Dementia Discovery Fund: Crowdsourcing a Cure for Alzheimer’s
When the goal of curing Alzheimer’s trumps financial returns, a philanthropic VC fund begins to look more like a hub of open innovation. The Dementia Discovery Fund encourages risky innovators through its mandate to back a wide range of potential treatments for dementia.
The Dementia Discovery Fund (DDF) is a venture capital fund managed by the UK firm SV Health Investors. However, the DDF differs from other VC funds in that generating returns is a secondary goal; its primary aim is to create meaningful new medicines for dementia (in particular, Alzheimer’s Dementia) [1]. Through this lens, the DDF can be thought of less as a VC firm, and more as a massive, ongoing crowdsourcing competition. Private innovators in the dementia space are incentivized to bring their ideas to the DDF at any time. If their idea is deemed to be a “winner” they may receive much needed venture funding and world-class business guidance from the DDF. The fund structure also acts as a tool for ensuring financial discipline as the DDF selects and invests in these winning ideas.
Open innovation is crucial to the DDF’s management of product development. The fund, who’s capital comes from a combination of the UK government, several large pharma companies, and philanthropists such as Bill Gates [4], has a 15 year mandate to validate novel hypotheses and expand the breadth of targets and mechanisms in development for dementia [1]. This strategy aims to create such a wide distribution of potential solutions that it increases the likelihood that at least one will be effective. This is in line with the core values of the famous IDEO design thinking; sourcing a wide range of ideas helps lead to breakthrough solutions [3], Intuitively it makes sense that accepting ideas from the widest range of sources will lead to the largest possible distribution of ideas, so open innovation is a great solution.
As the DDF grows its portfolio of early-stage dementia drug candidates, its lack of diversity leaves it extremely exposed to risk. But at the same time, the fund is able to capitalize on the focus of its goal to begin to mitigate risk. In the short term, the DDF is able to invest in more resources upfront, such as establishing important relationships with healthcare professionals, assembling a world-class scientific advisory board, and purchasing a CNS small molecule library [5]. None of these investments would be feasible at this scale for a single, early stage drug candidate. However, when they can be used by all companies in the DDF portfolio, the costs are spread out and the investment is more justifiable. In addition, access to these resources allow the portfolio companies to operate more efficiently, ultimately reducing risk to the DDF.
In the long term, the DDF implements open innovation responsibly by structuring themselves as a VC fund. The structure of individual investments is typically to seek an ROI gradually through milestone based incentives [7]. By seeking an ROI from the “winners” of its open innovation, the fund extends the length of its sustainability, regenerating capital to invest in future ideas. The milestone incentives are important for de-risking as well, since they call for incremental returns before the riskiest validation studies are conducted.
The DDF seems to have a good strategy for sourcing and developing novel ideas for dementia medications through open innovation. However, a major drawback is still the immense risk. Assuming a diverse portfolio is not an option, there are still a few additional steps the fund can take to continue to reduce risk. One is focus on the next round of investors earlier on in the development cycle. If a large VC firm is poised to invest in a DDF asset after a validation study, the DDF could try to sell that firm an option to invest before the study takes place. This option would allow the DDF to earn some returns up front and share the massive downside risk of a negative study. Another step would be to increase its push for fundraising via philanthropic routes. Private philanthropists have injected over $150M into Alzheimer’s research in the past year [2], [6]. By building a consortium of dementia research resources, DDF is creating a sustainable competitive edge in the Alzheimer’s research market. It follows that they should be able to convince philanthropists that their money will have the greatest chance of leading to new treatments if it is donated to the DDF, ultimately allowing them to sustain funding in the future despite the extreme volatility of their fund.
As funding remains to be the main concern with the DDF’s open innovation strategy, one question that remains is whether there are more strategies to making this finance sustainable. Across the rest of the VC industry, one would imagine there are other sectors that achieve similar advantages in consolidation of resources. Are there learnings that could translate into the context of the DDF and allow them to remain sustainable, or even become profitable over time?
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Citations:
[1] About the Dementia Discovery Fund – Dementia Discovery Fund (https://theddfund.com/about/)
[2] Bill Gates donated $50M following father’s Alzheimer’s diagnosis (https://www.aarp.org/health/dementia/info-2018/bill-gates-alzheimers-early-detection-tool.html)
[3] Design Thinking: A Method for Creative Problem Solving – IDEA U (https://www.ideou.com/pages/design-thinking)
[4] Investors – Dementia Discovery Fund (https://theddfund.com/about/)
[5] Partnerships – Dementia Discovery Fund (https://theddfund.com/about/partnerships/)
[6] Philanthropists Step up with $109 Million for Alzheimer’s Research (https://www.prnewswire.com/news-releases/philanthropists-step-up-with-109-million-for-alzheimers-research-300684541.html)
[7] Portfolio – Dementia Discovery Fund (https://theddfund.com/portfolio/)
Dementia is an difficulty and expensive disease that is only growing as the population ages. This organizations supporters and 15-year runway seems ripe for open innovation. I wonder if DDF could enhance its probably of success if it not only accepts a wide range of ideas but also connects like-minded inventors in collaborative teams? A subset of divergent ideas with undoubtedly converge on overlapping innovations. Bringing together creative thinkers has the potential to unlock incredible discoveries across the ecosystem.
