Recently, I had the opportunity of chatting with Marc Lohrmann, the Managing Partner of Vesalius Biocapital Fund III (VBC III). VBC III is a 120M€ venture capital (VC) fund investing in late-stage companies in drug development, medical devices, diagnostics and digital health, across Europe.

Listen to "EUVC #1 Marc Lohrmann, Vesalius Biocapital".

We chatted about:

• How Marc and Vesalius work as a country agnostic VC fund.
• The main barriers to cross-border investing.
• How investors without a natural sciences background can create value in Life Sciences companies.
• Why Vesalius moved towards later-stage companies and is investing across a several sub-sectors.
• How Marc invests in these different by dealing with different exit strategies and business models.

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A little bit about Marc Lohrmann

Marc has over 18 years of experience and joined Vesalius Biocapital in 2012 as a venture partner. Since then, Marc advised on the corporate development of portfolio companies of Fund I and Fund II. Marc is the Managing Partner of Vesalius Biocapital Fund III.

Prior to joining Vesalius Biocapital, Marc started eight life sciences companies, namely Reverse Medical which acquired by Covidien in 2014, was an investment manager at Bayer Innovation and worked with several corporate finance boutiques focused on life sciences M&A transactions.

Vesalius Biocapital Fund III portfolio companies address unmet medical & market needs and operate on the basis of strong intellectual property protection.

From operator to VC in life sciences: an emerging trend in Europe

Marc was a Venture Partner for VBC I and VBC II. He shared that he was quite skeptical when the offer to join as managing partner for VBC III came in. Marc was concerned about changing sides of the table.

Is it really a good idea to change to the dark side of the table?
by Marc Lohrmann

What’s really interesting about this, is the decision making process Marc employed. He read a couple of books to better inform his decision. But what really stayed with him was something his wife told him. Marc’s wife encouraged him to embrace this challenge. She made him face the fact that, as an entrepreneur, he had been complaining for ages about VCs.

So, why don’t you go ahead and do it better?
Marc’s wife

With three years of managing partner experience, Marc finds it interesting to work with entrepreneurs, helping them develop their venture. As a former operator, he believes he brings a different flavour, which entrepreneurs appreciate a lot. His experience as an entrepreneur, with a lot of lows and highs, gives him a different perspective in the board room.

It seems that a new generation of operators are entering the scene and becoming life sciences VCs. This has been a trend in the US for some time now, but novel in Europe; where, typically, former big Pharma execs were the ones stepping in. Marc believes this emerging trend in Europe will provide some fresh new insights into the industry in the coming years.

The ups and downs of being country agnostic

For most European VC, the money comes with hard stings attached in terms of geography. Investors in the VC funds (aka LPs) typically have a specific interest in particular geographies, skewing investments into these countries. This is not the case in the US, and is quite specific to Europe. Often, American VCs struggle to fully understand why this is the case in Europe.

According to Marc, VBC being country agnostic really has its upsides. They currently receive deal flow from most European countries. Marc stated that “if you chart the GDP of European countries, those on the top of the list are the strongest” in terms of deal flow. Germany clearly stands out, particularly given the Munich Office of VBC. VBC’s headquarter in Brussels, and the fund’s location in Luxembourg, also lead to significant deal flow coming from BENELUX. Generally speaking, Marc sees great signs from traditional markets like France, Germany and the Nordics. Eastern European countries are also showing interesting development in Life Sciences. Marc gave particular praise to “beautiful Portugal” which has popped out several intercity digital health and therapeutics deals.

However, being country agnostic also brings some operational limitations; particularly, syndication. Marc came back to “beautiful Portugal” as an example; stating that there are not many experienced people and investors in Portugal. This aggravated by the fact that there is very little specialised money for Life Sciences deals. As such, building syndicates in Portugal is difficult compared to other geographies, like Germany, or even regions, like the Bavaria. Nonetheless, Marc shard the example of Sword Health. This is a case of a local investment strategy leading to the set up of a global company. VBC invested in Sword Health together with a family office and, later on, Khosla Ventures and Founders Fund joined in. The American VCs ended up relocating the business to New York.

Different types of founders across Europe

VBC rarely invests in existing business plans. They expect the companies to integrate their feedback and digest it. Either to come back and prove them wrong or, typically, to integrate the feedback and adapt the business plan. This is a collaborative approach with management teams which takes some time, up to a couple of quarters. For Marc, having VBC’s footprint in the business plan increases returns, or improves products and patient care; often both.

