By Karen Pihl-Carey

A challenge for any biotech company is raising enough money to continue its research until it can become self-sufficient. What starts out as an idea in a university laboratory very well could end in that same laboratory if not for the financial support from venture capital firms.

ARCH Venture Partners is one such firm that helps private biotech companies with strong science realize their potential. Of the seven biotech companies in ARCH's portfolio that went public last year, ARCH was the founding or initial investor in all of them.

Earlier this month, the venture capital firm, which maintains offices in Albuquerque, N.M.; Austin, Texas; Chicago; New York; and Seattle, announced the close of a $380 million seed and early stage venture capital fund.

"I think about 30 [percent] to 40 percent will go to biotech," said Robert Nelsen, an ARCH co-founder and managing director. "We tend to primarily invest in revolutionary technology vs. evolutionary technology. In biotech, we tend to prefer platform technologies or therapeutic areas where there have been major breakthroughs."

Another venture capital firm, Amerigo Ventures LLC, of Woodland Hills, Calif., is just getting its feet wet in the pool of up and coming biotech companies. It is in the process of establishing a $10 million fund, soon to be followed by a $65 million fund.

"We are looking at a biotech/genomics company to invest in, although we haven't made a commitment there yet," said Tony Squeglia, director of corporate communications for Amerigo.

And yet another firm, Enterprise Capital Management Inc., of Atlanta, announced that it has launched a Dublin, Ireland-based mutual fund company to provide investment management for fund distribution in Europe, South America and Asia.

Also, in late April, Atlas Venture, which has offices in Boston and London, among other places, introduced its sixth fund for between $950 million and $1 billion ¿ one-third of which is expected to go to biotech. (See BioWorld Financial Watch, May 7, 2001.)

Unless a scientist or owner of a start-up company is independently wealthy, he or she is keeping a close eye on these firms.

So far this year, private companies have raised a total of $1.97 billion, compared to $1.81 billion at this time last year, showing there hasn't been a slowdown in venture money like there has been in public offerings.

It is money from venture capital firms that eventually put companies like Caliper Technologies Corp., Illumina Inc., Adolor Corp., Array Biopharma Inc. and deCode genetics Inc. ¿ all of which are in ARCH's portfolio ¿ in view and on the public markets.

Together, these companies raised about $480 million in their initial public offerings.

"Our companies are probably known for being very early and they usually have very strong science," Nelsen said. "We try to bet on the science first and the management second."

For example, the revolutionary technology belonging to Caliper that attracted ARCH was microfluidics, Nelsen said.

Venture capital firms tend to diversify their investments among several industries. Amerigo is focused on five areas, which include health care, communications technologies, financial services, energy and transportation, and materials technologies.

"We think we're in a great position because valuations have come way down on private companies," Squeglia said.

"Venture capital is very important to private companies, especially at this point of time when they need funding to get to the next stage," he said. "One of the companies we're looking at is in early stage clinical trials. They're looking for funding and we have an opportunity to come in while valuations are very attractive."

ARCH already has begun investing with its new fund. Three biotech companies that will benefit are Surface Logix, of Boston; Neurogesx, of San Francisco; and Elixir, also of Boston. Surface Logix is a broad platform technology company focused on creating new biologic devices using microcontact printing, applications in proteomics and validation assays. Neurogesx is focused on therapeutics in pain, and Elixir is focused on therapeutics for the aging population.

"We invest so early that it's very hard to invest in anticipation of a market cycle," Nelsen said. "So the companies we fund now are going to be going public two, three, four, five years from now. We have no idea what the markets are going to be like at that point, so we might as well not worry about it."

ARCH has been fortunate so far with its investments.

"We don't have the most companies in the space, but I think we've had a pretty strong track record," Nelsen said. "We've never lost money in a biotech company. I'm sure we will. So far, we haven't."

ARCH finds companies in which to invest by working with other venture capitalists and through its relationship with universities. Nelsen said it's important to make sure an early stage company will have enough funding to carry it through to the next round.

"The key element to early stage biotech funding right now is investing only in very big ideas and very revolutionary technologies," he said, "and making sure the companies are syndicated well, and there's a lot of money at the table so one can go through into the next up cycle.

"There's a lot of money coming into health care right now," he added, "and I think there's some danger of Grade B technologies getting funding and not making it to the next round."

ARCH's Fund V limited partners include financial institutions, major corporations, endowment funds, pension funds and private investors. More specifically, it includes partners such as Allstate Insurance Co., DOW Chemical, John Deere Pension Trust, State Farm Mutual Automobile Insurance Co. and TIAA/CREF, among others.

ARCH Venture Partners came into existence in 1986. Including Fund V, its total capital under management will be more than $700 million.

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