Rob van der Meij, Partner at Capricorn Partners sat down with Kathryn Sheridan from Sustainability Consult to share his insider perspective from the world of biotech financing.
Kathryn: How is the world of biotech finance these days?
Rob: Despite the pandemic, there’s no shortage of money available to invest in industrial biotech startups. In fact, we’re seeing a flurry of money coming in which actually worries me.
Kathryn: Why is that worrying?
Rob: It worries me when it’s coming from investors who don’t have a clue about the sector, especially in pre-revenue companies. If they only look at the numbers, then it’s essentially stupid money. In industrial biotech, you have to really understand the technology and early-stage business development phases.
I’ve seen too many people fall for investing in a good story and get burned. They might be able to raise money at first but then it fails miserably because the technology or market isn’t there. People will pay for ridiculous valuations, based on a hyped storyline, even where there’s not sufficient substance behind it yet. Some of these technologies are complicated and investors need to be able to make sense of it.
More financially-oriented investors expect the industrial biotechnology or the chemicals sector to behave like other sectors, like for example renewable energy projects, where long-term take-or-pay agreements are the norm. Investors have to understand the variation in business models and the complicated value chains of the chemical and industrial biotech industries. The chemical industry supports all the other industries but it’s not organised in the same way.
I always say for pre-revenue companies, “Don’t start with the finance, start with the technology and the market”. If the technology is right and the market proposition potentially makes sense, the money will come. Don’t look at the financial model and the spreadsheets first. Making money is consequential.
Kathryn: But not all investors can be experts in chemical engineering surely?
Rob: We all have different roles to play. At Capricorn, we have a diverse range of expertise in our team and we prefer to co-invest with other investors with expertise in the sector. So when we look at a technology, we know what we’re talking about.
With DMC Biotechnologies, for example, we’ve just raised $34 million in the first close of their Series B and we have great co-investors who understand the potential of the technology, the business sector and the company.
We have co-investors with a deep knowledge base, plus strategic investors like Michelin and Solvay who see the value of the technology and markets.
It’s so much stronger to invest from a knowledge base than from a financial base. That means startups looking to attract investment need to be able to do more than present a nice story and some random financial projections in a nice spreadsheet.
Kathryn: How do you know there’s a market for these products?
Rob: With drop-in molecules, it’s easier to demonstrate that there is a market while demonstrating an improved environmental footprint with industrial biotech. At Capricorn, we’re focusing more on drop-ins these days, even though there are some amazing novel materials out there.
As an example, DMC is already commercial with its first product, a drop-in product, and their technology platform deals with issues like production standardisation, robustness and scale-up predictability that have traditionally held the biotech industry back. That means they can bring new products to market in record time and low cost. It’s also about their management. We’ve seen the DMC team consistently deliver in the years we’ve been invested in them.
Kathryn: How important is sustainability in all of this?
Rob: Sustainability is really important. And yet we see that everyone talks about sustainability but not many people are really doing it. I’ve heard you refer to it as the “sustainability circus”, Kathryn.
Kathryn: It’s true. I sometimes think of it as a sustainability circus, a sort of roadshow of shiny reports and awards but behind the scenes, not that much is happening. How do you deal with that?
Rob: At Capricorn, before we invest in a company, we carry out a really thorough analysis. Among other considerations, we measure the technology against the UN Sustainable Development Goals (SDGs) and compare it to the current situation and the next best alternatives.
Not only does the technology have to be positive on the key SDGs for this case, but it also cannot be negative on any of the other SDGs. We would not invest in something that is positive on one goal like renewable biomass but negative on another, for example water footprint.
As sustainable investment funds, we are required to provide a lot of transparency and justifications on our investment portfolio. You should see the hoops we have to jump through with lots of different questionnaires and showing our qualifications. And yet when banks and other institutions finance the soybean trade which leads to deforestation, none of this scrutiny applies other than basic compliance with the law.
It’s not a level playing field and unsustainable businesses get funded much more easily. Still, we believe it’s important to ask the critical questions and that this should apply to all investments.
Kathryn: What advice would you give anyone looking to invest in biotech?
Rob: Do the things that make sense. Don’t follow the hype. Don’t follow the bubbles. Do not invest in a story, invest in fundamentals.
Kathryn: It sounds like a very down-to-earth philosophy. Can you really do that as an investor?
Rob: Well, we’ve been doing that at Capricorn for almost 30 years. And we are stubborn. We’re not jumping on the hyped bandwagons. Our investment philosophy has always been to do the right thing. Do the right thing for the planet and making money is a consequence.
First, we see if a company is doing the right thing and if it makes sense over the long-term – their market, product, value proposition, technology and their path to commercialise. Then we look at the people and see if they have the right team. And we look at where and when we can be of help and add value with our experience, network and so on.
Kathryn: When should startup founders reach out to you?
Rob: Startup founders can always reach out to me both to discuss Seed funding, Series A and Series B rounds as well as with questions and for discussion. My Capricorn colleagues and I are often around at conferences and on jury panels. We’re currently launching an early-stage industrial biotech fund and a successor to the Sustainable Chemistry Fund will launch in 2023.
Kathryn: Thank you Rob for these insights and for your support of the biobased industry.
Rob: Thanks for having me. Being an investor in industrial biotech is such a privilege. We get an insight into the future and we get to work with interesting people and help create future technologies which will change how we live on the planet.
Rob van der Meij is a chemical engineer from the Netherlands. For over 30 years, he has worked in the chemical and water treatment industries. Rob has held management positions at Akzo Nobel and Shell Chemicals. He has been CEO for a range of startups. Today, Rob is a Partner at Capricorn Partners in Leuven, Belgium.
Capricorn Partners is an independent manager of private and quoted equity funds, licensed by the Belgian authorities. Their funds include the Capricorn Sustainable Chemistry Fund and they invest in minority shareholding positions of innovative companies with technology as a competitive advantage. See more at www.capricorn.be.