Venture capital firms (VCs) reported market potential (e.g., projected revenues) and probability of financial success as the main factors guiding investment decisions on new products. VC interviewees suggested that the evaluation of pharmacotherapies is no different from that of any other product or business plan. These companies are most interested in high financial return, and typically are less concerned about image or altruistic interests of shareholders.
The VC interviewees were not involved primarily in pharmacotherapies for substance abuse. They attributed this not to a lack of interest, but rather to a lack of opportunities. One VC company executive indicated that in his five years of evaluating biotechnology and pharmaceutical products, he had never seen or evaluated a compound for the treatment of addiction.
VCs reported that their evaluation of candidate investments did not focus on a "magic number" such as a return on investment (ROI) calculation. Rather, VCs employ a large number of criteria to screen potential investment opportunities. One large venture capital firm's investment standards (noted in the recent literature, not drawn from interviews) are based on four fundamental questions about the candidate investment:
- How big?- refers to the size of the market multiplied by the market penetration that the proposed company is likely to achieve. Market penetration factors in competition, market trends, and potential for a family of related products to result from the product, e.g., a diagnostic kit for a disease and a treatment for the same disease.
- How fast?- refers to the time necessary to develop the product, obtain regulatory approval, and market a product.
- How much?- refers to estimates of the total capital required before a company achieves cash-flow break-even point, and to determination of the source of capital, e.g., VCs, banks, government grants, corporations.
- How can do?- refers to overall assessment of the investment opportunity. Includes factors such as projected revenues, time and capital needed to break even, differentiation of product from competitor products, and quality of people involved (e.g., skills, expertise, reputation in field)
(Adapted from: Kunze B., Nothing Ventured, 1993).
One VC interviewee noted criteria similar to those noted above when evaluating a pharmaceutical or biotechnology investment. One of the VC firms analyzes potential ventures by considering all facets of market potential, including pharmacology, data on how the molecule works, animal models, results from clinical trials (if available), and potential revenues. In the case of a pharmacotherapy for cocaine abuse and addiction, this VC firm is most concerned about the following: (1) the likelihood of a "clean" trial (e.g., a trial whose results are not confounded by lack of patient compliance, co-morbidities, dropouts, and other related factors) may be low, (2) compliance issues of the drug post-market, and (3) lack of clarity of the desirable clinical treatment endpoints, confounding judgments about whether an anti-addiction drug works. However, the VC representative stated that social stigma and other qualitative factors would not be an issue if the projected revenues for the drug appeared to be strong.
Another VC interviewee stated that the firm used similar investment criteria, adding to the key drug investment criteria the importance of the reputation and quality of the people involved in the venture, and ease of regulatory approval.