In follow up to FasterCure’s March 12, 2015 webinar on venture philanthropy deal-making, Ken Schaner is featured in FasterCures’ most recent blog post, which can be found here. The post discusses characteristics of a venture philanthropy deal.
Hundreds of listeners from nonprofit foundations, industry, and academia tuned in March 12 to learn about the growing trend of venture philanthropy in medical research from legal experts, foundations, and companies. “This [venture philanthropy] is not at all a new phenomenon, but the Cystic Fibrosis Foundation’s recent return on investmentfor Kalydeco has placed a magnifying glass on this model and raised new questions about the structure and impact of these deals,” Moderator Margaret Anderson, executive director of FasterCures, pointed out in herintroduction. “We created today’s discussion to provide a practical, ground-level view of what these deals look like, the impact they’re having, and what the potential partners in deals like these need to know.”
Defining characteristics of a venture philanthropy deal
While FasterCures subscribes to a more expansive definition of venture philanthropy that encompasses a variety of strategic approaches, for the purposes of this Webinar we focused in on the strict definition: nonprofits funding for-profit companies. Even within that strict definition there is debate about its meaning; speaker Kenneth Schaner of Schaner & Lubitz, the lawyer who has worked for more than a decade with the Cystic Fibrosis Foundation(CFF) on its successful venture philanthropy deals, noted that even he and his partner have differing definitions. Schaner identified the main element of a venture philanthropy deal as being return on investment, which can take several forms, including capital gains on an equity stake, interest on a loan, and (most commonly) royalties upon achievement of milestones of success.
Schaner briefly reviewed the history of venture philanthropy in medical research, which began with CFF’s initial investment in Aurora Biosciences in 1998 (Aurora was later acquired by Vertex Pharmaceuticals). He emphasized the fact that it took 15 years for that investment to produce a product (Kalydeco, a breakthrough for CF patients) and a return, underscoring that venture philanthropy is a long-term proposition for foundations, and the risk of failure is high.
Offering some practical insights into structuring these deals, Schaner noted:
- Deal sizes are typically between $200,000 and $150 million.
- Royalties are usually capped; for smaller awards (under $6 million), they are most often a multiple of the funding provided (four to six times), with additional royalties if sales are higher than anticipated.
- An interruption license should be considered to ensure an asset can continue to be developed even if shelved by the company or if the company goes bankrupt.
- Foundations should pay close attention to the definition of “the field” in the contract.
Size doesn’t matter
Schaner summed things up by saying the CFF experience has been a wonderful thing for the foundation and the patients it serves, as well as for other foundations by demonstrating the important new roles they are playing. But he actually doesn’t like to use it as an example, since there are relatively few foundations that can afford to invest at the level of CFF. “When I do a transaction that’s $200,000 it has the same potential for helping a project get past the Valley of Death [as a $150 million investment]. Don’t be discouraged that you can’t invest this kind of money. You can invest less and still get great results for your patients.”