The Burrill Report


Venture capitalists speaking at Deloitte Recap’s Allicense meeting in San Francisco in early May said that while recent exits have eased a challenging financial environment, they’re feeling intense pressure to be as creative and capital efficient as the companies they fund.

While venture investment in life science continues to be strong with more than $900 million in funding announced in April, venture funds have not performed well. In response, VCs are refocusing their strategies to achieve better returns for their investors. One approach they’re taking is to think of the exit at the outset, when a company is being created, according to Rod Ferguson, a managing director at Panorama Capital.

This is a central idea behind the Velocity Pharmaceutical Development Model at venture firm CMEA. Managing Director Karl Handelsman says his firm looks to in-license molecules, often shelved by a pharmaceutical company because they don’t fit with current development strategies, and can be developed to proof-of-concept in two to three years for $10 million to $15 million per compound before being sold back to the pharmaceutical firm.

CMEA creates a company to develop the molecule and eventually sell it back to the pharmaceutical company. It is still a gamble, says Handelsman, as the odds are that two thirds of molecules will fail before they reach the proof-of-concept inflection point. But at least the bet on each molecule is small, and the payout for the ones that succeed will likely more than cover the losing bets.

Panorama Capital’s Ferguson characterized the IPO markets as pathetic, noting that an acquisition was the only good exit. But panelist Jonathan Norris, managing director at SVB Capital, said his recent analysis of the past six years of M&A in biotechnology showed that only 60 companies saw exits of $100 million or greater in upfront payouts, out of more than 600 venture-backed companies—not the greatest odds. The highest pre-money valuations went to oncology firms, the lowest to cardiovascular drug developers.

If an exit through an IPO or acquisition is not the solution, then what? Ferguson suggested that venture capitalists help their companies with licensing deals and option arrangements that could lead to an eventual takeout. Good partners take away the need to take companies public, noted Alison Kiley, a director at Alta Partners. She said that venture capitalists are getting better at being portfolio managers and asset managers funding companies more smartly. She also feels more positively toward structured buyouts, the current structure of most private company acquisitions, because lawyers are getting better in formulating deal terms.


In the end, for both companies and investors, it takes a combination of factors to build a successful company. It will always be a gamble but the science is getting better and investors and managers are getting more creative and aware of what it takes to build value.




May 11, 2011
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