[Editor’s Note: This article was cross-posted at the EBD Group website.]

Skim the headlines, and you might get the impression that the biotech startup world revolves around an insider’s club of Midas-listed venture capitalists.

Not true.

Clever entrepreneurs who know where to look can find other sources who bring a lot to the table – family offices, venture philanthropies, crossover funds, and corporate investors. Billions of dollars are available from non-traditional sources that don’t exactly advertise that fact. Some of them start investing as early as Series A and have the deep pockets to go much further. Four of the five entities involved in the largest number of new biotech investment deals during 2016 – OrbiMed, Pfizer, Novo and GSK – all fall into non-traditional VC buckets, according to a report by Silicon Valley Bank. (Arch Venture Partners was the only traditional VC firm in the top five).

The overall pie for early-stage investment is growing, and that’s partly driven by some new faces around the investment table. The amount going to Series A biopharma deals — $2.2 billion in 2016 – was double the amount in 2013, according to SVB. Throughout that span, corporate venture capital consistently accounted for about one-fourth of the money. Crossover investment peaked during 2015 during the biotech stock boom, and declined last year, but hasn’t disappeared. Family offices and venture philanthropies are clearly ascendant players. Data on the phenomenon, however, is hard to capture because those groups either don’t report their investments to third-party data compilers, or don’t do it as consistently as traditional VCs.

In many cases, the new investors aren’t just checkbooks. Many can open some very valuable doors with partners, with investigators, with other deep-pocketed investors. All of that can be quite useful for biotech startups striving to get to the next level in development.

How to get in the door with these people? Part of the trick as an entrepreneur is figuring out who these people are, and what they look to invest in. Many of these outfits don’t go of out their way to draw attention to themselves, or bother to explain themselves. Some spade work is always going to be necessary for entrepreneurs that want to bring different phenotypes of investors into a working syndicate.

To further build on the theme, I’ll be moderating a discussion at BioPharm America in Boston on September 26^th. It has the somewhat tongue-in-cheek title of “How to Avoid VCs and Still Get the Money You Need.” People with some different perspectives will be in the room – Peter Kolchinsky of RA Capital; Chris Garabedian of Xontogeny; Rick Pierce of FEP Capital Advisors; Barbara Russell of Detwiler Fenton; and James Shanahan of SynDevRx.

Ahead of the session, I’m sketching out some thumbnail profiles a few typical crossovers, venture philanthropies, family offices, and corporate VCs. At a minimum, it should provide a taste of how at least a few leaders in their categories think about investing, which can be helpful when planning and preparing for a first meeting.

The Crossover: RA Capital, Peter Kolchinsky

Boston-based RA Capital Management got started in 2002, raised its first outside money from other investors in 2005, and evolved into a public-private crossover investor in 2012.

Valuations were still somewhat beaten down in 2011, during the post-financial crisis period when RA Capital moved into the private investment world. At the time, there was a fairly small cohort of public investors like RA that were scientifically specialized enough and interested in investing in the wave of venture-backed biotech companies that were itching to go public. Over the next couple years, 2012-2013, RA and a few other well-known public biotech specialists (Deerfield, Rock Springs, EcoR1, and Fidelity are a few) began moving into private investments thought to have potential to “cross over” into the public markets.

“As you do scientific diligence on the public side, the science takes you everywhere, including to interesting private companies,” Kolchinsky said. “The science doesn’t care about artificial differences between public and private companies. Great science can occur anywhere, and hopefully an investor is flexible enough to recognize it anywhere.”

When RA started seeing more science it liked in the private company world, it adapted. “If you’re a public-only fund, you have to wait for the IPO. By expanding our mandate, we started reaching through the IPO window to invest in private companies we found compelling. By then supporting them in the IPO, we could help smooth their transition to the public markets.”

RA was the most active crossover investor during the biotech boom years of 2013-2015, with 41 investments across biotech, medical devices, and diagnostics/tools, according to Silicon Valley Bank. Then things cooled off. RA did six crossover biopharma deals in 2016, according to data compiled by SVB. (Kolchinsky says that analysis is incomplete: RA actually did 11 publicly crossover deals last year).

