The asset-centric platform at Index Ventures is built around stringency. The entire concept arose from the realization that drug discovery and development is a complex process, in a low-validity environment (meaning there is often too little data available to make decisions), where the amount of capital required is steeply graded from little to vast sums.
These parameters together imply a requirement for a filter that is more tolerant of false negatives (a decision to kill a project that would, if continued, succeed) than of false positives (a decision to continue a project that will fail later). We call that stringency.
But success is not just about ratcheting up stringency – its about when to apply it as well
It turns out that the “gradient” of filter stringency with time is the major difference between the “pick the winners” strategy, that has some vocal supporters in the pharma industry, and the alternative that DrugBaron calls “kill the losers”.
Moreover, stringency is easier to apply in theory than in practice. As DrugBaron has noted previously, cultural factors bias the kill/continue decision making process in favour of continuing – which automatically lowers the filter stringency. And these cultural factors can be very strong indeed.
Our entire asset-centric platform has therefore been constructed to build in stringency, and to counteract the cultural bias towards continuing. This is achieved in at least three ways: by stripping away the complexity due to having more than one asset in a company, everyone involved can see more clearly the risks and benefits of continuing with a single asset. And at the same time, by providing an environment where entrepreneurs are protected from the consequences of the kill – so long as they have done “the right things” with an asset. And perhaps most importantly, by ensuring each entrepreneur has a single shot at a time to achieve a significant upside, they are incentivized to ask repeatedly if their current project really is the best use of that singular opportunity. Equally importantly, its built to grade that stringency from low to high as the capital at risk increases.
But, as DrugBaron commented only recently, the benefits of such a model remain substantially theoretical – just like the arguments against “pick the winners” as a strategy. These strategies are relatively new, so data is difficult to come by. The asset-centric concept has only been mature from a handful of years, and while the first exits are certainly encouraging, the jury remains out as to whether asset-centric investing really can deliver a step-change in return on capital deployed. The “pick the winners” strategy in pharma is even more recent.
Against this background, it was certainly exciting to see the conclusions of a recent analysis by Boston Consulting Group (BCG) looking at factors that predicted success in pharma R&D. It provides actual evidence for the principles of asset-centric investing, and against “pick the winners” – the key, as we suspected all along, is not only high stringency filters, but calibrating stringency in line with capital at risk.