends; they're not just work relationship.
So I guess multifactorial, as JF said, but a couple of different new answers for each one of us, I think.
Yaron Werber:
Well, terrific. Otello and JF, thanks so much for joining us. It was entertaining, illuminating, and unbelievably insightful as usual. We really appreciate it. Thank you.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of Cowen Insights.

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