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VC Funding Rises to Pre-Crash Levels

By Salvatore Salamone

May 12, 2005 | As venture capital funding returns to pre-crash levels, the life science industry seems to be taking the Mad Magazine character Alfred E. Neuman’s attitude of “What, me worry?” assuming everything is back to normal. But a closer look at investment patterns reveals a funding gap that is making it harder for academic and early stage research efforts to attract needed capital.

Last year, U.S. biotech companies received about $3.98 billion in venture funding — the most since 2000 when $4.17 billion was invested. The 2004 total was about $500 million more than in 2003 and $800 million more than in 2002. All of these numbers come from the MoneyTree Survey conducted annually by PriceWaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association.

The number of deals also climbed back to 2000 levels (325 deals in 2004 vs. 326 in 2000) and the amount invested per deal has recovered much lost ground ($12.3 million last year versus $12.8 million in 2000).

VC Funding

What the numbers don’t show, however, is that VCs aren’t as eager to fund basic research or early stage development, the kind of work that primarily done in young, academic spin-off companies. When money was flowing in the dotcom boom days, these fledgling companies had a far easier time getting cash.

“Today, [investors] are looking for later stage technology,” said Matthew McCooe, director, new ventures, Columbia University Science and Technology Ventures, speaking at the New York Biotechnology Association annual meeting in Manhattan last month.). Investors are also seeking that technology from more established biotech companies than was the case in the past.

Others agree with McCooe. “Public funds are going to discovery work, and venture capital companies are funding validated [research] that makes it into early stage clinical trials,” says Peter Leonardi, director, business development and technology transfer, at The New York Presbyterian Hospital.

Burnt in the past, but flush with new money to invest, VC’s now demand quicker returns on an investment, often in the 2-to-3 year timeframe — something unlikely to happen with basic research in the life sciences.

When very early stage work does win funding, the amounts invested are generally less. “[But] it costs the same to do the due diligence for every deal,” says David Solomon, medical director, Carrot Capital Healthcare Ventures. To offset pre-deal costs and to ensure investments are recouped in an appropriate time frame, VCs predictably favor the larger dollar-value deals of later stage technology.

Bridging the Funding Gap
To some extent, pharmaceutical companies and even universities are helping bridge the gap by taking a more active role in supporting early stage commercializations and research and development.

For example, McCooe’s work at Columbia goes beyond the traditional work a university would do to license technology. His group helps promising research get a better chance of being funded by using what it calls a proof of concept approach. Essentially, Columbia University is performing tasks a VC would normally do after it invested in a company.

McCooe’s group reviews promising basic research and evaluate what needs to be done to commercialize it. It also provides enterprising researchers who want to launch a company with help putting together a management team and a board of directors. 
Pfizer is also trying to bridge the gap by going directly to the universities and their spin-off companies. “We play in the gap,” says Jim McLoughlin, director, strategic alliances, Global R&D — Worldwide Safety Sciences, at Pfizer. “We see an opportunity where VC funding is not flowing in.”

McLoughlin notes that his staff, which includes more than 50 people, handles about 2,000 college licensing and development deals a year. And the relationship is more hands-on than a traditional technology licensing arrangement. “We stay engaged with [the university partner] and help move the technology forward,” says McLoughlin.

Industry experts believe such different approaches will increasingly been needed to continue to get basic research incorporated into drug development.  l

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