CASE STUDY 7

Sciona: A Venture Capital Case Study

Colin Bond

SCIONA

Sciona is a bio-technology company working in the area of genetic personalisation. This field of work involves creating products and services tailored to an individual's genetic makeup.

Sciona researches and develops DNA screens for common gene variants that affect an individual's response to food, medication and the environment. These genetic screens serve as the basis for providing personalised advice to consumers. They can also help companies to customise personal care and nutrition products.

Sciona's geneticists, molecular biologists and dieticians work with universities and commercial companies to identify sets, or “panels”, of genes that influence vital health areas, such as cardiovascular health, as well as genes that affect certain aspects of performance and well-being.

Sciona has an efficient and scalable ability to collect DNA samples and analyse the DNA for specific gene variants. The resultant information is used to generate personalised advice concerning lifestyle choices and consumer product selection. A key component of Sciona's service is its report-generation engine based on the latest information technology. It converts the scientific data into consumer-friendly reports of great practical value.

THE FUNDING HISTORY

Sciona was initially funded in 2000 by “seed money” totalling £1.5 m, predominantly from a high wealth individual (“angel”) investor together with a number of smaller contributions from other private investors.

In 2002 “first round funding” totalling £3 m was obtained from two UK venture capital companies – Prelude Trust (who were the lead investor) and Abbey National Treasury Services. This investment “round” followed the successful merger of Sciona and Genostic Pharma – the latter being a Cambridge-based company which held a UK patent on a system of screens for personalised genetic medicines (known as genostics).

Over fifty venture capital companies in the UK and Europe were contacted in the process of securing “first round funding”. Two of the fifty reached the “due diligence” stage before deciding not to invest in the company.

At this time Sciona also entered into a strategic partnership with Genaissance Pharmaceuticals, a US-based and NASDAQ-quoted company. Genaissance agreed to license its HAP™ technology to Sciona for use in the development and marketing of consumer products. The multi-year agreement gave Genaissance the right to support Sciona's pharmacogenomic research and customer genotyping. In exchange Genaissance obtained a 30% fully-diluted equity position in Sciona.

In September 2004, “second round funding” totalling $4.1 m was raised to develop further products and markets for genetic personalisation of nutrition and personal care advice and products. Burrill & Company and Prelude Trust led the “round”, which also included the investors BASF Venture Capital and DSM Venturing. The “round” was interesting as it included venture capital from two traditional European chemical companies. The funding also accompanied a shift in the company's marketing focus, research and operations to the US market.

THE VENTURE CAPITAL COMPANIES

Burrill & Company is a life sciences merchant bank, focused exclusively on companies involved in biotechnology, pharmaceuticals, diagnostics, human healthcare and related medical technologies, wellness and nutraceuticals, agricultural technologies and industrial biotechnology. Burrill & Company has over $500 m under management in its family of venture capital funds, and has one of the premier strategic advisory and partnering practices in the life sciences.

Prelude Trust is an investment trust, launched in 1997, with the unique objective to seek significant capital appreciation over the long-term, primarily through venture capital investment in unquoted high-growth technology and life science based businesses.

BASF Venture Capital was established in 2001 as a wholly-owned subsidiary of BASF Future Business. This German-based company participates in start-up businesses by providing venture capital to open up new growth potentials. In doing so, it focuses on companies with innovative business models and technologies in which chemistry is an important key to success. Investment is channelled towards companies that can demonstrate successful applications for their product developments as well as market demand. BASF also supports these companies with its expertise.

DSM Venturing is part of the DSM Venturing and Business Development business group. It is an active investor in several venture capital funds and start-up companies in DSM's strategic growth fields of food ingredients, pharmaceutical intermediates and performance materials.

SCIONA'S OBSERVATIONS OF THE VENTURE CAPITAL EXPERIENCE

Sciona's experience with raising funds from the venture capital market provided the following observations.

1. What are the Venture Capital Companies Looking for?

Sciona's experience demonstrated that the venture capitalists look at both the quality and originality of a company's business plan. This not only involves assessing whether the company's products are commercially viable but also whether the management team has sufficient expertise and credibility to make the business plans succeed. The venture capitalists also like to assess the significance and worth of the intellectual property held. Finally, they need to feel comfortable that investing in a company fits well with their existing investments.

2. Issues Arising during the Funding

Sciona found that, although there are a large number of venture capitalists, there are only a few that are able to invest in businesses like Sciona due to its specialist nature. The venture capitalists themselves need the necessary skills and experience to assess the business risks. This is particularly so at the “first round” stage of funding when the business has a very limited track record.

Sciona also learnt of some more general issues that arise from raising venture capital funds.

The funding process – particularly the “first round” stage – normally results in significant covenants being placed on the company that is raising money. These limit management freedom and may also place constraints on “angel” investors. Such covenants may include:

• Board representation requirements.
• Restrictions on recruitment and capital expenditure.
• The requirement to provide regular financial statements and monthly management reports.

Additionally, the valuation of the company, particularly at the “first round” stage, may be extremely disappointing for the management and the initial “angel” investors.

3. The Search for Venture Capital

Sciona also experienced some more general issues relating to the search venture capital.

Firstly, the process is a major and time consuming management commitment. Much time becomes involved in writing and giving presentations to prospective investors and the results from applications to the venture capitalists often yield poor results. The rejection rate is very high.

Secondly, scarce “seed” money may be used in the search for a venture capital partner.

Consequently, rather than send in “cold” applications to the venture capitalists, it is much better to obtain an introduction to the relevant representatives of these investors through a business contact or friend.