Category Archives: venture capital

VC Financing Down for First Half of 2011

EvaluatePharma recently reported VC investments in companies developing human therapeutics (excluding diagnostics, devices, medical instruments, etc.).  A total of $1.9 million was invested in 98 deals the first half of 2011.  If this trend continues for the remainder of the year, 2011 will be the worst year for VC financing during the past five years.  For comparison, $4.5 million was invested in 270 deals in 2010.

Companies developing oncology drugs continue to attract the most of money (34% vs. 31% for 2010).  CNS companies attracted 15% of VC investments, and anti-infectives got 12%.

Unfortunately, the downward trend is not surprising considering that the VC industry itself continues to contract.  LPs want liquidity in times of uncertainty, and venture capital as an asset class is not very liquid.  Other headwinds that may be contributing to the declines VC drug investments include a conservative FDA regulatory environment, as well as Medicare reimbursement uncertainty, expanding development timelines, and increasing costs.

That being said, there’s still a ton of unmet need in the drug therapy space and a ton of very exciting technology being developed.  Hopefully, enough money will be available to commercialize these new technologies.

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All Good Things Must Come To An End

As I’ve mentioned previously, the venture industry is undergoing a contraction period. Unfortunately, the venture fund that I’ve been working at for the past two years has not been immune to the current trend.

It is with great sadness to have to leave the fund. It’s been a wonderful experience working in venture. I’ve met a ton of very smart people and learned a lot about emerging technologies and markets.

Unfortunately, it’s a tough time for the venture industry as a whole, and I believe a very difficult time for life sciences investors in particular. While a ton of innovation still exists, healthcare reform and regulatory headwinds have made early-stage life sciences investing more risky. I believe the pendulum will eventually swing back the other way, but it’s hard to say when it will at the moment.

Investing in People, Not Products

It’s a cliche that “VCs invest in people first and foremost.” VCs will argue that the an experienced management team knows what it takes to commercialize a technology. But does it make sense to invest in entrepreneurs without a technology or product? Apparently, VCs think so.

Clovis Oncology raised $145 million earlier this year without a single product to commercialize. Clovis’ management team consists of former executives from Pharmion, which was acquired by Celgene in 2008 for $2.9 billion. Clovis plans to acquire or license and develop oncology products. Investors include Domain Associates, New Enterprise Associates (NEA), Versant Ventures, Aberdare Ventures, Abingworth, Frazier Healthcare Ventures, and ProQuest Investments. ProjeX Therapeutics, which is backed by Sofinova, Ascalon, and Kineta are also pursuing similar acquisition/licensing models.

Given the risks and costs of developing drugs, investing in companies pursuing acquisition/licensing makes sense. Why invest in five separate companies with five seperate products and five management teams, when you can get a portfolio of products all managed by one, experienced management team. Investors still get a say in what products/technologies to license/acquire as long as they have board representation. It’s simply much more efficient and cost-effective.

I think we’ll start to see more and more companies like Clovis get funded in the future. It will be interesting to see how successful these companies become. Unfortunately, if this trend continues, the individual entrepreneur will have an even harder time raising capital.

Next-Gen Genome Sequencing Attracting Investors

Despite the financial conditions, companies developing next-generation genome sequencing technology have been able to raise significant amounts of money. In August, Complete Genomics raised $45 million while Pacific Biosciences raised $68 million. Don’t forget that Pacific Biosciences just raised $120 million in 2008. Both companies are pursuing the “holy grail” of genome sequencing, being able to sequence an entire human genome for less than $5,000. Keep in mind that the first human genome (Human Genome Project) took 13 years and $3 billion to sequence. See the recent article in Forbes for more on Pacific Biosciences.

While some people argue that sequencing the entire genome is not necessary, especially since 90% of the genome contains “junk” DNA, for less than $5,000, it doesn’t really matter. The initial customers for genome sequencing technology will likely be drug companies for use in clinical trials, but as costs decrease, consumers will eventually become the customer. Look at the success of companies like 23andMe.

A number of next-next-generation companies, pursuing complete genome sequencing for less than $1,000, are chasing the tails of Complete Genomics and Pacific Bioscienses. They include Halcyon Molecular, Genovoxx, Lucigen, Sequenom, Oxford Nanopore Technologies, ZS Genetics, Anvantome, and VisiGen.

Highlights from California Bioscience Business Roundtable

A number of topics was discussed at the recent California Bioscience Business Roundtable including the venture financing environment, follow-on biologics (biosimilars), and health care reform.

Doug Kelly, MD from Alloy Ventures gave a pretty bleak outlook on venture financing; he even used the word “Armageddon” in describing the current environment. I was actually surprised to hear that he was not looking at any biopharmaceutical drug investments at the moment. Uncertainty surrounding biosimilars regulation and the FDA approval process were making it difficult to make any big bets. Adding to that is the financial crisis that is limiting the ability of VCs to make investments. Bill Gurley from Benchmark Capital has a great explanation of how the financial environment is impacting VC on his blog. I thought I was relatively pessimistic but Doug Kelly really depressed me!

Lori Reilly from PhRMA and Sam Youngman, White House correspondent from The Hill, discussed health care reform. The Democrats have not been doing a good job advocating health care reform apparently. Although, the recent passing of Senator Ted Kennedy might be a catalyst that galvanizes the Democrats. President Obama should start making an even bigger push for reform as a result. It’s difficult to see whether any legislation will get passed by the end of the year given the amount of time Congress has left, but eventually, a compromised bill that doesn’t make anyone happy will get signed. If the Democrats cannot get something signed soon though, the opportunity for health care reform will eventually die, similarly to what occurred during the Clinton administration.