Crossover deals as a whole fell 70 percent last year as the biotech stock market dropped, as election season spooked some investors who worried about a tougher drug pricing environment. Quite a bit of pain was involved in that downturn, as companies that received crossover investments at high valuations in 2015 were under pressure to go public, and achieve liquidity in 2016, albeit at lower valuations. (See previous Timmerman Report coverage of “the crossover hangover” in 2016).

A year later, RA continues to allocate about 20 percent of its capital to private investments, Kolchinsky said. He wouldn’t disclose specific numbers under management in its public and private portfolios, but RA reported about $815 million worth of public investments in 24 public companies in its latest 13F SEC filing that includes a snapshot of valuations on Mar. 31. (See the full table).

Over the last year and a half, Kolchinsky said RA has gotten more involved in startups, even those as early as the white-board conceptual stage. Some of this stems from its TechAtlas research division, which creates visual maps that give RA Capital a sense of the competitive lay of the land in different therapeutic categories. “Once in a while you see a white space,” Kolchinsky said. “Something should be there, but it’s not. You could wait for an existing company to do that, but why wait? We’ve been investing for 15 years. We know a lot of people. We’ve served on many boards. We know which people we’d like to work with again and again. So we’ve pulled companies together around different ideas with people we trust.”

Investment tastes shift over time, but the firm does post on its website a listing of crossover investments it has made, last updated June 1. It also lists five investment themes which stem from a long-term thesis that U.S. healthcare will demand “higher quality and more cost-effective delivery of significant healthcare outcomes.” To that end, it says it scouts for “prevention and cures; cost-effective diagnostics; genetic testing and personalized medicine; physician-patient convenience; and small-molecule replacements for biologics.”

The Venture Philanthropist: Bill & Melinda Gates Foundation. Charlotte Hubbert.

Everyone knows the Seattle-based Bill & Melinda Gates Foundation is the world’s biggest charitable organization. The foundation concentrates most of its people and resources — $39.6 billion in assets at the end of 2015 — on improving global health, global development, and education.

Fewer people are aware that the Gates Foundation does more than just give away grants to scientific teams working on basic biology, or supporting development of low-cost vaccines and diagnostics. Since 2011, it has been making equity investments in for-profit companies that have some overlap with the Gates Foundation mission, and who are naturally driven to turn scientific concepts into marketable products that work.

Charlotte Hubbert is the sole partner with Gates Foundation Venture Capital, although she works with a larger team of private equity professionals. The foundation has $2 billion it can put to work in venture capital and private equity investments, she said.

Hubbert is a molecular biologist by training from Duke University who came up in traditional venture capital ranks at Accelerator Corp. and HIG BioVentures. She oversees a portfolio of  equity investments the foundation has made in biotech companies since its first deal in 2011 (Liquidia Technologies, a vaccine platform company).

The Gates Foundation focuses its equity investments on global health and agriculture. It is willing to invest at any stage of company growth, Hubbert said. The foundation, as a nonprofit, considers itself an “impact investor.” That means it defines success with high-impact products delivered to address its goals of reducing the global burden of disease and poverty. Hitting a 10x home-run return through an IPO, which later fizzles out because the company couldn’t ultimately make a good drug, might be a success for some VC firms. It’s a failure in this model.

“We are patient capital, long-term capital, product-focused capital, and we bring an extensive network of experts that can be deployed to help especially in platform companies,” Hubbert said.

The last few months Gates Foundation Venture Capital has been busy placing lots of bets. They include:

• Vir Biotechnology, an infectious disease platform company run by former Biogen CEO George Scangos. Gates Foundation VC joined Arch Venture Partners as co-lead investors.
• Intarcia Therapeutics, the drug/device company with a product for diabetes and plans to adapt it for HIV (a deal the CEO brags about on the company home page, months later)
• Achaogen, the developer of antibiotics that has seen a surge in its value from a positive Phase III trial readout against hard-to-treat gram-negative bacterial infections
• Arsanis, the antibody developer with a drug against Staphylococcus aureus

The Gates Foundation venture capital and private equity portfolio is still only 5-6 years old – too young for a complete venture capital report card. It has one big biotech exit – Pfizer’s $5.2 billion acquisition of Palo Alto-based Anacor Pharmaceuticals and its boron-chemistry drug development platform.

