1Mby1M Virtual Accelerator AI Investor Forum: With Mo Islam, Partner at Threshold Ventures (Part 3)

Sramana Mitra: Could you talk a little bit about the financing journey of a company that has a 10-15 year lifecycle?

Let me set this in context. The world that we have lived in for the last 30 years is that VCs want to go from zero to a hundred million dollars in five to seven years. That is the unicorn trajectory, so to speak. Now if you are looking at 10-15 year timelines, how do we address that from a venture structure point of view, limited partner expectations point of view, and so forth?

Are we now talking about splitting it up like in biotech, for instance? Companies get acquired after Stage 1 clinical trials. Companies get acquired after Stage 2 clinical trials. They don’t necessarily stay within the same corporate structure for the entire journey, right?

As you said, large pharma companies constantly outsource R&D to small companies and then acquire, bring them in, and do maybe Phase 2, Phase 3 within a large company structure.

Is that what we are looking to see in the cycle of the AI-enabled drug discovery companies like Verge?

Mo Islam: Potentially, I’d say with some of these companies, once you’re in clinic, there’re paths to potentially public markets, right? Or you could spin off an individual asset into its own company and take that public, which we have seen some folks do.

More broadly within venture, I think there has been a realization that the five-to-seven-year path to liquidity is probably gone. We don’t see that anymore. We do see more like a 10 year plus path.

Sramana Mitra: Not five to seven years liquidity so much, but five to seven years to a hundred million in revenue and that fast clip growth so that you have enough valuation even if you’re doing the rest of the journey. People can come in at later stages.

Mo Islam: In some cases, we’re actually seeing $100 million revenue in less than five to seven years. Especially within AI, the growth has been explosive in some of these companies.

But with respect to a venture fund, they’re typically like tenure funds, and LPs have an expectation of liquidity within that timeline. That’s what’s changed quite a bit. Even $100 million of ARR that used to be the barometer where you could think about going public, that’s gone now.  

Now the bar is much, much higher. That’s why we’re not seeing a lot of companies go after public markets.

Sramana Mitra: One of the things we are seeing, though, is the earlier stage companies exiting into later rounds of financing. That’s one of the ways people are bridging that longer cycle, but I think the desire to have that high velocity growth has remained.

Mo Islam: Oh, yes.

Sramana Mitra: It doesn’t necessarily apply to drug discovery, the way it applies in software. I think your Atomwise business follows the cycle of a software business. So that can get to that kind of velocity in that kind of timeframe.

Verge, I think, is on a different model.

Mo Islam: It is. Both have a mix of tech and biotech investors, which I think has been helpful to guide some of the direction that they could go in terms of future cap kind of capital financings.

Atomwise is very dependent on where their partners will take their assets because it is more of a tech platform play. On the other hand, Verge is more of an AI enabled biotech, and they have a path to potentially public markets depending on how their asset performs in the clinic.

So, they’re slightly different. Broadly within drug discovery, once you have something in clinic, that does open up the opportunity to look at public markets because there are public market biotech investors who know how to value those assets. It may still be a pre-revenue company, but you have very positive clinical data that which can be used to underwrite that company in a public market setting.

Software is more traditional. What used to be $100 million of ARR is now more like $200-$250 million before you’re considering going public. That bar has gone up and made it a lot harder in those sectors.

We just had our annual meeting with our LPs not too long ago, and there’s some optimism over the next four years where things may start to open up.

This segment is part 3 in the series : 1Mby1M Virtual Accelerator AI Investor Forum: With Mo Islam, Partner at Threshold Ventures
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