Great job at outlining a very novel way that a quasi-VC firm is approaching medical research. I strongly agree that crowdsourcing ideas via an open innovation model can potentially lead to a broader distribution of ideas and have a higher chance of a breakthrough solution being found. One question I have, though, is whether this approach could undermine the traditional longitudinal / cumulative nature of scientific research. There’s a rich history of scientific breakthroughs emerging from learning from the discoveries of others (i.e., standing on the shoulders of giants). Do you think that the DDF should loosen its role as a repository for ideas and have all ideas be publicly accessible? I think there’s a major advantage of cumulative learning and being able to see and react to other people’s ideas could lead to even more innovative solutions than if participants in this open innovation competition were to just submit their ideas in a vacuum / isolated manner. I suppose that one fundamental challenge of opening up all submitted ideas to the public could undermine the financial reward structure where some participants might feel gypped if someone else incrementally improves on the idea they’ve already submitted. I wonder if there could be an alternative reward system to keep people motivated to submit their ideas if all of these ideas were to be accessible to the public…
The structure of the industry is capitalistic, so it naturally incentivizes competition (and thus not sharing data). However, there are examples of consortiums that aim to address this. One example I’ve heard is many large pharma companies agreeing to share their relevant data amongst themselves for a year or two (enough time to give them a competitive edge vs the rest of the industry) and then agree to make that data known to the public. This at least prevents the data from being locked away forever. I believe the DDF does that in a sense, but since they work with early stage companies, they do not have much of the more meaningful clinical data to share.
Thanks, Joe. My biggest question about the DDF concerns how the fund determines whether and how long to continue investing in medicines for dementia. The examples of open innovation given in our assignment come from the technology industry. In that industry, the cost of failure—both to the “open innovator” and to users providing ideas to that organization—is extremely low. For example, an unhelpful Yelp review takes only a few minutes of a user’s time to write and almost no resources to host on the website. Further, I believe that it will automatically be buried (effectively winnowed out of consideration) as more helpful reviews are added to the page.
By contrast, in drug development the cost of failure is very high, so I assume that there is a greater need—at least with some innovation ideas—to withdraw support from them at a certain stage given their expected probability of success. So how does the DDF evaluate ideas as part of the winnowing process (moving from divergent to convergent thinking, to use the language of IDEO)? What is the process, if any, for deciding not to invest more resources, and what are the criteria?
Their strategy is to develop the new ideas to some specific value inflection point. Typically this will be one or multiple killer experiments that should either de-risk the asset and provide a strong “Go” signal, or expose a flaw in the asset (toxicity, lack of efficacy) and provide a strong “No-Go” signal. If the signal is go, they will engage industry VC or Pharma partners to back the asset through later stage development. This allows them to exit and re-coup their returns earlier on. If the experiment signals “no-go” or is unclear, the project is likely to receive no more funding.
Thanks for the explanation!
Thanks Joe – this is an especially interesting topic to discuss related to dementia considering the size of the burden along with the amount of new solutions that we have seen fail in the past decade. I wonder if this open innovation strategy is beneficial considering it can widen the net of potential solutions and hopefully find stronger solutions in the process. Do you think that this strategy is able to combine the best attributes of both the non-profit charities and the more profit driven funds, or can this prove to be inefficient as an imperfect version of both without a clear mission?
The goal is certainly to combine the best attributes of both. I don’t see why they wouldn’t be at least as good as any charity or for-profit fund (to be clear, DDF strongly asserts that they seek an ROI, but they are largely funded by charity). One possible concern is that, being backed by charity, they may not have the freedom to tap into expensive resources that could be seen as wasteful, but I think this is a very minor drawback (and possibly even an advantage).
This is a really interesting example of impact investing – we’re seeing more and more companies / funds prioritize social impact over financial returns (which I actually think in many cases will lead to longer term financial success). As you mention, there’s a tension with DDF’s concentrated bet – obviously there is diversification risk, but at the same time, their singular focus on Dementia allows them to become world-class, potentially increasing access to more philanthropic capital. I’d be interested to see if this model gets replicated for other types of disease.
As has been said before, very nice article. I’m curious the extent to which picking “winners” to invest in impacts the potential benefits of open innovation as there may be ideas passed over which could have been the breakthroughs, though the bar for investment may be low if primarily funded by charity. I’m also curious about the extent to which they are beholden to external LPs. If they are responsible to external LPs, I could see downside potential in pressure to over-curate investment choices limiting the benefits of open innovation, as well as the benefit of being able to stick to the high risk non-diversified strategy focused on dimension as the external LPs will be theoretically highly diversified investors already. If primarily beholden to internal stakeholders or charity stakeholders, I could see the incentives reversing toward broader investment opportunities but requiring greater diversification to lower the stand-alone risk of the firm. It will be interesting to see how they navigate the capital pressures in striving to maintain as open an approach as possible to maximize the potential for finding solutions.