what they’re doing isn’t really venture investing,” he says.
That late-stage deal isn’t as innovative, and it isn’t as much fun, Lichter says. Rather, he describes it as largely a numbers game. A venture fund needs to put so much capital into a late-stage deal that it’s impossible to get home-run returns of 50-fold on investment, which can be possible with seed investments of just a few million dollars, Lichter says. Over the years, San Diego’s life sciences community has done particularly well with its seed and early stage startups. But if everyone flocks to safer bets, and hardly anyone is willing to gamble on early-stage investment, then how can a region like San Diego create companies?
Avalon is just one firm, so it can’t really be the answer all by itself. Still, I had to press Lichter on how viable the approach really is, and how well the firm has performed, because that will determine whether it can continue.
Avalon was founded 25 years ago by Kevin Kinsella, and is now working on its eighth fund, which provided $150 million to invest in August 2007. The firm splits its bets 50-50 between life sciences and high tech, Lichter says. The last fund is now almost completely invested. One of Avalon’s tech investments, Zynga, the developer of “FarmVille,” secured an investment from a Russian group that put in $180 million. “We did extremely well on that one,” Lichter says, without providing specifics. One other winner Kinsella pointed to was Sytera, a maker of drugs for eye diseases, that was acquired by Sirion Therapeutics in August 2006. Avalon is also bullish about a couple of other portfolio companies in the Boston area—BioVex and Acceleron Pharma—although they haven’t generated returns yet, Kinsella said.
Avalon is having discussions about raising another fund, although it hasn’t put together a prospectus yet, Lichter says. A lot will depend on how pension funds or other institutions view Avalon’s track record. Lichter noted that Avalon’s sixth fund ranks in the top 5 percent of venture funds raised in 2001 according to data from Cambridge Associates; the seventh fund is still a little “too early” to judge; and of course, the eighth fund is still just a couple years old, although it has already returned half of its invested capital, Kinsella says. But at least as of now, Avalon insists it has a future in bucking the trend, and doing venture capital in the old-school, early-stage way.
“We invest in companies that we thought up, or with entrepreneurs we’ve known a while and trust,” Lichter says. “We always take Series A deals. And we only invest in disruptive technology.”
This may sound like an uncomfortable place to be in a cautious economic climate, but Avalon insists it’s perfectly happy digging through the scientific literature and venturing out on the edges of biology. “We don’t need to feel the brush of the furry skin of our fellow sheep in venture capital to feel good about our investment decisions,” Kinsella says. He wouldn’t say for sure whether Avalon plans to raise another fund, but Kinsella did make a clear statement that Avalon has a future. “None of us are getting ready to retire,” Kinsella says.
