We’ve heard warnings for a couple of years now that the chickens would come home to roost in the biotech venture capital scene. Quite a few VCs just haven’t delivered the returns to back up all their talk, and you can’t wait around forever for things to improve.
This drama is going to be long and painful, and it’s only just beginning. There were a lot of firms that raised their last funds before the financial crisis of 2008, and after putting much of the cash to work in startups, they are finding it much harder to raise new funds today. While some of what’s happening may be a necessary culling of the weaker members of the VC herd, this trend is going to make it tougher than ever for some worthy entrepreneurs to raise cash for new companies to develop drugs, medical devices, and diagnostics.
Consider the headlines from the past few months. The National Venture Capital Association reported in a survey that four out of every 10 biotech funds have curtailed life sciences investing in the past three years, and the same number expect that to continue the next three years. In June, CMEA Capital said it has no plans to raise another fund, although it did carve out the relatively small sum of $20 million to invest in different biotech models through a vehicle called Velocity Pharma Development. Earlier this month, Prospect Venture Partners, a well-respected name in biotech, told VentureWire it was unable to raise enough cash to execute on its strategy for another healthcare fund.
This past week, I heard rumblings about how another well-regarded biotech venture firm in San Francisco—The Column Group—had fallen on hard times, which was about half-true. And I’m hearing that we’re going to see more fallout from other firms retrenching or restructuring before 2011 is done.
The Column Group, a firm with three Nobel Laureates on its science advisory board and a couple of big-name partners in David Goeddel and Rick Klausner, confirmed to me last week that it is no longer investing in new startups. The firm raised its initial $260 million fund to invest in 10-12 early-stage, big-idea life sciences companies, starting in early 2007. Since then, it has invested about half of its money in 10 companies, and is reserving the other half for follow-on investments in the existing portfolio, says managing partner Peter Svennilson. The firm considered raising a second fund about 18 months ago, he adds, but decided against it. The Column Group hasn’t generated any returns yet, and it is essentially in a holding pattern until it does.
“The partnership has decided we want to have a couple spectacular exits from our first fund before we raise the second fund,” Svennilson says. He adds: “The times are over when you can raise several funds on a concept.”
Biotech has long depended on its “blue-sky” concepts that caused people to look away from the cold reality of spreadsheets, and toward the warm glow of potentially groundbreaking technologies like RNA interference, stem cells, and genomics. If The Column Group can’t raise money with all its scientific expertise, then you can imagine how that sends shivers throughout the venture industry. The Column Group has made a number of high-profile investments, and syndicated with some of the biggest boys of biotech VC—Kleiner Perkins Caufield & Byers, Third Rock Ventures, Venrock Associates, OrbiMed Advisors, New Enterprise Associates, and SV Life Sciences. When I interviewed Mike Ross of SV Life Sciences at the last JP Morgan Healthcare Conference, he said he was concerned about whether there are enough venture capital partners, over the long haul, who will be strong enough to help finance a promising company all the way to the point it can generate liquid returns.
I heard a similar theme this week from Mike Powell of Sofinnova Ventures. Sofinnova was a bright spot on the VC landscape last week when it said it was able to raise a $440 million biotech-only fund, after initially seeking to raise a max of $400 million.
Powell expected to get a lot of congratulatory e-mails, which he did. But he got way more than he expected—“hundreds and hundreds” of e-mails from industry colleagues who expressed how big an achievement it was to raise that cash in such a bad environment. And there were other curious
