Using Pitchbook® we have identified 56, EUR >50M, M&A transactions of VC funded companies developing therapeutics from 2010 to 2020 and have modelled the investor cash flow in each of the companies. Combined, the M&A’s returned a multiple of 6.4x.
The 56 companies were financed with 138 financing events (1999-2019) and in the same period Pitchbook® registered 1553 VC-backed financing events in therapeutic companies in total.
With a VC fund performance requirement of 3x, a EUR 100M fund would need to invest EUR 47M into the companies from our M&A analysis (6.4x47M = 3x100M). Assuming a fund investment average of EUR 7.5M per company in 12 portfolio companies – the fund needs at least 6 (47M/7.5M) of these companies over the typical 5-year investment cycle.
At random, you will have an approximate 138 in 1553 (roughly 10%) chance of investing in a company that later will M&A.
To get 6 companies that will M&A EUR>50M out of a 12 companies’ portfolio, you need to improve your chance of a correct draw to 50% or approximately by 5 times over random pick. Being 5 times smarter than a random draw is what it takes in venture capital when you focus on therapeutics.
Food for thought?