Surely some entrepreneurs wonder if you’re asking for trouble when you have an investor who isn’t 100 percent aligned on financial return goals with for-profit investors in the syndicate. The Gates Foundation’s counterpoint is that while it has to be a steward of its global health priorities, it can add value to the whole company with more than its money. It has rare ability to open doors with more than 1,300 partner organizations that can provide crucial advice and assistance as startups advance on all their goals. “Our grantees are part of a family that talk to each other,” Hubbert said.

Hubbert tends to take an observer seat on portfolio investments. When the foundation invests, in, say, a platform technology with broad potential for immunologic drug discovery or low-cost biologics, it understands that for-profit investors in the syndicate will have different priorities at certain times. Maintaining a board observer seat allows the foundation to stay in the information loop. While Hubbert didn’t say so, it may also help remind the CEO and for-profit oriented investors on the board of the commitments made previously to global health when taking a Gates Foundation investment. Making an equity investment raises the stakes for everyone involved over the long haul.

“If we give a company a grant, it’s like dating. An equity investment is a marriage,” Hubbert said.

Family Offices: bgc3. Niranjan Bose.

First off, most family offices keep their cards close to the vest. They tend to say little about their strategies in public, and disclose even less about their investments to third-party data analyzers. Those looking for transparent categories of investment should look elsewhere.

Secondly, bgc3, short for Bill Gates Catalyst 3, isn’t exactly a family office. It’s more like a think tank that scopes out areas of emerging interest for the billionaire philanthropist Bill Gates, through technologies and opportunities that don’t always fall within the mission of the Bill & Melinda Gates Foundation.

Still, these areas that capture Gates’s intellectual curiosity do sometimes morph into equity investments in startups, including biotech startups. The co-founder of Microsoft, of course, is no newcomer to biomedicine. His first biotech investment dates all the way back to 1990 with Bothell, Wash.-based Icos (acquired by Eli Lilly for $2.3 billion in 2007). His next big move was the recruitment of Caltech star biologist Lee Hood to the University of Washington in 1991. The vision that he and Hood shared then was for a new wave of technological tools that would usher in the age of more automated, data-rich, computationally enhanced biology (a story I describe in detail in my new biography, “Hood: Trailblazer of the Genomics Age.”)

While Gates’s interests have evolved over time toward an emphasis on cost-effective technologies for global health, such as vaccines, he maintains wide-ranging interests across many realms of biotech, and of course, has the ability to invest in top-tier deals when he wants. Often, bgc3 is the front porch for these ideas, the place that scopes out the landscape of emerging technologies that Gates finds interesting, and that he may want to invite inside to hear more about.

These “learning opportunities,” as Gates’s science advisor Niranjan Bose describes these small gatherings of thought leaders, sometimes provide the spark for private investments. When an investment is made, it can be made through his investment firm, Cascade Investment LLC, or through a special investment vehicle or through VC partners, Bose said. Sometimes, a new technology that needs some capital and laboratory testing will be routed to Global Good – a workshop in Bellevue, Wash. supported by Gates and Nathan Myhrvold, the former Microsoft chief technologist and co-founder of Intellectual Ventures. Global Good, in one example of nonprofit work, developed a system for transporting vaccines in cold storage without ice or electricity for seven days, Bose said.

Other times, Gates’s interests lead toward more classic equity investments alongside for-profit biotech venture capitalists. Some of Gates’s recent equity investments have gone to Editas Medicine, Foundation Medicine, Nimbus Therapeutics, Schrodinger, and Gingko Bioworks, to name a few. Each of these grows out of curiosity, in areas like CRISPR genome editing, computational drug discovery, DNA sequencing.

