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Friday, December 19, 2008
Looking ahead: Sector by sector surveys of the landscape ahead
Biotech VCs face tough choices: Hold tight or cut losses
By Marc Songini
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The lack of an initial public offering as an exit strategy means life sciences venture capital investors will be applying Darwinian principles to pare down their weak performers and stick with the portfolio firms that can adapt to today’s financial environment, say experts.
Underscoring the dismal state of the market, Andover-based medical device startup TransMedics Inc. this month pulled its IPO registration, citing bad times.
“It’s really scary right now,” said Douglas Fambrough, a general partner at Boston venture capital firm Oxford Bioscience Partners LP. The current circumstances mean a startup with sound management and great technology that is hitting its regulatory and other milestones still can’t be sold off profitably. However, he said, “You want to protect the startup and do everything you can do to make sure you make it through this period and it reaches the promised land.”
Without simple exit opportunities for startups, this is an atmosphere of “brutal Darwinism,” said Jens Eckstein, general partner of Boston-based TVM Capital Corp. Some funds are getting tight, and their managers will have to decide which startups remain funded. “You have to wind down on some of the very weak players,” he said. “In 2008, a lot of people saw the writing on the wall. The IPO market was very bad. In 2009, it will be worse,” said Eckstein.
Some companies will simply run out of cash and sell, whether they want to or not. But selling at a cut-rate price to any buyer could be a disaster, said Fambrough. Part of any startup’s value is the people in it. “If you just bought them at a fire-sale price, you just bought a demoralized team looking for new jobs,” he said. On the other hand, if you lay off most of the staff, sell the equipment, and make it hibernate, that consequence is just as bad, he said.
With IPOs largely gone as an investor exit, one alternative is the merger-and-acquisition route, although even this has been rare lately. One such acquired (and fortunate) firm is Sirtris Pharmaceuticals Inc. of Cambridge, which GlaxoSmithKline PLC purchased in June for $720 million. “We got bought out just before the market turmoil,” said Michelle Dipp, vice president of corporate development at Sirtris. “We got very lucky.”
A silver lining
Despite the gloom, experts see a few dim rays of hope.
One advantage, Dipp pointed out, is that biotech investors are fairly patient about their investments, as it usually takes five to 10 years for a startup to reach a “value-inflection point.” And a few new companies are actually receiving funds.
Boston-based Alnara Pharmaceuticals Inc. closed $20 million for a Series A round in October, although funding discussions had been ongoing well before that date. “While the current economic climate has made raising capital more challenging for biotech companies, innovative science and a proven track record are still compelling to investors,” said Alexey Margolin, CEO of Alnara, in an e-mail.
“People are still excited about the prospect of a major breakthrough,” said Neil Exter, partner at Boston-based Third Rock Ventures LLC, an investor in Alnara. “There are lots of scientists discovering new things and the pace of innovation is the same.”
However, he added: “There will be more selectivity about the potential breakthrough.”
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