Lilly Ventures and Protagonist: To Be or Not To Be?

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This means that funding Protagonist is aligned with a CVC strategic investment approach rather than a pure CV cantered solely on financial gains.

While the above reasons point to the attractiveness of the project, Lilly Ventures faces several challenges and potential risks associated with failure and other costs.

The first problem is related to the presence of co-funders. Normally Lilly Ventures invests as part of a syndicate group. While several well-known Australian VCs have signed up to co-invest in Protagonist, the company is unable to lure potential investors from the US. There are two main reasons explaining why Lilly Venures struggles to get investors on board. First, while the company’s location would bring favourable cost reduction benefits, the distance and time difference make co-investors sceptical, as they prefer to be physically close to their early-stage companies. Moreover, relocation to the US is impractical due to the costs of moving. The second reason relates to the life-cycle of the investment. In fact, the returns on investment in Protagonist would manifest themselves only in the long-run, which is not appealing to conventional VC investors seeking quick financial returns. Several co-investors, while not opposed to Protagonist’s location in Brisbane, rejected the potential deal because they could not justify an investment that would not see liquidity for five to seven years. Therefore Lily Ventures has difficulties in making the case to investors for early-stage biotech start-ups. The absence of US co-investors would reduce the possibility of spreading the investment risks and increase Lilly Venture’s financial burden. It would also entail that the parent company could not benefit from investing knowledge that they would bring to the table. It is also problematic as the relation with co-funders enables a CVC fund to enlarge the impact of its investments, particularly beneficial when technological uncertainty is high (Lerner, 2013).

Another set of issues revolves around the relationship between different stakeholders involved in the deal, specifically Lilly Ventures and Protagonist. The non-disclosure agreement that Protagonist had Lilly Ventures sign led to wasted time and resources, it implied a non-reciprocal relationship and it reduced the benefits stemming from the knowledge spillovers that would accompany the transition – one of the main purposes of CVC. Additionally, Protagonist regarded itself as an independent discovery venture unit and only wanted to take on a partner at the clinical trial phase. This immobilizes Lilly to take action and influence the future direction of the firm. Investing in Protagonist might also entail potential issues such as conflict of interests and governance problems.

Finally, the approach taken by Lilly venture in dealing with protagonist resembled more the one of a VC, thus contradicting their CVC principles and distancing themselves form the strategic objective of the company. Moreover, even if the funds were to be successful, Lilly might struggle to leverage on the knowledge and resources gained from start-up investments.

Recommendations

A careful analysis of the pros and cons of funding Protagonist reveals that Eli Lilly can greatly benefit from this investment in strategic terms. Yet, as suggested by Lerner (2013) companies seeking to gain resources and agility from corporate venturing should follow specific steps, such as goals alignment, the provision of the right incentives, and the creation of systems to transfer knowledge. The case analysis suggests that Eli Lilly should go ahead with the investment, yet it should meet the following conditions.

First, it should carefully put in place procedures to manage the resources, knowledge and networks offered by Protagonist. It should collaborate more with the Protagonist partners, renegotiate the agreement to better suit Lilly’s interests and redefine a more appropriate exit strategy.

Second, Lilly Ventures should make sure that there is a strong alignment of goals amongthe corporate fund, the start-ups and the parent company in order to allow Lilly Ventures to draw on the parent’s expertise (Lerner, 2013). Without that alignment, useful knowledge is less likely to flow from the stat-ups to the corporate parent. Therefore, Lilly Ventures should perform a careful due diligence of Protagonist, get to know its employees as well as other potential co-founders. Only when they assessed whether all the interests are in line will they be able to go ahead with the investment

Subsequently, it should focus on getting investors on board. It should highlight the benefits of the deal to potential co-funders, by stressing the synergies brought by the collaboration between the start up and the parent company. Indeed Eli Lilly can bring much value to Protagonist in terms of reputation, skills and resources – from scientists, to infrastructure and employees. This in turn can change the manner in which external venture capitalists assess the start-up future prospects (Lerner, 2013). Lilly Ventures could also leverage informal relationships and networks with investors in the US to form a syndicate groups.

Eli Lilly should also be committed to effectively gather valuable knowledge and resources. One of the major knowledge transfer problems for Lilly Ventures, as given the geographical location of Protagonist it might be challenging to capitalise on the knowledge of the start up. Eli Lilly should therefore actively manage the knowledge spillovers, for instance by creating linked units dedicated to this task and ensuring frequent communication between the Protagonist’s product developers and experienced workers at Eli Lilly.

Another step to follow revolves around the design of powerful incentives. Eli Lilly should link compensation to demonstrated investment success, not only in financial terms but also in strategic ones, as this leads to success, better employees, and more profitable investments. Employees could also receive a share of profits generated and bonuses based on less tangible benefits to the corporation.

Finally, Lilly Ventures should not give up on this promising project. There are risks for businesses that rethink their commitment to various investments as it can lead the parent company to be regarded as a unreliable investor. In turn, external investors might be hesitant to join and start ups might be wary to accept its funds (Lerner, 2013).

To conclude, for companies that believe conventional in-house research is inadequate to the tasks of producing valuable knowledge and insights into breakthrough technologies or market changes, the creation of a venture fund might be well suited to bring those innovative discoveries that enable businesses to stay ahead of