Take a look at the venture capital weather vane, and you’ll see the wind blowing in from the biotechnology sector these days.
Just as they flocked to dot-coms three years ago, major venture firms in region are shifting their portfolios toward more biotech deals and new funds dedicated to financing biotech startups are springing up following the bust of the Internet economy.
After getting burned by failed e-commerce and information technology plays, many investors see biotech as the safe harbor for current deals, viewing an aging population and efforts to use genes and proteins to fight diseases as the drivers behind a rapidly expanding market.
And as always, the venture capitalists see safety in numbers.
A recent study by market monitor Venture One found that 41 percent of venture-backed biopharmaceutical companies were able to raise new money last year, compared with just 28 percent overall. Of the more than 60 venture deals in the Carolinas and Georgia that Local Tech Wire has tracked so far this year, about one-fourth have been for biotech or pharmaceutical services companies.
“That’s the asset class in favor now versus other areas, especially in seed and early-stage deals, and the Southeast economy is strong in that area,” says Scott Albert of Durham-based Aurora Funds. “We see it, and our limiteds (investors) agree with us.”
Poor prospects for IT returns
Aurora’s new $75 million fund, which is expected to close by the end of the year, will be weighted heavily toward biotech deals, Albert says, compared with the fairly even split between biotech and information technology companies in the firm’s first three funds.
The first three deals from the new fund are indicative of the trend. Aurora has led the $6.4 million first round for Cropsolution, a Morrisville, N.C.-based company that has developed a technology to discover pesticides and insecticides more quickly; it also has participated in an early round for a bioinformatics company in Pittsburgh; and it has seeded Regado, a spinout from Duke University Medical Center that hopes to develop drugs whose effects can be switched off if necessary.
Albert says the primary reason for the shift is that the economic downturn restricts the potential returns for investments in IT companies. Telecommunications firms are already glutted with inventory and aren’t buying equipment, and big companies don’t have the budgets to buy new enterprise software.
“There’s no revenue there,” he says. “We probably won’t see an exit above $40 million because IPOs aren’t there.”
Noro-Moseley Partners of Atlanta also is skewing its $320 million fifth fund, the largest in the region, more toward health care and biotech, says Alan Taetle, while Durham-based Intersouth Partners likely will see its current $183 million fund wind up evenly split between IT and biotech deals, according to Mitch Mumma.
“We raised the fund during the tech boom and expected it to lean heavily the other way (toward IT deals),” Mumma says. “But most of our deal flow for the past few quarters has been in life sciences, so we’ll probably end up fairly balanced.”
Biotech focus vs. contrarian stance
Other funds don’t seek balance, preferring to specialize in biotech deals.
Quadrant Venture Capital of Washington, D.C., recently launched the University Biomedical Fund, a $50 million pot to make seed and early-stage investments in technology being spun out of university medical centers and biotech programs in the Southeast and Mid-Atlantic.
Also, Rachel Selisker, the former chief financial officer of pharmaceutical services giant Quintiles Transnational, is working with British venture firm Thompson Clive Investments on a $50 million Raleigh-based fund targeting life sciences- and health care-related service companies.
“It’s not like we’re another telecom fund in Boston,” says Anne Mathias of Quadrant. “There’s very little money targeting these investments in this region, and we see a lot of opportunity here.”
But at least one area venture firm sees more opportunity in going against the tide. Southeast Interactive Technology Funds, which saw some of its biggest successes and biggest failures by running with the herd in the dot-com boom, is now in a contrarian posture, which Bob Diemar likes.
“The flavor of the month certainly has been biotech recently,” says Diemar, who noticed a significant increase in biotech funds while working on Wall Street before joining Southeast Interactive earlier this year.
The firm “would be all over” a software-based monitoring or distribution system that caters to the biotech or health care market, he says, adding, “We’re just not going to make pills. We’re sticking with our theme, and with some of the other (venture) money cleared out, it creates a much more favorable environment for us.”
Other venture capitalists also say that, despite their current biotech leanings, now might be the best time to invest in IT companies.
“When you see so much focus on biotech, it’s probably a good time to do some software deals,” Mumma says.