So what is the team at bgc3 curious about these days? Bose said the team has been exploring microbiome research, particularly work that attempts to elucidate the “gut-brain axis” and how that can manifest in neurological and behavioral disorders (See TR coverage from November). Another area of interest: Novel mechanisms for the treatment of Alzheimer’s disease.

Corporate VC: Brian Gallagher. SR One

SR One is among the granddaddies of corporate venture capital. It started in the early 1980s as the corporate venture arm of Smith, Kline and French, a forerunner company now merged into GlaxoSmithKline, said SR One partner Brian Gallagher. The SR One venture group started out in the Philadelphia area near the U.S. corporate base, but has expanded over time to include offices in Boston, San Francisco and London.

The aims haven’t changed in more than 30 years. The firm consistently shows up high on the lists of active corporate VCs, with 13 new investment deals struck between 2015-2016, according to data compiled by Silicon Valley Bank.

“The reason to do it was to invest in external innovation, as a way of diversify away from strategy of parent organization. Our remit has never changed,” Gallagher said. “We always invest for financial returns. We are also about supporting innovation and innovative approaches in healthcare. If our companies are successful, they should be of interest to partners and acquirers in the space, including GSK.”

There is pretty much always some confusion about corporate venture capital in the marketplace, because there firms take a variety of different approaches, and have different funding mechanisms, which aren’t exactly clear to outside observers. There’s a spectrum of approaches, Gallagher said. On one end are the corporate VCs like SR One that operate a bit like a traditional venture firm, but with only one limited partner (the parent pharma company that provides investment capital from its balance sheet). Partners at SR One are employees of GSK. Their investments are reviewed at a high level by a governance committee of top GSK executives, although the reviews don’t contain proprietary information, Gallagher said.

That’s an important point. Some entrepreneurs worry about corporate VCs functioning a bit like corporate spies, getting access to sensitive information that can be fed back to the mother ship’s business development and/or R&D team. Gallagher said that’s always been a big no-no at SR One since the beginning. SR One does call on GSK’s R&D team to conduct diligence on new investments, but with strict protocols to maintain confidentiality. You can understand why the sensitivity – if entrepreneurs think your corporate VC is a spy feeding information into the R&D team that will just copy, work around, or chase the down the startup with greater resources, that might discourage startups from speaking to said corporate VC.

“We maintain very strict firewalls with GSK. We never share sensitive information,” Gallagher said. One benefit of a long track record: Gallagher said that sort of comment doesn’t raise eyebrows on the street. “We are a known commodity,” he said.

SR One has nine investment deal people spread across its four locations, Gallagher said. It doesn’t have a set fund size, an evergreen fund that (hopefully) grows over time, or an annual budget set by the parent company. Instead, SR One invests off the corporate balance sheet. The amount it deploys in a given year depends on the number of new deals it participates in, and the number of follow-on financings it joins for existing portfolio companies, Gallagher said.

Traditional venture capital firms need to raise new funds every 3-5 years from limited partners – state pensions, endowments, foundations. That creates a periodic need, sort of like on election cycles, to market themselves to a wide array of investors looking to get a little exposure to private biotech deals. Corporate VCs have their own pressures, but they don’t manifest in quite the same way with the need every 3-4 years to make the portfolio look good so that more money can be raised. Even worse, you can run into desperate traditional VC firms, otherwise known as “zombies” that can cause more than just minor boardroom disagreements.

When SR One syndicates with traditional VCs, it pays close attention to the fundraising cycles of its partners to do its best to avoid a potential boardroom clash, as sometimes happens when a traditional VC wants to sell a company quick to improve his returns, while other more patient investors in the syndicate want to put more money in to grow the company so it can reach a long-term value inflection point.

“We go in with eyes wide open,” Gallagher said. “Personally, I think the strongest syndicates of investors have diversity. They have a mix of traditional, corporate VCs, and perhaps other types of investors.”

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