VBC, similarly to other verticals, goes through 400 to 450 deals per year and needs to filter them quickly. From Marc’s perspective this is more or less independent of the country. Historial investors/investors interested, science, market potential, competition, IP, and so on, has little to do with geography. He does, however, see very different founder profiles across Europe. Germany, for example, has great Pharma executives; whilst Portugal has really hungry and ambitious entrepreneurs (side: borderline stubborn).

At the end of the day, Marc believes it’s all about being really selective and true to VBC’s investment thesis: investing in unmet medical and market needs.

On remote VC and becoming more effective

VBC is becoming more and more effective in supplying ventures with feedback on how to improve the business plan remotely. Dealing with management teams from Portugal to Turku, Finland, VBC has long been using tools like Zoom; well before the lockdown. Marc believes that geography doesn’t play a major role in working with founders. Overall, according to management teams, input is taken as value add.

This story is a bit different outside of Europe, particularly on the investing side. According to Marc, going over the Atlantic to syndicate is hindered when meeting face to face isn’t possible.

An insider’s view into life sciences investing

The assumption out there is that the life cycle of life sciences companies is long. However, life sciences VCs are exit driven and understand that the relation is short winded, ending with a trade sale (or IPO, even though not the preferred exit route in life sciences). Furthermore, recent figures show that, surprisingly, returns of life sciences are on par or above those of tech funds.

Many find it difficult to understand that each sub-sector deeply affects the exit strategy. The life cycle of life sciences companies differs greatly and, as such, so do their business models. This might seem complex from the outside, and even lead to misconceptions about the complexity of life sciences. It’s all about structuring and segmenting between the different sub-sectors of life sciences; which is not that complex when you take an insider’s view:

In therapeutics deals, once there is good Phase 2a or Phase 2b data, on an interesting indication and new modality, exit likelihood is high. Exits typically lead to double digit returns through big Pharma acquisition.

In MedTech and Diagnostics deals, strategics tens to wait after first sales. This is far after regulatory approval in major markets, recurring sales and post marketing studies. These deals tend to be sold at a critical moment. The venture has generated enough value, but strategics only pay a multiple on sales, or sometimes even income. According to Marc, this is not a great deal for VCs, and is more of a Private Equity approach.

In Digital Health deals, there are so many different business models and sub-sectors. Here exits tend to follow a similar rationale to therapeutics. According to Marc, these companies are “sold based on phantasy, rather than hardcore facts” (e.g. sales, recurring revenue, number of patients, etc.).

Crafting an equity story

Marc has been active in life sciences investing for 21 years now, with no scientific or R&D background. His approach?! He assumes that the technologies, from a scientific, technical and medical standpoint, make sense. He is quick to this assumption because so many talented people have gone through it.

Marc stated that, in the board room, there are already a bunch of amazing R&D people. His added value, and unique perspective, is the ability to create an equity story that is highly attractive to potential acquirers. Marc recognises that this requires a lot of business acumen and market awareness; which is only possible when you look less to the science and more to corporate development and exit strategy. This ends up being “highly valued by entrepreneurs and brings diversity into the board room”.

Crafting an equity story and exit strategy, requires that VCs are very upfront about their investment strategy from the get go. Being very clear helps avoid tension later on; “just like a marriage”.

When you marry, if you are very upfront with what you can expect and can’t expect, that simplifies what you’re doing afterwards.
by Marc Lohrmann

Focus on investors who actually care

VBC’s largest backer is the European Investment Fund, and its second biggest backer is a German pension fund. During fund raising, VBC was driven by the investment topic (i.e. unmet medical and market needs), and it was really important LPs understood what the investment strategy.

What Marc find out was that some investors don’t care about that at all; for them it’s all about return. Marc’s take is that you, as a fund manager, have to decide what kind of LPs you want.

Do they care about the story or just about making money ? If the latter, maybe another asset class is best.
by Marc Lohrmann

Marc shared a great example of a former entrepreneur from the automotive industry. This type of investor really cares about the story, about the investment strategy. These are really engaging conversations. These LPs want to know all about the spirit leading the fund management team to do what they are doing. Approaching this type of investor increases the HIT ratio and, according to Marc, is a much wiser spend of time.

Impacting patient care

One of the major questions for VBC III was whether to go for all the four sub-sectors or only one (i.e. therapeutics). They ended up going for the four sub-sectors. Namely, because it makes for a more balanced portfolio, and it made sense based on previous agreements with LPs. These agreements were such that VBC would look beyond therapeutics, and back deals with an impact on patient care.

Quickfire Round

• Founders need to understand the geographic agenda of VCs and LPs. Fortunately, most founders do.
• Many large VC funds in life sciences were raised recently, these are great and exciting news.
• In the future, expect great deals from VBC and Marc will be supporting founders in realising successful exits.