New times, new directions for investment.
While it’s not clear how Congress will react, the proposal signals that biotech is looking for new ways to get money to innovate and remain viable. That includes venture capitalists funding specific projects or mezzanine rounds normally paid for by hedge funds. Venture capitalists also are evaluating syndication partners, to spread the risk and get value-added in the deal.
“This environment will create other ways of financing,” Heather Preston, managing director of venture capital firm TPG Biotech, said at the Massachusetts Biotechnology Council’s investment conference in December. “There will be things we haven’t conceived of for funding science and medicine.”
She pointed to companies like Symphony Capital and NovaQuest, which have come up with new ways to fund clinical development in their portfolio companies, including closely managed partnerships and tailored investment structures.
“A lot of companies are flexible to look at alternative financing like structured financing,” she said. “We’ll invest in debt, or behind a specific asset. It doesn’t have to be a direct equity investment.”
Preston believes there will be a lot more venture activity in the public markets over the next 18 months or more. One reason is that hedge players don’t have money for mezzanine rounds.
Larger Series A rounds
Other changes venture companies are seeing is that first rounds are getting bigger. Around a dozen companies in the US in the past few months raised $40 million Series A rounds. “This is unusual,” said Jens Eckstein, general partner of TVM Capital.
Eckstein added that the Series A round has become more of a combination A & B, with syndicates strong enough to keep companies going for longer, and staying independent of outside financing.
He added that the market will see more Darwinism or forced selection, where stronger companies will survive and no money will be spent on the weaker ones. The management of venture capital-backed companies will be expected to control costs through lean structures and smart outsourcing.
“Venture capitalists will look carefully at follow-on financing and how proactively we get involved with companies,” agreed Neil Exter, venture partner with Third Rock Ventures.
Simeon George, an associate with SR One Ltd., the venture arm of GlaxoSmithKline plc, added that clearly delineated milestones will be needed before a venture capitalist agrees to keep funding a company.
Value-added syndicates
At the same time, syndicate composition is taking on a larger role. “Syndicates are an issue for venture capitalists and for management,” Eckstein said. “The more deep pockets you have around the table, you can be more flexible.”
“We look at a company and the syndicate partners,” said Exter. “Deep partners help with scientific and other matters. Everyone needs to add value. And this [the syndicate] should be someone you want to work with long term.”
Preston said that in a Series A round, her firm looks to see if syndicate partners have more money to invest and are reserving capital for subsequent rounds. She also examines, “What is the least amount of money to get to a reasonable milestone.”
George said it is important for syndicate partners to be like-minded on the exit strategy for their investment company.
Dry powder aplenty
Amidst all this make-do-and-mend there is some heartening news. People will continue to get sick, a phenomenon that is recession-proof, as is cool breakthrough science and the emergence of great ideas, Eckstein said. With the incoming Obama administration, there is potential for richer budgets for the FDA and NIH, he added. And, there is a lot of dry powder: a number of venture capital firms, including TPG Biotech and Third Rock, have only recently closed their latest funds and have money available to invest.
“Most of our fund is uncommitted,” said Exter of Third Rock, which put together its first fund of $378 million in 2008. “We are looking aggressively for funding early stage ventures.”
George said that SR One also is looking at a number of early stage opportunities now. And Preston said her company, which raised $500 million in its most recent fund, has a significant amount of money to invest globally, “We have three investments with the new fund, and plan to invest aggressively over the next three years.”
Receive the Funding Newswire each Tuesday, our Policy Bulletin each Thursday, and news about bridging Europe’s east-west innovation gap twice a month in The Widening. 
A unique international forum for public research organisations and companies to connect their external engagement with strategic interests around their R&D system.