Streets Paved with Gold

Panoramic Images In an age of instantaneous communication between people thousands of miles apart from one another, it might not seem that important for companies to be in the same place as the sources of their funding. But if the growing number of venture capitalist (VC) firms in New York City that focus on biotechnology is any indication, it appears critical that everyone – financial institutions, venture capitalists, and startup life sciences firms – needs to be in the same place. "Access to capital is important," says Daniel Lubin, managing director of Radius Ventures, a life sciences-focused VC firm with $100 million of committed capital [See Radius Ventures sidebar]. "That's New York City's edge – the proximity to the financial markets." Venture capitalists aren't passive investors, explains Lubin. "We are influential, we play a role in governance, and we take positions on the boards of the companies we invest in. The more embryonic the company, the closer you want to be. You want an umbilical cord that is very connected to management. We like that we can hop in a cab and be there in 10 minutes. That's preferable to getting on a plane and flying half the day to see the management of one of your portfolio companies." A number of firms are following Radius' lead. "We've seen a great increase in the number of VC firms in New York over the past few years," says Maria Gotsch, senior vice president of the New York City Investment Fund, speaking of venture capital in general and venture funds focused on the life sciences in particular. "We are seeing a big increase in early stage investors." In 1995, venture capitalists invested $61.5 million in life sciences companies in the New York metropolitan area, according to a survey by PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association. That was only 3.9% of all money invested by VCs into life sciences firms within the United States. By 2003, the number had grown nearly ninefold to $544 million, or 10.8% of all VC funding of life sciences companies. Already in the first six months of this year, VCs have invested almost $149 million in New York-based life sciences companies. It's impossible to determine how much of that total is coming from VCs in New York City, although analysts and trade organizations say that the great majority of the dollars going into New York companies comes from New York VC. However, many New York-based VCs operate satellite offices of firms headquartered in California, and because surveys count only the VC firm's headquarters when determining the source of the funds, New York funding is likely undercounted. All in all, experts say there's been an explosion in the number of VC firms operating in New York in the last decade. A DEEP TALENT POOL The proximity to the financial markets is not the only item that draws VC firms; the strong academic institutions and world-class hospitals in New York are also attractive. Venture capitalists often ask doctors or top professors to review a company's scientific hypotheses, even as financial pros are poring over the business plan. "New York has a phenomenal pool of experts and we are all able to tap into this spectacular expertise," says Sunny Sharma, a vice president at Easton Capital Investment Group, which manages about $140 million in venture capital funding. Easton runs the East-on Hunt New York fund, a $30 million portfolio of New York companies in which the New York State Common Retirement fund is the limited partner. To see how these connections work, consider the example of Memory Pharmaceuticals, a company started by Columbia University's Eric Kandel that recently moved to New Jersey. Memory got its start in 1998 by licensing Nobelist Kandel's discoveries, and got early stage financing from Venrock Associates, the New York City-based VC arm of the Rockefeller family fortune that also provides seed financing to a number of other life sciences companies in New York. VC MULTI-OPTION EXIT STRATEGY The other big advantage to New York is that it offers a plethora of exit strategies for venture capitalists. Typically, VCs provide the early-stage seed money to get a company off the ground, in exchange for an equity stake. But VCs usually like to commit their money for only three to five years, which means they have to find other buyers for their portfolio companies. One popular exit strategy is an initial public offering, selling equity stakes in the company to the public. Since most IPOs are underwritten by New York-based investment banks, New York companies can be perceived as having a slight edge. But even more important than the access to the financial markets is New York's geographic proximity to big pharmaceutical companies, most of which have their headquarters in New York or in nearby New Jersey. "The biggest plus for New York is the close proximity to large pharma," says Brenda Gavin, managing partner of Quaker BioVentures, a $180 million venture capital fund that focuses on life sciences companies in the mid-Atlantic states. The access to Big Pharma is important for two reasons. First, small biotech companies have to get their drugs into clinical trials before they can release them to the market and make money from them. "For every one person on the West Coast who knows how to do clinical trials, there are literally hundreds in the East," says Gavin. "And big pharma is much more welcoming than it was in the