“We need to put regulators, legislators, presidential candidates, and even the private sector on notice that this situation represents a serious problem that will lave long-reaching economic implications if not addressed,” said Mark Heesen, president of the U.S. National Venture Capital Association (NVCA).
Dixon Doll, chairman of the association, added, “…public offerings create visible, long-term economic growth.” Public companies that had been venture-backed account for 18 percent of the US gross domestic product, according to a 2007 report by forecasting company Global Insight.
A survey of 660 members of the NVCA found 81 percent do not expect the IPO window to re-open in 2008, blaming skittish investors, the credit crunch/sub prime mortgage crisis and the bureaucratic overhead of the Sarbanes-Oxley Act, which requires enhanced accounting standards for publicly-traded companies. Opponents of the act say it complicates financial reporting and makes it more costly, particularly for cash-strapped start-ups.
As of June 30, 2008, 42 venture-backed companies had filed for an IPO with the US Securities and Exchange Commission and are currently “in registration,” which means they aren’t yet publicly traded. The NVCA said the figure is down 40 percent from the three-year high of 72 companies in the third quarter of 2007.
Venture investment flat
Piling on the agony for development-stage companies, second quarter investment of $7.4 billion in 990 deals by venture capitalists was essentially flat compared to the first quarter, according to the MoneyTree Report from PricewaterhouseCoopers and NVCA. The software industry captured the most deals in terms of numbers and dollars in the second quarter, followed by industrial/energy companies. Cleantech remains a hot area for investors. But biotech was bumped out of the top two for the first time in five years.
According to the NVCA, the pace of investing in the first half of 2008 indicates venture investing is on target to reach $30 billion this year.
Heesen said he is concerned that first round funding levels declined in the second quarter. This could be the result of the closed IPO window, and will become a concern if the situation is prolonged, he added. In addition, venture capitalists are investing for longer periods in their existing portfolio companies. The median age of a venture-backed company from founding date to IPO hit a 27-year high in 2007 at 8.6 years.
Trickling down
All that news is causing shudders in technology licensing offices, which fear investments could fall to the poor levels in 2001. “I’m quaking in my boots,” said Lita Nelsen, director of the technology licensing office at the Massachusetts Institute of Technology. “I’m terrified, but I don’t know what to do about it.”
She added that MIT hasn’t felt the pinch yet, as it takes six to eight months for the impact of a financing drought to trickle down to technology licensing offices. MIT spins out about 24 companies on average a year. For the fiscal year ended June 30, that was down 10-15 percent over the last few years, Nelsen said, adding that one advantage academic spinouts have over other start-ups is that the university can wait out an economic downturn.
Acquisitions more promising
One thing that has been a boost to biotechnology companies is trade sales to pharmaceutical companies eager to boost their pipelines. “They’re paying a lot for companies and compounds,” Nelsen said.
“It’s difficult to go public in today’s environment, but that doesn’t mean there aren’t any exits,” added Kristina Burow, principal at ARCH Venture Partners, which invests in technologies from academic and national labs. She points to GlaxoSmithKline’s $720 million acquisition in April of Sirtris Pharmaceuticals Inc., a Cambridge, MA-based developer of small-molecule drugs for ageing disorders including Type 2 diabetes.
“But the thing that’s hitting universities more than anything is the lack of government funding,” Burow said. The National Science Foundation’s (NSF) funding has been nudged up after being flat for several years, but the NSF still is only able to fund about 21 percent of all research grant proposals it receives.
Getting creative
There is a silver lining: universities are becoming more creative about how to take science and technology out of the lab to commercialization, Burow said. Some universities have brought in individuals from industry. For example, the University of California at San Francisco hired James Wells, cofounder of cancer drug developer Sunesis Pharmaceuticals Inc. of South San Francisco. Wells was appointed professor in the pharmacy and medicine schools, and directs the university’s Small Molecule Discovery Center.
“Technology transfer people need to be more assertive to parlay their technology,” added Chang Hong, an intellectual property attorney at Flagship Ventures’ portfolio company Joule Biotechnologies Inc, a Cambridge, MA biofuels startup. “They need to call venture capitalists instead of putting the onus on companies to call them, and ask about their technologies.” This is particularly true of universities that aren’t in the top tier and don’t have venture capitalists banging on their doors, as do MIT, Stanford University and others.
Hong said the financing situation isn’t worse today than it was in the dotcom bust of 2001. At that time he worked for GlycoFi Inc., a Lebanon, New Hampshire, yeast glycoprotein company acquired by Merck & Co., Inc., in 2006. GlycoFi got venture capital financing from founding investor Polaris Venture Partners and others in subsequent rounds. “There are a lot of investors who are looking for the right fit and technology,” Hong said. Still, he added, there’s more opportunity for acquisitions than IPOs now.
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