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'Super A' early-stage investments can harm company growth

A rise in large first rounds of funding may do companies more harm than good, senior dealmakers told delegates at the Invest Europe Venture Capital Forum in Paris on Oct. 17.

Speaking during a panel discussion, Adam Koppel, a managing director at alternative asset manager Bain Capital LP's life sciences strategy, said he has seen a number of large series A fundraising rounds, or "super A rounds" as he labeled them, made by venture capital firms in the U.S. This can put strain on management teams to create value where value may not be there to be made, he said.

These rounds can also breed arrogance in the company, said Jeremy Green, portfolio manager at life sciences investor Redmile Group LLC. "When you go into those companies, you tend not to feel that sort of cutting-edge that you want to feel," he added.

The best companies are created because there is stress in their development, Koppel said. "A great winemaker told me that to make great wines, he stresses the vine," he said. When a company is overcapitalized, it reduces that stress and those leading the business do not think as hard about capital allocation as they probably should. "I think the greatest vines of the life sciences companies come when they have more capital constraints," he added.

Green has seen series A rounds of around $300 million or $400 million. Round A investors get paid on the risk they took to be early, and when you reach the B round, you're probably close to a $1 billion valuation, despite still being in the high-uncertainty or high-risk category, he said. "By the time you get to the public markets, you need to have a $2 billion to $3 billion pre-IPO valuation. It's hard to have created value and de-risked the company enough to justify the valuation," he said.

In France, initial fundraising rounds have not reached the same level, but companies can raise double the amount they could three years ago, said Maïlys Ferrère, director of large venture investment at state-owned investment bank Bpifrance SA. French life science companies are seeing very big early rounds, but they have several tranches with different conditions.

Companies can raise more because there is a large amount of money in the market, but the main driver behind the larger investment rounds is that management teams and venture capital are taking a more global approach from the beginning, which was not the case a few years ago, Ferrère added.

'Dramatic' opportunity in Europe

The opportunity to back life science companies in Europe is "dramatic," said Green, who arrived in France to launch Redmile's first European office two months ago. Europe, he said, is punching well above its weight, scientifically.

But panelists said a problem for European countries is a lack of growth capital options following on from early-stage investment.

"Unfortunately, we don't have, in Europe, specialized investors in the market, and it's a big challenge for when the company needs big rounds," Ferrère said, adding that some companies are also going public far too early as a consequence.

This has also meant that many companies have found backing from investors outside of the region. "We were joking [ahead of the panel] about the number of great companies in America that came from French science," Green said. There has been a rise in European growth capital funding, but it still isn't enough, he added. "Too many of these companies will go to the U.S. and then not come back," he said, adding that he believes there is potential for change.

The launch of growth strategies by private equity firms could provide a solution for some, David Nicault, director at Bridgepoint Advisers Ltd., said. His firm will consider companies with mature business models that are at the late-stage financing juncture, which may still be loss-making or carry more execution risk than their typical deals. “When the business model is already mature enough, we can definitely do it, and be a very good partner for these companies, mainly in order for them not to go to soon to the listed market,” he added. For example, Bridgepoint led a $160 million growth investment round in treasury management software firm Kyriba Corp., taking a majority stake in the business.

"That's an example of this new trend, these two worlds where it's usually quite different," Nicault said of the deal. "The venture world was always close, actually, to the listed world, but not at all to the more mature private equity world, and I think it's going to change because in the end, what we bring to the companies is useful for some of them."