By Michael A. Greeley

March 17, 2004 | TWO YEARS AFTER THE LAUNCH of Bio·IT World, companies are being funded at a much greater pace, both publicly and privately, the stock market is doing better, and many economic indicators are improving. The bio-IT ecosystem is on the mend. Or is it?

A reasonably high level of skepticism still pervades the industry, but vendors are increasingly (and cautiously) optimistic that the science underlying many of the bio-IT software tools is now better understood, and therefore the tools' capabilities are more compelling to would-be users.

The signals, while still unclear, tend to point in a positive direction — certainly more positive than this column observed last year.

"After a period of productive rationalization, where exciting new tools were shown to be ultimately flawed, there are a number of opportunities for robust management teams to flourish," says Jeff Peterson, CEO of Target Discovery, a company developing expressional proteomics tools. Peterson acknowledges that a higher burden of proof has been placed on companies today because of "all the failed 'omics' investments of the last five years." He suggests that vendors in this climate are now engaged in higher-level, more specific conversations with pharma and biotech companies. Peterson's approach? "Crawl before you walk before you run."

Colin Hill, CEO of Gene Network Sciences, a predictive systems biology company, says the worst is behind the bio-IT industry. "The hype has dissipated, and companies are focused on delivering the results," he says. Hill's strategy includes developing additional products, which should generate near-term revenue.

Additionally, Hill says he observed a marked pickup in activity in the middle of 2003, which is coincident with the stepped-up level of funding activity. The downstream benefit of the opening of the biotech IPO window (finally) may be that bio-IT budgets in 2004 grow bigger. Hill is quick to add, though, that "the overall promise has still not been delivered."

Ultimately it is the customers who will determine when the bio-IT sector will improve. Rainer Fuchs, vice president of research informatics at Biogen Idec, expects a relatively quiet year in 2004. The "worst [is] behind us, although there will probably not be any big scientific advances this year." Fuchs advises bio-IT companies to "find small groups of early adopters to perform real-life validations." His investment focus this year: products that will show operational efficiencies with immediate cost savings, such as document management and scientific data storage systems.

Do not underestimate the power of fund flows we witnessed over the past six to nine months. With liquidity returning to the ecosystem, there will be a stepped-up level of business activity. Lawrence Wittenberg, a senior attorney at the law firm of Testa, Hurwitz & Thibeault, observes that "although it is not as euphoric as the year 2000, there are a lot of merger and acquisition discussions as well as venture financings under way, much of which has not yet been announced."

The other "flow" investors like to watch is the "human flow." Are executives joining bio-IT startups? Stephen Bochner, a partner at TMP/Highland Partners, a leading executive search firm, notes that over the past few years "executives would rather put glass under their fingernails" than join an early-stage bio-IT company. That has changed markedly. "We have come out of a period of unprecedented reticence among capable candidates to move to startups; we are totally swamped," Bochner says.

So what should we conclude? The signals, while still unclear, tend to point in a positive direction — certainly more positive than this column observed last year. The bio-IT companies operating in this environment have most likely weathered the worst of it.

Michael A. Greeley is managing general partner of IDG Ventures, a global family of funds operating in North America, Europe, and Asia, with approximately $600 million under management. E-mail: mgreeley@idgventures.com. 


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