Biotechnology venture capitalists _ the start-up practitioners, that is_ come in two varieties: opportunists and innovators. But regardlessof the approach, spotting potential money-making science is aninexact discipline.

"I don't have a shopping list of technologies I'm looking for," saidStandish Fleming, of Forward Ventures, in San Diego. "All I can puton a shopping list is what I know about. I'm interested in new areas."

Most start-up venture capitalists, Fleming said, are opportunistic.They pick and choose from scientists and entrepreneurs who make apitch for seed financing to support their commercial dreams.

Innovators are the minority, he added. They come up with an ideaand assemble a scientific team with the expertise to make it work.One classic example, Fleming said, is Avalon Ventures' KevinKinsella, who peruses scientific journals for promising technology.

"You read an interesting article over the weekend," Kinsella said,"and Monday morning you call the first author."

Reactions vary when scientists hear Kinsella suggest their researchcould be the foundation for starting a company.

"They'll say, `Yeah I thought so too,' or `I never thought of that, tellme more,'" said Kinsella, who has degrees from MassachusettsInstitute of Technology in Cambridge and Johns Hopkins UniversitySchool of Advanced International Studies, in Baltimore.

Kinsella departed the venture capital game to concentrate on guidingSequana Therapeutics Inc., of La Jolla, Calif., a genomics companyhe started.

San Diego-based Avalon, founded by Kinsella, has ended its seedfinancing activities. "We invested in 30 companies," he said, "andhad one failure."

Fleming, who has organized two venture capital funds, has helpedstart such biotechnology companies as Sequana, Somatix TherapyCorp., of Alameda, Calif., and CombiChem Inc., of San Diego.

Fleming's Forward Ventures partner, Ivor Royston, a scientist, wasinvolved in founding Hybritech Inc., of San Diego. When Hybritech,a cancer diagnostics company was acquired by Eli Lilly and Co., ofIndianapolis, in 1986, initial stockholders received a return of $60million for their $300,000 investment in eight years. Lilly soldHybritech to Beckman Instruments Inc., of Fullerton, Calif., in 1995.

Fleming, a graduate of Amherst College, in Amherst, Mass., and theUniversity of California at Los Angeles Graduate School ofManagement, said the general operating rules in seed financing arereturns of "five times your money in three years and 10 times yourmoney in five years."

Investors usually realize their rewards on completion of an initialpublic offering by the start-up company or its acquisition by a largerfirm.

But as Kinsella points out, "The first dollars that go out the door" toform a company have the highest risk attached.

Typical seed financing, Fleming noted, is $1 million or less. "In thebiopharmaceutical industry it can take $25 million to get a companyto an initial public offering," he added.

With that amount of funding necessary, Fleming said, the businessmodel of a fledgling company is as important as technology.

A scientist who wants money for research to see if a technologyworks will have a hard time attracting backers.

"It has to be technology that is close to a potential product," Flemingsaid.

Forward Ventures, over the last three years, has supportedcombinatorial chemistry, genomics and gene and cell therapycompanies.

Avalon Ventures' recent start-up efforts include organizing firmspracticing combinatorial chemistry and genomics as well as otherswith support technologies, such as ultra-high-throughput screeningfor therapeutic compounds and bioinformatics to integrate geneticdata. Caliper Technologies, an Avalon-backed firm in Palo Alto,Calif., is developing automated tools for biochemical analysis withwhat it calls a "lab on a chip."

Patience Can Pay Off . . .

"In venture capital financing," Kinsella said, "you talk about patientmoney. But there's a limit. If you can't get significant results [such asthe start of preclinical studies] in two to three years, it's beyondventure capital."

Athena Neurosciences Inc., of South San Francisco, was started in1986 with $120,000 in seed capital, said Kinsella, who founded thecompany. Athena, which focuses on drug discovery and diagnosticsfor neurological disorders, was sold in March 1996 to Elan Corp., ofAthlone, Ireland, for $600 million.

Josh Lerner, an associate professor at Harvard University's GraduateSchool of Business Administration in Cambridge, Mass., saidcompanies have three major sources of money _ venture capitalfunding, corporate alliances and public markets.

"When the public markets dry up, pharmaceutical companies aremuch more aggressive in forming alliances," he said.

Venture capital funding tends to follow robust public markets.However, Lerner, who studies the structure of venture capitalorganizations, said that pattern has changed. While public stockindices have surged to record heights the past 18 months, smallercompanies are not getting as much venture capital attention as theydid in 1991 and 1992, the last bull market romp.

Venture capital for early stage and seed financing may have beenredirected to Internet companies and related technologies, Lernersuggested, or investors may have become more wary of the risks.

Jesse Reyes, of Venture Economics, a Boston-based researchconsulting firm for the venture capital industry, said in the last 10years start-up funding for biotechnology went from 6 percent of allventure financing to a high of 10 percent in 1991 and 1992. (VentureEconomics is part of Thomson Corp., of Toronto, which also ownsBioWorld Today.)

. . . Despite A Huge Liquidity Risk

Biotechnology, Reyes said, represents a "gigantic liquidity risk"because most companies "are pinning their hopes on onetechnology."

Despite the potential pitfalls, Fleming noted, the "vast majority ofname brand companies" have been started with venture capital.

Pharmaceutical firms, Kinsella said, are slow to react to newtechnologies.

"Three and a half years ago" he observed, "George Poste [of London-based SmithKline Beecham plc] was the only research directorcommitted to genomics and he went to Human Genome SciencesInc., [of Rockville, Md.]."

Now all the drug makers understand the importance of genomics,Kinsella added, and "when the U.S. industry gets interested, theJapanese companies start getting interested."

Leaving the progress of biotechnology drug development to investorswith their eyes on quick cash returns may lead to some long-rangetechnology not getting funded, Lerner said. But venture capitalgroups, he noted, have put significantly more money intobiotechnology than long-term Japanese corporate funding.

"The venture capital system," Lerner said, "has shown an ability toglom on to promising technology." n

-- Charles Craig

(c) 1997 American Health Consultants. All rights reserved.