Although venture capitalists are a lot more conservative on where to place their fund in the aftermath of the easy funding and exuberant burn rates era of the 1990s, there are substantial amounts ofventure capital funding still available for businesses demonstrating strong business plans and management teams. Such attributes – and the potential of technologies they believe will revolutionizemedicine – continue to lure venture capitalists to the attractive biotech industry.
Biotechnology pursuits are expensive, timeconsuming, and chances of success may be fairly low. Thus venture capitalists are looking more than ever for business plans that are viable, tight, proven, and extensive before contemplating any other risk factors.
The venture capital market wants a substantial degree of reassurance that enterprising biotech companies have a true underlying understanding of their markets and products or services as well as the competitive landscape before committing funds.
A solid leading management team is a very decisive component of the equation. Some venture capitalists go as far to say that a solid management team is more important than the product itself because an experienced team is more likely to be able to rescue a bad product rather than the other way around.
Ultimately, however, venture capitalists are focusing their investments into companies with tangible products as opposed to those having merely a promise of genome technology. This places manufacturers and makers of therapeutic biotech products, analytical apparatus, and instrumentation for the life sciences a step above on the venture funding ladder.
The allure of the biotech industry for venture capitalists is real. Last year alone overall global biotech revenues increased 15 percent to more than $41 billion. On the other hand, research and development expenses rose exponentialty by 34 percent to more than $22 billion during that same period, with more than 50 percent of the revenues generated reinvested R&D.
The life sciences sector, which combines biotech and medical devices companies, raised $4.7 billion in venture capital in 2002, according to the MoneyTree Survey. While down from the $5.4 billion in venture capital in 2001, the $4.7 billion invested by venture capitalists in the life sciences sector accounted for 22 percent of all venture capital invested last year. This was the highest level enjoyed by an individual sector in seven years.
In comparison – according to data compiled by Thomson Venture Economics for the National Venture Capital Association on the biotech industry’s high-tech counterpart – in 2002 dot-com venture capitalists cut their fund-raising activities for future investments to a 21-year low.
* VCS See Hope or The Future
Many experts believe that the biotech industry has the capabilities of radically increasing its current revenue stream over this decade. Obviously, there are venture capitalists eager to invest in the biotech industry – but they also are keen to avoid a repeat of the last decade, which witnessed the vaporization of billions of dollars in imprudent investments.
Today’s financiers and investors are looking for opportunities that would allow them to share in the rewards of the next big drug discovery or cure, but their standards have now risen dramatically. Venture capitalists no longer are prepared to accept 10- to 15-year timelines to profitability.
The flourishing biotech companies are becoming more and more successful in dramatically reducing such timelines to profitability through a variety of costeffective and beneficial integrations, formations of networks, and strategic alliances where each company provides an intricate component in the faster development of income- yielding products. This brings interested venture capitalists to the negotiation table.
There are some venture capitalists who accept the harsher reality that they have to invest more money over longer periods of time. These are the venture capitalists who are more willing to finance the development of experimental drugs into latestage phases, instead of delegating such risks to public investors. However, even where the attractive biotech company meets the eager venture capitalist firm, the latter is adhering to more stringent safety-first principles.
Inevitably, such a venture capitalist compels the capital-hungry biotech company to tough
terms that it has no choice but to accept. Regrettably, this makes for an environment short of the “positive vibes” that would encourage entrepreneurs to seek financing for new ventures.
Fortunately, there are other creative ways to fund for growth, and companies in the life sciences and biotech sector should not be discouraged when they are not successful in attracting what they may perceive as “over selective” venture capitalists. More and more such interests, particularly startups and smaller companies, are turning toward joint ventures, partnerships, and licensing, among other funding sources.
The strategies are not being adopted for the purpose of attracting venture capitalists, but rather as a means of tagging along and piggybacking larger biotech companies. Many startup companies also are exploring opportunities that may be offered to them through grants, foundations, other non-equity capital sources, and angel financing.
Larger, publicly traded biotech companies are finding some success in raising monies through “private investments in public entities” (PIPEs), which offer a rather attractive proposition of not having to file a registration statement prior to such transaction.
Whichever way this is looked upon, there is still venture capital money waiting on the sidelines. Many believe that once there is more consistency of indicators that the economy is into an upturn, venture capital money will more readily flow behind it. With this in mind, the future of capital investments in biotechs continues to look bright.
Copyright San Diego Business Journal Jul 07, 2003
