Jan. 22, 2008 SDF VC PWC

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On Tuesday, January 22, 2008 in Palo Alto at Pillsbury Winthrop Shaw Pittman LLP and SDForum held the fourth quarterly Venture Breakfast Series in partnership with PWC. Alison Leopold Tilley of Pillsbury Winthrop introduced Steve Bengston of PWC and moderated a panel with Lou Bock of Scale Venture Partners, David Lowe of Skyline Ventures and Evgeny Zaytsev of Asset Management Company.

Are we in a recession? Harry Truman said if you laid all the economists in the world end to end they would point in all directions.

I asked Steve Bengston and he said a recession is two consecutive quarters of negative growth. He has not seen that. I’ve followed his work for some time and believe him. Most of the activity he sees is for later stage expansion deals in software and biotech.

Biotech deals have a longer period of gestation before they pay off. I think you need to invest in biotech just so it can help you live long enough to get money out of biotech. Four million VC dollars buys more months of burn than six million during the dotcom boom because of lower expenses in improved business processes and less money spent on marketing. VC are concerned about capital efficiency. They like to get ten times what they put in and biotech doesn’t always work that way. You may only get two or three times what you put in. It makes sense to put 10 million in a seventy million dollar company, not thirty.

Biotech historically has been about protein therapeutics. In the broader sense it is any idea turned into a drug candidate. There are challenges in the research, hazards in testing and obstacles in regulation that make getting a product out very unpredictable. Sometimes there are breakthroughs for the patient investor. The antibiotic tetracycline was thought to have a only two positions for carbon atom until a Harvard scientist figured out how to put it in any number of positions. This could lead to a new series of antibiotics to treat resistant infections. The problem for investors is that it took twelve years. Universities fill this long funding gap better than angel investors, but they tend to be protective of their discoveries and licensing.

Investing an existing proven drug that might be used for another purpose is a safer bet, providing it is approved by regulators. The lead times and capital efficiencies are better than something truly new. Offshoring works particularly with clinical trials but more and more top notch research facilities are being built around the world. In the end it still has to be approved for domestic use and there are no guarantees through a complicated and seeming arbitary process.

The typical exit timeframe is five to seven years. Maybe there will be an IPO. Increasingly big pharmaceuaticals are using small companies as external R&D since they can’t seem to develop internally. When the drug works they buy the company. The key in making money is having good money management as well as good research. You are investing in a company and how well it is run, not just a drug.

All of this takes a strong stomach, hopefully treated with some newly approved antacid.
Copyright 2008 DJ Cline All rights reserved.