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Infinite Demand for the Unavailable

By Michael A. Greeley

Dec 2005 / Jan 2006 | I’m often asked, “What is the outlook for 2006 from a venture investor’s perspective?” VCs once again believe that investments being made today will consistently generate superior returns; that has not always been the case in recent history. Earlier this decade many investors were hesitant to commit to new technologies given all of the uncertainties. Stability has returned to the market, companies are able to raise capital, and most importantly there is increasing evidence of liquidity for the private investor.

The bio-IT field is once again attracting capital, but at a more moderate, deliberate pace than the euphoria of the late 1990s. Many of the issues the industry has confronted over the last five years still exist but are beginning to recede in some small measure largely driven by the growing acceptance of the biomarker phenomenon. As better data are generated, better tools will be needed to capture, analyze, and report higher-value findings.

So what is still wrong? An entrepreneur recently described his dilemma as being overwhelmed by the “infinite demand for the unavailable.” In other words, all of pharma would purchase bio-IT tools with features and functionality if the promise of value delivered actually met or exceeded the realities of their performance. Given the complexities and chaotic nature of the biological systems these tools are meant to study, it is no wonder that customer disappointment remains, sales cycles are long, and ultimate engagements are for less dollars than hoped for.

But one of my predications for 2006 is that bio-IT vendors will see predictable revenue streams from important customer engagements. Unfortunately, these revenues will continue to be modest. The ultimate customer base is still reasonably small and concentrated, and skepticism for many of the products will continue. But the struggles to improve productivity will finally drive customers to invest more aggressively in these tools.

The venture market outlook is more complicated, though. Bio-IT entrepreneurs today are best advised to be extraordinarily focused on immediate customer needs, to not over-engineer products or strive to address too many different market opportunities in parallel. There is a renewed emphasis on capital efficiency. Customers are the most ideal source of funding. Absent that, venture capital funds effectively bridge entrepreneurs to customer revenues. But it is very expensive and needs to be used judiciously. Many funds today can deliver deep networks of potential customers, employees, and partner relationships, which in this environment are even more valuable. Early customer revenues will determine survivability.

The Year Ahead
An important customer will become more visible in 2006, which I believe to be the government across its many different agencies. The extraordinary homeland defense budgets that were appropriated over the past couple of years will find their way to small venture-backed informatics companies. The siren song here, though, is that it is difficult to build meaningful companies on the backs of these initiatives. A more traditional, commercial customer base will still need to be developed, but early government contracts and grants will prove to be an important source of funding for many entrepreneurs.

One issue that will play out in 2006 is that many large venture funds need to invest significant amounts of capital in their portfolio companies. A “capital gap” has emerged where entrepreneurs are finding it problematic to raise $1 million to $3 million. Bio-IT companies simply do not require meaningful amounts of capital at the outset. There is also the problem that the value bio-IT tools promise won’t be realized for years, which has negative implications when investors think about exit scenarios.

For many businesses, venture capital is a poor source of funding. Funds have grown to sizes that are causing them to “over-invest” in early-stage companies; too much capital can be as damaging as too little capital invested.

So, is 2006 the year we begin to satisfy the infinite demand for the unavailable? I expect the bio-IT industry will make great strides as products become more compelling and customers accept that investments in these tools will begin to impact discovery pipelines. Venture investors will be cautious, though. The capital gap created this decade as many funds effectively graduated from the very-early-stage venture market will keep fundraising challenging.

Michael A. Greeley is managing general partner of IDG Ventures. E-mail:

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