The science driving precision medicine — specific therapies developed for narrowly defined groups of patients, often using genetic or molecular profiling — is advancing rapidly. But science is not enough. Exploiting these opportunities requires significant capital. That’s because research to develop a new treatment and bring a new drug to market is extremely expensive, and conventional methods for obtaining funding aren’t adequate. Consequently, new funding models are required in which disease-focused nonprofit research foundations play a central role in raising capital and mobilizing an ecosystem focused on controlling and curing a disease.
For many diseases, funding early-stage R&D and innovative startups has increasingly been the domain of venture capitalists (VCs). However, the VC business model requires spreading risks and not concentrating multiple bets on any one disease. Consequently, VCs are rarely focused on curing specific diseases. Yet, because the science is so uncertain, making multiple bets on one disease is exactly what is needed to combat a specific disease.
This is where nonprofit foundations can play a critical role in raising funding and activating a broader ecosystem. On their own, disease-focused nonprofits can’t raise enough money for finding treatments. But with the right strategy and leadership (topics we discussed in earlier HBR articles) and with enough money, they can entice other investors and companies to ensure that their disease is getting enough attention and funding. That is a central finding of our work at the Harvard Business School Kraft Precision Medicine Accelerator, whose mission is to accelerate the development of cures for cancer and other diseases.
Since nonprofits are often narrowly focused on one disease area, they know about the relevant scientific research and the promising entrepreneurial activity taking place in that domain. As a result, they can help those innovative companies that have the greatest potential for successful treatments.
Through our work, we have spoken with and learned from a new generation of leaders at nonprofit foundations who are developing sustainable funding models, raising significant amounts of capital, and bringing together multiple stakeholders to accelerate progress in fighting a particular disease. Three approaches stand out:
1. Create sustainable revenue streams. Historically, foundations often made research grants and hoped they led to success. But with research costing so much, we see some creative nonprofits, such as the EB (Epidermolysis Bullosa) Research Partnership, adopting a more businesslike mindset to develop sustainable revenue streams where research investments are continually replenished.
One way to achieve this goal is to build terms into grants that can provide the nonprofit with revenue when grants yield tangible results. For example, a grant recipient might provide a foundation with payments upon achieving certain milestones. A foundation might also require access to intellectual property (IP) that is created, along the right to assign or license that IP if it is not being used by the grant recipient to the satisfaction of the foundation.
Other organizations, such as the Muscular Dystrophy Association (MDA) and the Pancreatic Cancer Action Network (PanCAN), are working with industry to monetize (appropriately) and generate a return from the valuable assets they have developed, including databanks, biobanks, clinical networks, and patient registries.
The idea is for nonprofits to have more of a business orientation by looking for appropriate opportunities to leverage the organization’s assets resources in recoup some of the research-related costs. Doing so can help sustain the organization’s efforts.
2. Venture philanthropy. Venture philanthropy is still philanthropy, where a donor gives money to a nonprofit and receives a tax deduction. But with venture philanthropy, a donor’s contribution is earmarked by the organization to invest in for-profit ventures — typically early investments in startups that go beyond funding: The foundation can also assist with access to a clinical network focused on the specific disease and can help identify patients, partners, and collaborators.
For multiple reasons — including management attention, governance, and fundraising focus — it is often appropriate for a nonprofit to set up a separate venture philanthropy fund to make these investments. Any investment returns that are generated are returned to the fund for additional investments.
Pursuing a strategy of venture philanthropy requires donors who understand that cures often come from entrepreneurial for-profit companies. These individuals embrace the idea of making donations that will be used for investments in for-profit ventures aimed at treating or curing a disease and aren’t looking for a financial return on their philanthropy.
Examples of nonprofits that have taken this approach include the Juvenile Diabetes Research Foundation (JDRF) and the Multiple Myeloma Research Foundation (MMRF). JDRF raised $90 million to launch the T1D Fund. To date, the fund has invested in 15 companies focused on type 1 diabetes, which had been an area neglected by researchers and companies. Importantly, the T1D Fund’s efforts have sparked far greater interest in type 1 diabetes research and have catalyzed over $200 million in additional investment in this area.
More recently launched, the MMRF’s venture philanthropy fund expects to raise $50 million in its first five years and has already made several initial investments. Through its venture philanthropy activities, the MMRF’s involvement in deals provides more value to a portfolio company than just money. It provides companies with access to its databank, biobank, and clinical network, as well as the expertise of its scientific and clinical leaders. By partnering with an early-stage company, the MMRF intends to help the company go further, faster.
Both organizations have raised money that allows them to partner with venture capital funds and make sure that the funding ecosystem is providing capital to combating their disease.
3. Impact funds. When the science for a disease is far enough along, efforts to find cures can tap investment funds that were created to earn market-rate returns. Several of these impact funds, such as the UBS Oncology Impact Fund and the Dementia Discovery Fund (DDF), have raised significant capital from sophisticated investors.
The UBS Oncology Impact Fund is a $471 million fund created by multinational bank UBS to appeal to high-net-worth clients, who each invest $500,000 to $1 million. Venture capital firm MPM then leverages its domain expertise in oncology to invest these funds in private and public companies.
DDF, which is focused on making investments in finding treatments for Alzheimer’s and other kinds of dementia, has raised $350 million from seven leading pharmaceutical companies, AARP, and Bill Gates (personally, not through his foundation). SV Health, a venture capital firm with offices in Boston and London with domain expertise, is managing and investing this fund.
At the risk of stating the obvious, it is important for an impact fund organization to bring on board scientific and venture capital experts who can lead its efforts to identify and structure investment opportunities.
Picking the right approach
Which of these approaches is right for a particular nonprofit research foundation?
The right answer depends on the maturity of the science for the disease it is trying to control or cure. It also depends on the number of companies in the space, the maturity of the ecosystem, and the mindset of the organization’s board and donors, as well as its ability to attract top talent.
If the science is early and immature, the organization may be best served by making grants and working to embed creative contract terms to create new revenue streams to recoup and replenish some of the organization’s research-related costs, thereby making these activities financially sustainable on an ongoing basis.
If the science is more mature, with early-stage companies in the field, venture philanthropy may be the best approach. The foundation will need two things: support from donors who understand and embrace the idea that their donations will be used to make investments, and the right team and organizational capabilities to be a credible partner for these ventures.
If the science across a broad disease area is further along — with multiple credible companies and a robust ecosystem of players working in this disease area — the best approach for a foundation may be to raise significant capital for a broadly targeted impact fund that aims to deliver market-rate returns. An impact fund may be appropriate for investing in efforts to develop therapies for related diseases under one umbrella, such as “cancer” or “neurological diseases.” Impact funds can also be appropriate vehicles for investing in scientific platforms that can be applied to multiple diseases.
With a comprehensive strategy, capable leadership, and innovative funding models, nonprofit research foundations will have the base that is necessary to leverage scientific breakthroughs from precision medicine to drive efforts to find treatments and cures.
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How Nonprofit Foundations Can Sustainably Fund Disease Research - Harvard Business Review
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