The extraordinary positive power of saying no 99% of the time

We don’t know if CIO Matt McNamara actually Iikes saying ‘no’ quite as much as he has to, but the success of Horizon 3 Biotech depends on it. Of the three to five hundred companies they assess in any given year, only about five make the cut. 

Which isn’t always easy on the other 495.

“It's not unusual for a venture capitalist to say we invest in 1% of companies we see. Sadly, we make a lot of enemies along the way because every single person that presents to us is passionate about their company and their product, and we have to say no 99% of the time.”

Still, there are often more bites at the cherry available for eager prospects. If specified milestones are met “we’re more than happy to revisit investment opportunities.”

One reason McNamara backs his judgment in the biotech space is his deep and close to three-decades-long relationship with it. 

In this third and final interview, you'll hear how he trained as a molecular biologist back in the 80s, when, as he puts it, "biotechnology was just starting to become a sexy sector”, before exchanging his white lab coat for a marketer’s suit and tie, and stepping into the world of start-ups and getting his first taste of venture capital, an appetite that only grew.

He also reflects on a significant multimillion-dollar investment success, the delight he gets seeing a technology that Horizon invested in doing good work in skillful hands, and also recounts a confounding and disillusioning moment that shook him hard but taught him a key lesson, one he has profited from and is keen to share.

Edited Transcript:

Of the 500 companies you look at each year how many make the cut?

In effect, we end up making three to five investments per annum out of that 500. So it's not unusual for a venture capitalist to say we invest in 1% of companies we see. Sadly, we make a lot of enemies along the way because every single person that presents to us is passionate about their company and their product, and we have to say no 99% of the time.

Do companies come back round after hitting milestones you might have pointed out were lacking during your initial assessment?

Absolutely. No, that's one of the most pleasing things about this sector. It's not always at the first round. Our feedback is often, we'd like to see the following done before we could get interested in it, or for the example, I used before, if you could tick those two milestones, then we know that you're on the way and there's only a couple of milestones. And that might happen in six months, 12 months, sometimes even 24 months later, and we're more than happy to revisit investment opportunities.

Tell us about your personal background working in biotech industries.

35 years ago, I graduated as a molecular biologist, and my first job was at the bench in a white lab coat. I very, very quickly realised that's not what I wanted to do, and this was back in the mid-80s when biotechnology was just starting to become a sexy sector. And I said I set my sights on trying to bridge Australia's good science with commercialization because, at that stage, we had not been able to do it. And I said, we're going to need to build those skills, and I'd like to be a part of the bridge that can do that.

So my first role was at Merck and then Johnson and Johnson Medical, where I was in sales, marketing, and general management, and I did an MBA while I was at those companies. Then I joined my first startup, which was called E Bioinformatics out of the University of Sydney, and that's where I got my exposure to venture capital and I understood how it worked because that company was backed by a venture fund.

Then about 22 years ago, soon thereafter, I joined my first venture capital fund called SY Capital, and it was a pre-seed fund. I was the CEO and we invested in 10 companies and nine of them completely tanked, but one of them was a big success. It was Viralytics that went on to become that $500 million sale, but we exited it well before that. And it was then that I realised I had a strong aversion to early-stage companies. And so I then joined BioScience Managers and spent 14 years as the chief investment officer, and we had a number of funds that achieved a great deal of success. We had 200 million funds under management, and we had funds that had 22, 24 and 44% IRRs net to investors. So they were very happy with us, and a lot of them re-upped for subsequent funds.

And BioScience Managers use the later stage investment strategy, and that's when I joined Horizon3BioTech, and I helped devise the mandate. I was always going to be sticking with later stage, but I also wanted to include public, private and international opportunities because the problem I had in previous funds was, our mandates were narrow and we were seeing some really good deal flow from our networks that we had to decline because it didn't fit the mandate. And so that's why I'm very, very enthused about the deal fire we're seeing at the moment.

The worst lesson I had was about trusting people. Now, in our sector, because you see so many technologies, there is a line of thought to treat everyone as a crook. That's not in my nature, I like to trust people and verify later. But unfortunately, there was a long time ago, a professor who presented some data to us, and as it turned out, this data, he had falsified. What he had done is he had allocated the results to active and placebo after he'd seen the results.

As a result of us not knowing that we devised, spent many millions of dollars and several years, devised a very strong FDA regulatory approval study and the results were flatline. There was absolutely zero difference between the active ingredient and placebo, probably because it was equivalent to a sultana or a placebo. And so we didn't identify that early, we only found out after we got that zero and one of his lab staff because they were so abhorred with his behaviour that they told us about that, and that was just a really sad moment. So we need to be really, really stringent about data that we believe before we invest.

What are some of the other key risks investors need to look out for?

We have 12 investment criteria that we look at, and a lot of them are obvious to investors when they're doing due diligence of our companies, but the ones that we particularly look at, competition, because it's very hard to know what technology is coming down the pipe, what's behind you. And so we often look at patents and see what is in the market, but our best opportunity is using key opinion leaders because, because we are so well-networked around the world, we are typically only one or two people removed from someone that is at leading edge of this technology. And so we will access those key opinion leaders and ascertain whether this technology is leading or following or about to be overrun.

Other areas are actually intellectual property. You don't know what someone's going to file after you. And it's very sad to get a long way down the track, 90 metres down the track, and you find that there is a technology that is superior to yours or has an indication that can displace your technology that you've invested in. So we do thorough freedom to operate reviews and patent reviews on a regular basis, to make sure that we don't get right to the end of the process and realise we could have known two years earlier. So they're two of the key risks that we find in our sector.

What’s the lightbulb moment where you realised you really enjoy investing in this sector?

We had a high net worth, very experienced investor. He made a $10 million investment in one of our funds, one of my previous funds. And when he told me it was the best private equity investment he'd ever made, and we were allowed to use that in our promotion, that was a very proud moment. But not as proud as when you see someone using a product that you've been instrumental in getting to the pharmacy shelf or to the surgeon's operating table and made a big difference in people's lives. I've seen people recover from conditions where they thought they were not going to be able to recover, and that was easily the proudest moment in my and my colleagues' experience.

How difficult is it for the everyday investor to tap into this opportunity?

If they've got a good broker, they can get pre IPO opportunities, and they can get listed opportunities. And there are plenty of good companies that have performed enormously well. I look at the company Imugene, I've got a number of friends that are in that company at the moment, and they are extremely happy. All I would say to them is, like we, as fund managers, treat it as a portfolio approach. And so they should invest in several because whilst Imugene has been spectacular, there are others that have been spectacularly poor the other way, so I always advocate a portfolio approach.

What a fund manager like us can do is get access to opportunities that the average investor can't, and these are typically in private Australian companies, private international companies, and then, which are pretty obvious, but we see these deal flow that the average investor wouldn't. But the one that where we can really make a difference is actually in ASX companies, we can see because of our skills and our networks and knowing what a company needs, we can see that they're unloved on the market, we can see that they've got potential, we can add value to these companies along the way, and caress them to become the success that they deserve. And so when we choose a portfolio from those three areas, that's how we've typically delivered our ... I mean, we're aiming for a conservative 20% IRR for our investors, but then that's how I've been able to deliver a 22, 24, 44% in the past.

Investing to improve lives globally

Horizon 3 Biotech is uniquely placed to find, develop and deliver health science innovations that will make a positive difference to people’s lives on a global scale. Visit our website for more information.