Why Investors Tend to Fund Platforms over Assets

Lately, I’ve spent lots of time with pre-incorporation founders and academics who want to bring their discoveries and research to patients. Inevitably they run into the asset v platform quandary with academics scratching their head trying to understand investor jargon and founders grappling with their scientific strategy.

So, what are assets and platforms?

Assets are the end goal — therapies. They’re called an asset because it holds concrete monetary value. Therapeutic startups are fundamentally valued on the drugs they develop and how likely those therapies are to reach patients. When any therapeutic matures through development and clinical milestones, its odds of reaching patients increases and its asset value also increases.

Most simply, platforms are the discovery or manufacturing methods that create assets. Historically, once a startup identifies and de-risks an asset, the discovery platform is starved of funding as the company's resources are redirected to the asset's clinical development. But with more bioengineering advances (next generation sequencing, RNAi, CRISPR-Cas9) and computational strategies (AI, ML, computer vision) the scale of our discovery methods have rapidly increased and thus changed our resourcing approaches. Instead of starting from scratch for each drug, platforms are built to interrogate biological mechanisms at scale or engineer core machinery to intervene disease. Because of this ability to use core technologies to produce multiple assets, platforms are worthwhile investments even after a first asset is developed. Over the last several decades, platforms have evolved to be highly complex assets themselves.

Today, two platform types have emerged: New Therapeutic Modality (Caribou, Kite, Moderna) and Drug Development Transformation (Adimab, Genentech, Recursion). Because these platforms aim to efficiently develop multiple assets with adaptable, target agnostic technology and a differentiated competitive moat, they frequently increase the value of the company.

Credit: Biodraft, Chang and Karlin 2021

As you can see, these public platform companies have higher market caps (October 2021) when compared with asset-driven biotech companies, which reflects investor expectations of the company’s future value.

Why is worrying about assets and platforms important?

For early-stage founders, pinpointing the company’s focus is critical and astoundingly challenging. Understanding whether your core competency falls in an asset or platform path helps focus your effort and extract the most value from your tech. It also allows you to identify investors and potential buyers. Based on the information discussed so far, it’s easy to assume that platforms are the more desirable modality. However, there are a few pitfalls to the platform strategy:

  1. Expensive and seldom capital efficient
    It’s easy to forget to separate the value of your platform from the value of the produced assets. Unfortunately, this can lead to over-indexing on platform development over defining the critical path to therapeutic. The value of 100% platform development and 0% asset milestones is closer to $0 than you would like.
  2. Undisciplined R&D
    Platform technologies usually have many business model options and therapeutic targets to pursue. However, with few resources and even less capital, this presents a significant focus risk for early-stage founders.
  3. Culture and talent confusion
    As the company matures its platform and produces assets, startups struggle to develop the platform and navigate clinical development, which typically requires new, specialized talent.

There are also advantages to an asset focus:

  1. Market shock resilience
    With the challenging stock market performance, venture capital has also suffered. Investors are looking for more proof points and data than before. At Altitude, we’re observing that the startups earning funding today have de-risked their assets significantly. The focused approach of asset-based companies means they are also faster to clinical data and more immune to market conditions.
  2. More likely to reach patients
    If you rely on a high-risk platform to develop still risky assets, it gets dicey on whether you will ever achieve drug-in-patient. The straightforward asset approach means a focused approach to reach the clinic faster.
  3. Faster exits
    If speed motivates you, single-asset companies are more likely to be acquired sooner. Because acquirers want clinical data ahead of purchase, platform companies take nine years on average to public offering or acquisition. Asset-based companies take five to seven years, freeing up founders to work on the next idea.

What does Altitude prefer?

Altitude’s mission is to build the economic backbone for Utah’s health care sector by investing in a new, diverse generation of founders. Because we are rooted in economic development, we admit more platform than asset-based startups. Platform companies typically build larger workforces, require more diverse, interdisciplinary talent, and attract more capital to the region, which, naturally, supports our mission. However, we recognize the expertise and innovative energy that many of our asset-based startups bring to the community, and our team spends equal time supporting them.

Do investors prefer platforms?

Ah, the hated response: it depends.

Through this blog, I've called the therapeutic-focused method the "asset-based" startup. Most would call this traditional biotech. Biotech venture capital originates in New England, and those investors (Atlas, Third Rock, The Column Group) pride themselves in taking asset-based startups and centrally operating them. This venture model assumes a large stake of the company, which is justified by the heavy involvement of the firm in the company’s operations and executive staffing. They've mastered the method of focusing the scientific team on drug development and alleviating the business operations. This provides huge efficiencies for this method of drug development.

However, the advent of more core, scalable technologies platform approaches are increasingly popular, especially with tech-originated venture capitalists. These investors follow a founder-led model where founders are expected to lead companies independently. Investors in this model strongly believe that founders are uniquely able to problem solve and are multidisciplinary subject experts.

In the end, all investors are looking for return on investment and platforms, while riskier, seem to outperform.

How to know which model serves your startup best?

In the last fifteen years, many hybrid models have emerged to exploit different strengths of both assets and platform models. To decide which approach you want to take I would consider a few questions. 1) Is the core competency scientific expertise (of biological mechanism or similar) or is it a generalizable tool? If it is a tool, 2) how generalizable and package-able is it? And most fundamentally, 3) who would pay for your tool and how much? Would you create more value by going all the way to a therapeutic yourself? The team at Biodraft have done a really great job synthesizing the hybrid models, I highly recommend a read of their work.

I’ve definitely been guilty of toting the platform approach and emphasizing that it’s what we want at Altitude but I also recognize that both approaches are needed to serve patients and advance science. Understanding asset and platform approaches should help founders rapidly narrow in on their critical path, not change their conviction for the opportunity they’re working to meet.

For more help on your innovation journey email me at chandana@altitudelab.org




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