past to partnering with smaller firms to get these drugs tested." That fits with the second reason why the close proximity of large pharmaceutical companies is so important to the New York life sciences business. Increasingly, these large firms are buying out their smaller rivals, giving venture capitalists an alternative to an IPO as an exit strategy. "Most of the large pharmaceutical companies are looking for new sources for growth, and biotech is a big source of innovative products," says Michael Sjostrom, portfolio manager of the Quaker Biotech Pharma-Healthcare fund (not related to Quaker BioVentures). "About 50% of all new drug applications over the past few years have come from biotech. We expect to see the strong interest by large pharma to acquire small life sciences companies to continue." FOCUS ON DRUG DEVELOPMENT Life sciences companies in New York are focused on new drug development. Drugs for cancer and diabetes are among the most popular areas for research, but "cardiovascular is heating up," says Tracy Lefteroff, the global managing partner who runs the life sciences industries services consulting practice at PriceWaterhouseCoopers. "Another big trend is that VCs are getting away from platform companies, companies that have drug discovery tools. Instead, they are looking for companies with products under development." Meanwhile, VCs are trying to balance the riskier holdings in their portfolios with more stable investments. "One way to do this is to back a company that is looking for new uses for old drugs," says Quaker BioVentures' Gavin. "You take something that's already been approved for one indication, and you look to see if it's effective for another disease. That way the risk is reduced from the toxicity angle; you simply have to test for efficacy." All told, most venture capitalists consider the present to be a very exciting time to be investing in the life sciences business. "In the late 1990s, all the quantum leaps were in information technology," says Lefteroff. "Looking forward, we think the quantum leaps will be in life sciences." DAN LUBIN, RADIUS VENTURES Radius Ventures isn't the biggest venture capital company investing in the life sciences in New York. With about $100 million in committed capital, Radius is dwarfed by larger competitors like the Perseus-Soros BioPharmaceutical Fund, which has more than $400 million. Likewise, Radius isn't the oldest or best-established venture capital fund in the city, having only been around since 1997. But in many ways, it epitomizes venture capital investing in the life sciences business in metropolitan New York. Unlike other venture capital firms, Radius focuses only the life sciences business, with a particular concentration on companies operating in and around New York City. "We've modeled Radius around the deep strengths of the city, and we think we've done a great job of extracting the best in class," says Daniel Lubin, managing partner at Radius. "We believe that great VC investing in life sciences is a marriage of clinical, operating, and financial expertise, and we believe that by being in New York, we are able to tap the best from all three worlds. From my standpoint, New York has more scientific and clinical depth than in any other city." A glance at the backgrounds of the members of Radius' investment team shows exactly how this firm has selected some of the city's best minds. Lubin, for example, has an investment banking background, giving him the financial expertise to determine whether a particular life sciences company has a strong enough business plan to merit investment. He also has a health care background, having founded Cambridge Heart, a cardiology device company that went public in 1996. The team also includes George Milne, the former president of Pfizer's central research unit; Jan Rock, former vice-president at Johnson & Johnson; Mehmet Oz, vice-chair of surgery and professor of cardiac surgery at Columbia University and a director of New York Presbyterian Medical Center; and Leon Smith, chief of infectious diseases at St. Michael's Medical Center in Newark, NJ. "It's important for us to have the connections with the top hospitals, not just because the staff – the clinicians – can help evaluate the science used by our portfolio companies, but also because these hospitals can help bring patients into trials," says Lubin. "We may be small, but we are very nimble. We get in at a very early stage – pre-clinical to clinical testing – but we make sure to invest at a point when important critical milestones are going to be achieved within a reasonable amount of time." Radius has invested in Amicus Therapeutics, which is developing a drug to treat Fabry disease; Active Health Management, which makes software that helps evaluate information from clinical trials; and Comprehensive Neuroscience, which conducts clinical trials for drugs to treat schizophrenia, depression, and Alzheimer's disease. All of these companies are located in the New York metropolitan area. "We see great opportunities for the life sciences in New York," says Lubin. "What makes New York unique is that you have a VC community that has an appetite for early stage investing as well as close proximity to the center of the financial services industry, for later stage investing. It's really the best of both worlds." - Beth Piskora

Streets Paved with Gold

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