Biotechs Struggle for Venture Capital By CARLOS MARTINEZ Staff Reporter Biotech startups must do a better job of communicating their ideas in non-scientific language if they expect to get noticed by or funding from venture capitalists, according to a group of experts who gathered to discuss the financing troubles facing the industry sector earlier this month. Brent A. Reinke, managing director of the law firm Crosby Heafey, said during the Feb. 6 conference hosted by VC Bio in Westlake Village that biotech startups traditionally have had trouble marketing themselves to venture capitalists and other investors who do not have strong scientific backgrounds. “It’s hard enough to get venture capitalists to talk to a company, let alone try to get them excited about your business model,” Reinke said. Part of the problem, said John Simard, CEO of CTL Immunotherapies, is that scientists sometimes find it difficult to communicate their technologies to non-scientists, a category most venture capitalists fall into. According to a September 2001 survey by PricewaterhouseCoopers, venture capital investment in biopharmaceutical companies declined from a year earlier, despite a spike in interest in 2000 with the completion of the mapping of the human genome. The survey showed that through August 2000, there were 189 deals in the U.S. worth $2.6 billion in venture capital investment in private biopharmaceutical companies. A year later, the survey showed the number of deals dropping to 147 for $1.8 billion. In 1999 there were 234 deals for $1.9 billion. That drop in funding is in spite of the optimism in an industry which has seen an average annual average growth rate of about 11 percent continue unabated while nearly every other part of the economy has slowed. The decline in venture capital dollars is in line with other industries, said Gary Clark, CEO of Thousand Oaks-based consulting firm Fifth World Technology. But, he noted, biotech startups need not be painted with the same brush as the now-tarnished dot-coms and must do more to secure the fewer dollars available. “It’s a tougher market out there, so you have to have innovative products and be aggressive,” he said. “You have to pique their interest by making your product stand out.” Stephen O’Connor, CEO of Pasadena-based Nanostream Inc., said his company was able to secure $10 million in financing by touting its nanotechnology and its potential to develop devices so small they can’t be seen by the human eye. His company is developing microfluidic chips that will help automate and miniaturize fluid handling within the body. “It’s an area where there is so much potential that it almost boggles the mind,” O’Connor said. But O’Connor admitted his company’s success in finding investment dollars is thanks to the recent interest in nanotechnology and not typical for new biotech startups. Other biotechs with fewer obvious commercial applications or those in the middle of long-term development processes have a tougher time finding dollars. In the mid-’90s venture capitalists were flocking to biotechs amid the promise of new technologies, new medical devices and technologies and the accompanying promise of the Internet. The PricewaterhouseCoopers national survey showed venture capital investment in biotechs doubling from 1995 to 1996, from $506 million to $1.1 billion. But as dot-coms began falling by the wayside, upstart biotechs suffered along with them. Venture capitalists, burned by their experience with dot-coms, were no longer as eager to fund new technologies, even if they were in the life sciences area, said James W. Loss, an associate with the Los Angeles-based investment firm, Riordan and McKinzie. “Biotechs have to convince venture capitalists that their strategies will work,” Loss said. While some point to mega-giants of the biotech industry like Amgen and Johnson & Johnson, which gross billions of dollars in revenue from their products, Loss said few biotechs will ever see that kind of money, despite the years of research they put into new products. “Biotechs mean a long-term investment any way you look at it,” he said. But even those who make inroads with venture capitalists don’t often find the big dollars they’re after. Last year, Thousand Oaks-based StemSource Inc., for instance, was only able to drum up $2.5 million in funding, despite the potential of its stem cell research. “It’s a difficult market and a difficult economy when it comes to venture capital,” said company CFO Terry Butler, who along with other company officials made the rounds looking for investors. The company has begun a second round of funding which, Butler said, could raise an additional $5 million to $8 million. But Bill Robbins, managing director of Los Angeles-based Convergent Ventures, said biotechs can also tap into other potential sources of funding like grants, strategic partners, individual investors and even IPOs. “These are all areas they can pursue, depending on what their goals are,” he said. But there are drawbacks. Strategic partnerships, for instance, sometimes force a company to move away from its business strategy, Robbins said, sometimes so far the startup’s original purpose for existing is forgotten.