Geoff Eich, Director of Regulatory Affairs at Amgen, highlighted the success of follow-on biologics regulation in the EU. For example, interferon biosimilars had different characteristics than branded interferon and caused relapses in patients. Ultimately, the EU rejected the interferon biosimilars. Human growth hormone (hGH) biosimilars suffered problems with side effects initially until it was discovered that there were problems with the purification process. Once the problem was solved, EU regulators approved hGH biosimilars. These examples clearly show that there will be a number of technical hurdles for biosimilar manufacturers to overcome. Just imagine how difficult it will be to manufacture antibodies if it’s this difficult to do more simple proteins.

Top Life Science VCs

FierceBiotech just released a list of “top” life science VC firms. The article includes descriptions and different deals of each firm. It’s a good resource to learn more about the life science VC firms listed, in particular what types of therapeutic areas and at what stage of development they are focused on. The definition of “top” here can be a bit misleading though. I believe that the term “top” used in the article really means most active. Nonetheless, all of the firms listed have a very good track record of making investments. There are many more VC firms that invest in life sciences, so entrepreneurs looking for financing shouldn’t limit themselves to this list only.

VC Career Advice

I’ve been talking recently to a number of people interested in pursuing a career in VC. It’s really difficult to offer any good advice as to the best way to become a VC because there are a number of different paths to choose from. VCs can come from investment banking, management consulting, start-ups, big corporations, etc. There is no “typical” career track to follow to break into VC.

With a very limited number of openings each year and many qualified applicants, VC firms can be very picky in their hiring; most VCs working in life sciences have either an M.D. or Ph.D., and several have an M.B.A. in addition to the other degrees. As the VC industry contracts (see figure below, source: WSJ), there will be even fewer positions available.

While there’s no guarantee of landing a job, I believe the Kauffman Fellows Program is a good way to get your foot in the door. Search firms, such as Glocap, Pinnacle Group, and Polachi, might also be helpful.

I’d like clarify a misconception that some people might have about being a VC. I absolutely love my job, and I’m very fortunate to work with very smart, stimulating people. It’s a lot of fun meeting entrepreneurs with really interesting ideas about solving the world’s problems. There is no such thing as a perfect job though, as every job has its pros and cons, and being a VC is no different. Let me know if there are any jobs out there that will pay you to sleep with models (j/k). While it may appear that being a VC can be somewhat glamorous and lucrative, it is definitely not always the case; especially if you’re not a partner. I rent a one-bedroom apartment and lease my car. I have about $35K remaining of almost $100K in student loans to pay off. I am by no means poor, but my life is not very extravagant either. I believe most VCs who aren’t partners live relatively modest lifestyles.

Even if you overcome the odds and land a position, the probability of becoming a partner is relatively low. With fewer firms remaining, there are even fewer partner positions available. Ultimately, “you eat what you kill” in this business, and if my investment decisions result in poor returns, I won’t survive in this business for too long.

Check out John Gannon’s VC Career Resource page for more information.

Dow Jones VentureSource 2Q09 Results

Dow Jones VentureSource released results for U.S. VC Financing for Q2. VC financing during Q2 rebounded 32% from a dismal Q1 but was down 37% compared to the same quarter last year. For the first time, more capital flowed into health care than IT companies. While biopharmaceutical and medical device investments decreased, the health care services sector had a great quarter, improving nearly three-fold.

“Health care investment was the only sector to spring back to levels seen before the economic meltdown that began in the third quarter of 2008.”

The following figure summarizes the proportion of dollars invested into the different industries (click on figure for larger view).

This rotation to health care is pretty amazing considering the capital requirements and risks associated with health care startups relative to IT companies. I believe that investors recognize that there are still healthy exit opportunities in health care compared to other industries. In my opinion, there is still a lot of downward pressure on the VC industry. Hopefully, health care can remain a silver lining moving forward.

Signs of Life in Life Sciences VC

After a rough 1st quarter, the recently released OnBioVC 2Q09 Trends Analysis shows that life sciences VC funding increased year-over-year by 31%, totaling about $1.71B for 2Q09 vs. $1.18B for 2Q08. Funding for the quarter increased about 20% relative to Q1, which was approximately $1.43B. Not surprisingly, most of the money (almost $1B) went to later-stage companies (Series C and beyond).

It will be interesting to see what the NVCA/VentureSource Q2 results will be. I’m wondering if VC firms are rotating into life sciences deals or whether other industries will see a healthy increase in VC funding. I can see why VCs are interested in life sciences investments at the moment given the exit opportunities. I am a bit surprised, though, by the magnitude of the increase in life sciences funding compared to last year. Maybe LPs are loosening up faster than I expected, which is great for start-ups seeking capital.

Global Trends in VC 2009

The Deloitte 2009 Global Venture Capital Survey results suggest that, not surprisingly, the majority of firms plan to maintain or decrease their level of investment in the future. The pie chart below shows the proportion of U.S. firms that intend to change their level of investments in terms of capital and number of companies. There’s also a shift towards later-stage companies (figure not shown).
There is a silver lining though. The medical device group appears to be favored by global VC firms compared to other sectors. The following pie charts show the proportion of U.S. venture firms’ anticipated change in the level of investment for biopharmaceutical and medical device companies.