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January 01, 2010 (Vol. 30, No. 1)

Game-Changing Decade Transforms Biotech Ventures

Start-Ups Will Have to Operate with Lower Overhead and Less Capital for the Time Being

  • Future of Start-Ups

    What does this all portend for biotech start-ups? First, start-ups combining first-rate science with experienced entrepreneurs and project managers will have to operate more efficiently with lower overhead and less capital. This may mean forming a virtual company, which, at least for its first couple of products, licenses in technology and outsources further development, manufacturing, and sales.

    This also means exploiting other technologies outside of biotech in order to operate most efficiently. For example, according to Malorye Allison in the October 2009 issue of Nature Biotechnology, “One-third of [clinical] trial sites fail to recruit a single patient and fewer than 20% of clinical trials are completed on time, with about half of the delays attributed to patient recruitment.” This has led to the formation of social networking sites by both nonprofits and commercial enterprises. One such enterprise, iGuard, was reported to have recruited over 2,500 patients for more than 60 clinical trials. iGuard claims that its services shorten its clients’ study timelines by 4–6 months.

    Second, even though total VC funding has fallen considerably in these difficult times, and biotech companies have also been hard-pressed to secure capital, biotech’s share of VC has increased percentage-wise. This suggests that high-risk investments in biotech are preferentially being made because there is now a critical mass of well-managed development-stage biotech companies exploiting accelerating advances in enabling technologies. For knowledgeable investors the perceived rewards outweigh the perceived risks. As the economy recovers, more risk capital will become available, especially when exit strategies once again include initial public offerings.

    Finally, the economic collapse that occurred in late 2008 was not due to a failure in the VC marketplace, but rather a failure in a much larger financial universe involving the massive write-down of poorly understood, high-risk complex investments such as credit default swaps. Fund-raising by VC firms will improve as the economy recovers. Moreover, help is coming from some innovative state programs such as the Ohio Third Frontier, a $1.6 billion commitment that has created and nurtured over 500 companies, with a heavy impact on the biotech sector.

    In June 2009, Florida state officials announced the formation of the $250 million Florida Growth Fund, managed by Hamilton Lane, an independent investment-management firm. Hamilton Lane is placing these funds in VC firms as well as directly into companies through investments with other institutional investors. Interestingly, as noted in the October 31, 2009, issue of The Economist, when governments try to directly manage VC funds that they create, they fare somewhat poorly, such as government funds created in Canada, France, Norway, and Malaysia. When they invest directly as limited partners in VC funds, they achieve much better results, such as in Israel and New Zealand.

    Perhaps a harbinger of a turnaround regarding VC fundraising in the near future, Ballast Point Venture Partners announced in late October 2009, is the closing of a new fund with commitments of $140 million, exceeding their original target of $125 million. The Florida Growth fund is one of the investors.

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