The rubric for starting a company is that good management can make up for weak technology, but nothing can over come a shortage of funding. With the (few) global health startups attracting experienced biotech executives (e.g., Una Ryan at Diagnostics for All [DFA] and Andrew Schiermeier at Medicines in Need [MEND]) and a surfeit of technology coming from academia, funding is the weak leg of the stool. Global health companies are in the same bind as the 1200-plus ”pre-revenue” biotechs, haunting the halls of venture capital firms pleading for their next slosh of cash, or seeking angel investors whose potential capital has been deleted by depressed stock prices and who look for even shorter pay-backs than the professionals. At one time global-health-specific investment funds seemed possible, but attempts apparently have gone no where (cf., no progress in two years at Commons Capital). In the diminishing returns category, companies may seek government funding through an SBIR, although global health companies are at a distinct disadvantages by the numbers (see my posting of November 5, 2009). The remaining source, albeit more leery of companies than the government, are the foundations who tend to give through intermediaries, which is inefficient and allows the intermediaries inject their own basis, and don’t really understand why and how incentives work. Are there alternatives?
Fortunately, over the past ten years the not-for-profit and for-profit worlds have increasingly overlapped, and the tools and knowledge needed for foundations to make investments in technology-based global health companies are emerging. Foundations, which are required in the US to disperse an amount equivalent of 5% of their assets each year, are allowed by the US tax code to make “program-related investments” (PRIs) in addition to giving no-strings grants. PRIs may be in the form of below-market-rate-interest loans, convertible debt, or equity investments (for details see the Foundation Center), analogous to an investment bank making a loan to a startup at mezzanine or later stages of funding with the expectation of a return. PRIs have been used by foundations since their creation in the US tax code in 1969, and the Foundation Center estimated about $300 million are made each year, but primarily to non-profit organizations which have some potential of future income (like affordable housing development groups, see Philanthropy Journal).
Very few foundations use PRIs, though; the Mott, Kellogg, Ford (since 1974), and CARE USA are examples (it is funny that a foundation is willing to give its money away for no financial return is very conservative when there is a possible, but difficult to ascertain, return). As for foundations making PRIs in biotech/life sciences companies, I found only two. UK’s Welcome Trust will make a PRI in a company through its Technology Transfer/Translation Award program which is for R and D projects that address an unmet need in healthcare (Wellcome Trust); however, only a few companies have received such awards and it is not noted which were in the form of PRIs. In the US, the Alzheimer’s Drug Discovery Foundation (formerly the Institute for the Study of Aging, ADDF) has funded projects in about five companies since 2002 via PRIs with values of $100-250,000 for one to two years each.
What about PRIs for global health companies? It looks like the Gates Foundation may be taking the lead. Last September, the Foundation’s Chief Financial Officer, Alexander Friedman, announced that $400 million would be used for PRIs across the Foundation’s philanthropic mission. Further, four investments had been made and “a range of new deals is in the works, including charter-school expansion, agricultural financing for small farmers in Africa, and investment in global health technologies” (Seattle Times article). Details on how and how much will be invested in global health technology companies is not provided in the Foundation’s description of the PRI program (Gates PRI program). Unfortunately, from what is provided, there are indications that the Foundation will be a cautious investor, co-investing with venture capital firms at a minimum of a 1:1 ratio but preferring a possibly unrealistic 1:5 ratio. I am assuming that Mr. Friedman test-marketed his approach with his VC friends, although in my limited experience, VCs always say “yes” as long as there is no commitment. Further, it is not clear if the Gates will operate as the professionals do: conducting thorough due diligence to understand the opportunity and risk, investing the proper amount needed to get to the next value inflection point, and being closely involved in the management of the investee. Further, if I remember correctly, the Gates decided not to jump into the venture fund business and passed on establishing its own global health-specific fund not long after the idea was mentioned at BVGH’s Partnering for Global Health Forum in March 2008.
As for likely recipients of the PRIs, the Foundation already has supported the beginning of the pipeline through its Grand Challenges Explorations program (Grand Challenges Explorations). It would be great if Mr. Friedman looked at the successful projects as the basis of commercial ventures, assembled management, and funded them at traditional Series A levels. Given that the foundation had made multimillion dollar grants to academic groups with no plans or experience for actually implementing their innovations, a multi-million dollar bet on turning one of these projects into a company seems pretty sound. Also, there are a number of established companies that could use an infusion of cash (e.g., Sequella and DFA). Although I am sure that the Foundation has dozens of capable advisers for this effort, it remains to be seen how meaningful and effective it will be in the development of global health products. Perhaps BIO Ventures for Global Health, which has announced that it will be helping companies with financial risk of developing global health products in 2010 (BVGH December posting), will use have some influence. Obviously, I am new to PRIs and hope this posting will generate a discussion on how they may be used to speed innovations in global health.