Print
Email
Print Edition Stories
Stuart Garfield
Wednesday, December 16, 2009
Biotech entrepreneurs say investors take longer than ever
By Galen Moore
MHT's Galen Moore: Honoring innovation in New England
Companies born in the recession
MHT's Julie Donnelly: Life science startups finding investments
Most venture capital investors will tell you they’re just as thorough now as they’ve ever been when preparing to invest and that they invest with care for the long term, regardless of the economic season. But entrepreneurs see it differently. In the current boom-bust cycle, they say, VC due diligence is riding the brake on life sciences investments.
Entrepreneurs who have had success getting funded in the past have noticed the change, and some say it may be a permanent shift in the life sciences sector. Investors, they say, have begun to realize just how risky life sciences investments truly are. “Over the last couple of years there’s been an increasing awareness of the extraordinary degree of risk in biotech companies,” said Richard Anders, a serial entrepreneur who this spring helped found Mass Medical Angels, a life sciences investor group.
Taken as a whole, the biotech industry is a net loser over its lifetime, Anders said. There have been wild success stories, but far more failures, he said. With a long drug-approval process and outcomes that are far from certain, more due diligence makes sense. “In the life sciences business there are probably more moving parts than any other industry known to man,” Anders said. “It shouldn’t be surprising that it takes a long time to evaluate companies in that space.”
According to entrepreneurs, investors are taking longer to examine the science behind a startup proposition, but they are also scrutinizing members of the founding team, checking references carefully and considering personalities for potential conflict. They are looking more carefully at intellectual property issues and double-checking that the company will have room to operate if its plans bear fruit. Business plans in particular are getting more careful attention, said Constellation Pharmaceuticals Inc. CEO Mark Goldsmith. Investors want to see a road map that leads clearly to a successful exit before they invest, he said.
As the Cambridge drug developer’s new CEO, Goldsmith helped Constellation close a $17 million funding round in August. On the West Coast, he saw boom years from both sides of the venture equation — as a former executive-in-residence at Prospect Venture Partners and before that as CEO of California-based Cogentus.
“During the bubble period, it’s easier to get an investment funded on a good idea. Everybody has an expectation that a good exit will come out of it at some point,” Goldsmith said.
“Now that is not the case. Many companies are not succeeding. Many companies are running out of money. Valuations are down. Investors realize they’d better pay attention to the overall life cycle plans of the company and have much greater confidence and specificity about what’s going to happen.”
That won’t necessarily boost startup outcomes, Goldsmith said. The truism that startups must make 90-degree changes in direction to survive holds true in the life sciences, he said.
“Many of the successful biotech companies we look at today are successful on the basis of some asset or part of the business that wasn’t prioritized at the beginning of the company, but some pivot was made along the way.”
Spreadsheets and slide presentations aren’t the only thing getting a closer look. Potential investors are also taking a deep dive on the people who present them, said Acceleron Pharma Inc. CEO and founder John Knopf. For example, academic researchers looking to spin off university technology are getting especially close scrutiny, Knopf said. If the team actually knows one another and has worked together, that’s in their favor, he said, but often, the “best and the brightest” are brought together from different, sometimes competing, institutions and egos may get in the way of success.
Nowadays, even proven entrepreneurs are likely to find a longer go of it. “In the past, someone with a proven track record, they’d just give them the money,” Knopf said. “These days, even the serial entrepreneurs, (investors) are looking back and saying, ‘Where did we really make money with these guys?’ ”
Not every entrepreneur agrees that investors are taking a closer look. Some say VCs are simply taking longer to make decisions because, in a buyer’s market, they can. “The good venture firms always did a tremendous amount of diligence,” said NKT Therapeutics Inc. CEO Robert Mashal. “What’s changed is the length of time it takes them to do it in this kind of an environment.”
Newton-based NKT closed an $8 million Series A round in March, when public markets were near their bottom. Mashal said he thinks longer due diligence is simply a function of cyclical market forces. Before NKT, Mashal was a partner at Boston Millennia Partners, where he said he saw the same trend in the last downturn. “When I joined the VC industry in late 2000, early 2001, you had all kinds of time,” he said.
Of course, no matter what the economic environment, some startups — and some entrepreneurs — may have the luxury of setting their own timetable. Adimab Inc., a Lebanon, N.H.-based antibody discovery startup, closed financing rounds in 2007, 2008 and 2009. Founder Tillman Gerngross in 2006 sold his prior startup, GlycoFi Inc., for over $400 million. In spite of the climate, getting funded this time around was faster and quicker, he said.
“Once you build a company that is sold very successfully, the world around you changes,” Gerngross said. “People want to get in on the deals. For me, it’s very much more a seller’s market.”
In its latest round, Adimab’s management was able to set deadlines for investor due diligence, and then pick and choose from among multiple term sheets, he said. Eventually, the startup chose Google Ventures, the venture investing arm of Google Inc. (Nasdaq: GOOG), to lead its undisclosed third venture round. “VCs were not controlling the process,” Gerngross said. “We were controlling the process.”
But most startup companies don’t have the luxury of being so choosy. A large number of startups are in the market seeking funding, said Puretech Ventures founder and managing partner Daphne Zohar. She’s not sure VCs and strategic investors are plumbing companies any more thoroughly than they were accustomed to in better times. However, she said, noise from the crowd of startups in fundraising mode has made it harder for companies that might have otherwise easily attracted investors.
“That might give the perception that the bar’s gotten higher, but it’s just that there’s more stuff out there,” she said. “(Startups) have to be, I think, more innovative.”
Comments
If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.
RSS Feeds
