Climbing the Money Tree

Venture capitalist Brenda Gavin offers simple advice to life science inventors seeking funding for new projects: Be clear, brief, and persistent. "You've got to call more than once," Gavin, president of SR One, a GlaxoSmithKline venture fund, exhorted participants at a venture forum sponsored by Biotechnology Industry Organization (BIO) in October. Gavin said she gets about 25 calls a day. "Don't spend the voice mail talking, and if I have to play my voice mail 15 times to get your message, I'm ticked." An annoyed venture capitalist may not open the company's coffers to a hopeful inventor, and though many scientists bristle at the idea of perfecting a marketing message, a half dozen carefully chosen words can determine whether a researcher's dream evolves into a product that helps people or dissolves into a delusion.1 "The transition from discovery process to development process is sometimes a wasteland," says Christopher Yochim, associate director of global discovery alliances for AstraZeneca Pharmaceuticals in Wilmington, Del. "This is an area where a lot of money will be spent in the coming years, to move those [drug] candidates into development." Courtesy of Brenda Gavin Brenda Gavin Venture capitalists have invested $777 million in drug discovery since January 2001, or about $260 million per quarter, down from the startling $358 million per quarter invested in 2000 but up from the more moderate $144 per quarter in 1999, according to Venture One, a San Francisco-based venture and equity research firm. To tap this lucre, Gavin and other biotechnology financial experts admonish would-be inventors to build their management and administrative structures, seek moderate private or government early-stage financing, and curb the urge to garner as much money as quickly as possible. Over-investment by "angels"--friends, relatives, and other supporters--early in an invention cycle can squelch it later on. "The angel players [sometimes] overpay," Gavin said at the forum. She compared venture capitalists to real estate brokers. "We pay what the market will bear." Bryan Roberts, general partner in life sciences at Venrock Associates, a venture capital fund with offices in Menlo Park, Calif., and Manhattan, welcomes such early-stage investment. But he cautions that angels may not know the industry as well as venture capitalists (VCs) and pharmaceutical companies, so they may back systems and technologies that may never reach the market. "From my perspective, angels are helpful," he told the forum, "but there are risks. Angels are less sensitive to [product] pricing than are VCs." Seeding the Dream Strategic investors, such as pharmaceutical companies, send scouts to meetings and conferences. According to Pamela Demain, executive director of corporate marketing for Merck & Co. Inc., its scientists meet weekly to examine written proposals by researchers from biotechnology companies and universities. Yochim said AstraZeneca typically makes small investments in promising platforms and technologies early on, while some companies wait until after the completion of clinical trials on a diagnostic or therapeutic product. "We tend not to do huge deals in the $2 billion range," he told the BIO venture forum attendees. "[We have] a major effort to identify academic partnerships," he said. "We have extensive collaboration with [scientists], which gives us access to their intellectual property." Like strategic investors, venture capitalists will occasionally provide seed money to develop and test promising research. Roberts of Venrock said his firm recently seeded a nanotechnology materials project in Boston and later predicted that small-scale technologies will attract both interest and finance in the next few years. Robert More, a general partner in the Princeton, NJ-based Domain Associates, explained that his firm sometimes looks into small-scale investments. "If a scientist comes in with a good idea, and there's a killer experiment to find out if it works, we will spend $50,000 to find out," More said. "Three-quarters fail. I'd rather throw $50,000 out very quickly to find out if it's a good idea than spend $2 million or $3 million." Courtesy of Wei-Wu He Wei-Wu He The Bethesda Md.-based Toucan Capital Corp. seeks out early-stage investments in platform technologies for testing, diagnostics, or therapeutics. "We try to accept more risk than most venture capitalists," said Geeta S. Vemuri, a Toucan associate. "We invest in academic scientists and actually do hold the scientist's hand." But not all venture capital companies will accept such tremendous risk in developing products. Gavin ad-monishes scientists not to call her at "the two-men-and-a-dog" stage where the concept is not fleshed out. "If you're at that stage, my job is to be a jerk," she explains. "If you have a product in Phase III clinical trials, I want to talk to you." To sustain early-stage companies, Congress created the federal Small Business Innovation Research (SBIR) program, which supplies startup funding. The National Institutes of Health alone expects to invest $435 million in small business development in 2002. OriGene Technologies of Rockville, Md., has benefited from such funds. OriGene identifies and validates molecular drug targets. It obtained three concurrent fast-track grants from the National Cancer Institute and the National Human Genome Research Institute to develop a proprietary platform technology for gene cloning and gene expression profiling. "When I started OriGene in 1996, we could not raise any venture capital money," said Wei-Wu He, who is now general partner and cofounder of Emerging Technologies Partners LLC, a Rockville, Md.-based VC firm. "In the end, we had to raise $5 million in SBIR funding. The money is always there, but it's like a [research] job. Whether it's an individual investor, or the government--they all have different requirements." Courtesy of Heller, Ehrman Monica Medina Monica Medina of Heller, Ehrman, White, & McAuliffe LLP, a Washington D.C. law firm, urged scientists to investigate alternate sources of government funding. Department of Defense SBIR funds can be used for life science product development, for example, especially if the product can be used to defend from bioterrorist attacks. "Be sure to think beyond the NIH," Medina said. "Be creative, think about ways to differentiate yourself." Discipline and Diligence Too much government funding, however--particularly repeated bites of the taxpayers' apple--can worry a potential investor. Dependency suggests that a company may not be a viable risk. "When [venture capitalists] see a company that's actually lived on government grants, they get wary," Gavin told forum attendees. Late-stage investors want proof of a company's diligence. If a company burns through millions without getting to the market, new investors may steer clear. The problem may not be too much initial funding, but, too much initial spending. "I tell my clients to take as much money as possible," said Farah Champsi, life sciences partner for the San Francisco-based Alta Partners. "There's a lot of schizophrenia in the industry and the money might not be there. But it's really important to have financial discipline." Such discipline begins with a strong management team, the venture capitalists told venture forum participants. Scientists do not have to moonlight as managers, but investors do want to see evidence of experience and expertise in marketing products and staying within budget. A venture capitalist's success depends on its ability to generate profits for its investors as quickly as possible. Life science companies have a longer lead-time to profitability, and that makes investors all the more careful in opening the spigots. "I only want a manager who has been there and done that," Gavin said. "I can't pay for your education." Paula Park can be contacted at ppark@the-scientist.com References 1. P. Park, "Selling the story of a discovery," The Scientist, 15 [22]:35, Nov. 12, 2001. 2. P. Park, "Get thee to the market, scientist," The Scientist 15[16]:37, Aug. 20, 2001.

Climbing the Money Tree

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