Editor's Note: This is Part II of a two-part series. Yesterday's issuetook a hard look at the retrenchment at Parnassus PharmaceuticalsInc., a start-up company that had been wholly backed by D. Blech& Co.WASHINGTON _ In the last several years, a new model forgrowing a biotechnology company arose to challenge the traditionalventure capital paradigm of sequential rounds of funding based onmilestones. The "super start-up," as championed and practiced byfinancier David Blech, was a young company with, say, $30 millionto $50 million cash instead of $3 million or $4 million.But the collapse of Blech's financial power and influence reopensan old debate about which of these funding strategies builds asuccessful company. Will huge Regulation D (Reg. D) privateplacements like the $33 million ICOS Corp. deal, the $45 millionAriad Pharmaceuticals Inc. deal, the $35 million CellularTherapeutics Inc. deal and the $30 million Neurocrine Biosciencesdeal be done anymore?"With the leading practitioner of the super start-up model gone, Ithink it's safe to say there won't be as much effort in that directiongoing forward," predicted PaineWebber Inc.'s managing directorStelios Papadopoulos in New York.If the recent disaster that befell Parnassus Pharmaecuticals Inc. ofAlameda, Calif., a Blech-funded start-up with dreams of followingin the footsteps of those big deals, is any indication, Papadopoulosmay be right. Parnassus, which laid off its 25-person work force lastSaturday after it ran out of cash, saw its dreams of a $30 millionprivate placement reduced to a $15 million initial public offering(IPO) and then quashed altogether when D. Blech & Co. shut downin late September.Although tiny corporate casualties of Blech's financial crisis likeParnassus may vanish quickly and quietly among the estimated1,300-plus public and private biotechnology companies, difficultquestions remain. At the very least, biotechnology has left a bittertaste in the mouths of the entrepreneurs and scientists whosemortgage checks and careers are severely disrupted by thesefailures. For investors, a question continues to nag: should fledglingcompanies with unproven technologies be given enormous sums ofcash?Analysts say that neither the traditional venture capital (VC) modelnor the "start-up on steroids" variant is perfect and that financingstrategies must be decided on a case-by-case basis. "It's not aneither/or proposition, it's driven by the situation," Papadopoulostold BioWorld.The advantage of a traditional sequentially funded start-up is thatVC investors can keep a young company on a tight cash leash,forcing management to meet milestones, kill bad programs andremain focused. VCs thus mitigate the risks of inexperiencedmanagement teams and scientists who are unaccustomed to thepracticalities of business.Pros And Con Of SequencingThe disadvantage of round after round of VC investing is thatmanagement teams must spend tremendous amounts of time andeffort convincing each new round of VC investors to fork over afew more million at least once a year, rather than focusing onbuilding a business.Although Briane Dovey, general partner at Domain Associates inPrinceton, N.J., said he favors the round-by-round model, heconceded that the Blech strategy (when it worked) gaveentrepreneurs the comfort of knowing that there was enough cashup-front to advance their company through a number of stages andmilestones. But, he added, there are critical trade-offs."Funding a company with a whole lot of money up-front at the ideastage takes discipline out of the system and doesn't do a greatservice to the entrepreneur," Dovey told BioWorld. "Yet the round-by-round model wastes a tremendous amount of a company's timeand effort with crazy marketing and slide shows [to raise money]."Dovey said that the Blech alternative to the typical VC model wasappealing in part because it addressed core deficiencies in theestablished system. "I can't say we have the right answer withround-by-round," said Dovey. "It's just one I'm more comfortablewith." But he said that the old model must evolve to accommodatethe need for financial security felt by entrepreneurial CEOs. A newmodel could involve a syndicate of VCs commiting up-front to funda company through the IPO stage, as long as milestones are met.George Rathmann, CEO of Seattle-based ICOS and former CEO ofAmgen, said he prefers to have the financing in place before takingon the challenge of building a company. "At Amgen, we raised $19million right out of the gate and at ICOS we started with $33million," he told BioWorld. "If you want to concentrate on buildinga business you don't need the harassment of proving you met amilestone every nine months."Credentials Worth $33MBut analysts said that Rathmann, with the success of Amgen underhis belt when he joined ICOS, was a safe bet for a $33 million bolusof cash. "You trust someone like George Rathmann to spend $33million prudently," explained Papadopolous, whose firm joined D.Blech & Co. to pull off ICOS's unprecedented Reg. D offering in1990. Papadopolous said he's reviewed a number of proposed Reg.D deals since but has never seen a management team strong enoughto make it worth rolling the dice again.Although the traditional VC model, especially viewed from thevantage point of the Parnassus debacle, appears more stable [fewsyndicate deals go under], it's unclear whether either model is asure recipe for success or failure. Many a biotechnology companythat was sheperded through disciplined rounds of VC financing hasfumbled once in the public arena.In a bear market for biotechnology and in the hands of anoverextended D. Blech & Co., the Parnassus deal wasunceremoniously aborted instead of taking its place as a "son ofAriad." In addition, some critics charged that its management teamand business plan did not have the cachet or experience of an ICOSor Ariad. In the end, the reasons for succes or failure of any givendeal are complex and drawing out their implications for the industryas a whole is a hazardous business.Sarah Gordon-Wilde, a buy-side analyst for Amerindo InvestmentAdvisors Inc. in New York, told BioWorld that companies failroutinely, regardless of their financing strategy. Gordon-Wilde saidthat Blech used the bolus formula successfully to attractentrepreneurs to "hitch their star to his wagon.""Has the Blech format failed? It's not clear yet. Has the traditionalVC model succeeded? That's not clear either," she told BioWorld.She said that Amerindo has lost money on IPOs like that of IDECPharmaceuticals Inc., a company that progressed through textbook-perfect financing rounds under the stewardship of top VC firms likeKleiner, Perkins Caufield & Byers. "We bought it at $11 and nowit's worth $2 and change." In addition, she said, Amerindo boughtinto Ariad's monster Reg. D offering at $5.60 a share. The firm,which went public at $8 a share in May, is now also trading in the$2 range."I'm not about to throw stones at anybody or at any model," shesaid. "The real issue is not how companies are financed, it's thatthere are too many companies." n
-- Lisa Piercey Washington Editor
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