By Randall Osborne

Editor

Baby Boomers, images of the Vietnam War still lurking in their minds, may cringe a bit at the letters "V.C.," but the phrase for which it stands couldn't be more American.

Venture capital, in fact, may be about as American as you can get. "Venture" captures the pioneers' spirit about as well as anything, and "capital" surely exemplifies (often to the chagrin of our international neighbors) the nation's idea of what's important.

The National Venture Capital Association said third-quarter numbers show that, overall, venture-backed mergers and acquisitions held steady for the period, with 70 deals, down from 78 in the second quarter.

Much of the volume is due to the market's enthusiasm for life sciences. Six venture-backed medical or health care companies were sold for $321 million, compared with four deals for $9.7 million in those sectors during the previous quarter.

In biotechnology, three NVCA-tracked firms were acquired for $277.5 million vs. $51 million for three in the second quarter, and that number was mostly due to the August buyout of Novazyme Pharmaceuticals Inc. by Genzyme Corp. for up to $225 million. Novazyme, focused on enzyme replacement therapies for such afflictions as Pompe disease, Gaucher's disease and Fabry disease, fits nicely with Genzyme's efforts in those indications.

For start-up biotechnology firms especially, venture capital can be the only way to fly.

So it was good news last week when Versant Ventures closed its $400 million venture capital fund, the Menlo Park, Calif.-based firm's second, which brings the total capital under management to $670 million.

The company said it will continue to put cash into the "core areas" of biotechnology, medical devices, specialty pharmaceuticals, health care services and health care information technology, aiming to help out about 45 early stage firms during the next three years.

Nowadays, the picture is not what it was in the industry's beginnings, when VC firms would throw seed money at a handful of scientists getting together with men in suits to launch a company. The more likely scenario involves the VC jumping in a bit later, but contributing a lot more money.

But not much later. VCs still seem more likely to get in early or get in late, and to play it safe regarding those companies situated somewhere in the middle which may need the cash just as badly. High valuations left over from last year's financing hysteria mean an even more cautious investor pool, wary of the obvious risk.

Still, VC is a hot game, so hot that even the likes of Eli Lilly and Co. are getting into it. In September, the company launched Lilly BioVentures, a $75 million fund that promises not only financial backing but also the resources of an established pharmaceutical company.

"We like to consider ourselves partners with entrepreneurs," said Camille Pearson, managing director of Versant Ventures, an early stage health care venture capital firm that closed its $400 million fund Dec. 5, adding a second fund to the existing $250 million one.

In VC, Pearson told BioWorld Today, "things actually change in about quarterly increments," with trends hard to follow or predict.

"If a company gets hot with the venture community, it can raise a lot of money, and its valuation is bid up," she said. "If, for whatever reason, the company gets into a have-not category, they'll have a tough time."

Pessimism, "while not really a problem in biotech," can have its effect on VCs, Pearson said.

"What's driving it is the 'have, have-not' phenomenon," she added. "People who are newer to biotech are more likely to be jarred by the pessimism in the economy, or events like September 11."

Still, those with an impressive story can get cash, and "I don't even mean a company that has money," Pearson said. "I mean a company that looks good according to the parameters that VCs like," such as the old standards: a good team with solid technology.

Venture funds such as Lilly's can be formidable, she acknowledged.

"The venture firms that come out of pharmaceutical companies are leveraging help that's right there, so I have to work harder to create a network that benefits my companies ¿ but my network is more diverse," Pearson noted.

Lab coats abound at Lilly, but Versant also has scientists, plus more, she said.

"We categorize companies into two broad categories: therapeutics and platform companies," she said. "The ones in therapeutics more likely to get our attention are early stage with human data. Believe it or not, they exist. We've funded three of them, one already and we're looking seriously at another two."

Christoph Westphal, a principal with Polaris Venture Partners, said later-stage firms face "more of a challenge than early or mid-stage companies" right now.

"It's still a good time to be looking for money," Westphal said. Polaris closed a $900 million fund in August, and oversees $2 billion altogether, with one-third targeting health care and two-thirds in information technology.

"Every year, we will found a company, and every year we'll have one or two we'll be providing with seed money," with expectations of progress in a three-year to seven-year time frame, he said, noting the firm has a larger office in Boston and a smaller one in Seattle, providing a presence on both coasts.

In choosing where to put cash, he said, "We always go back to the roots: strong technology differentiated in the marketplace, addressing large needs, and some understanding of a time horizon that makes sense for investors."

David Schnell, managing partner of Prospect Venture Partners, a $600 million VC for health care and biomedical companies, said the firm likes start-ups especially.

"We've been early stage investors throughout our careers," he said. "We've led collectively about 50 deals, and all have been Series A or first institutional money, and we've continued to invest in those companies throughout. We've maintained on average two deals per partner per year."

Prospect has "focused on early stage, high-growth opportunities [with] significant company-building" potential, Schnell said.

Schnell echoed others in saying Prospect likes to "build companies" and plans on a three-year to five-year development time for firms that get cash. Prospect has a $100 million fund and one $500 million fund, with 65 percent to 70 percent of its dollars in biotechnology.

The industry has had a rocky ride during its history, he said, but has turned out some seasoned personnel in whom VCs and everybody else can have faith.

"The availability of experienced management teams who have gone through the financing cycles that characterize biotechnology is greater than we've seen in the past," Schnell said. "We'll probably do eight to 10 deals per year."

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