Yes, the mood has undoubtedly improved in comparison to last year’s gathering of the healthcare investment community around the “old clock” at Union Square in San Francisco. But given the overall depression of last year this was perhaps not all that difficult to achieve. I have mulled over all the conversations I had during the usual four day frenzy, trying to sort out reality from wishful thinking, and here are a few admittedly subjective conclusions:

—The industry is still facing fundamental problems and has not convincingly formulated breakthrough solutions when it comes to the exorbitant cost of drug development, high attrition in the clinic, predictable FDA decision-making, reimbursement, and disruptive innovation. Everybody has been forced to implement draconian cost-cutting measures and it is amazing to see how much can still be done with so much less resources and money. But, we are really stretching resources and dollars towards the breaking point.

—Skepticism around IPOs in the healthcare sector without solid near-term revenue streams remains very high. Very few VC investors expect a significant increase of IPOs in 2011, hence, this favorite exit route of the biotech boom years remains elusive, putting continued emphasis on M&A.

—The emerging mantra of last year’s conversation about pharma and biotech (as well as their investors) being all in one boat has taken root. The dialogue centers around collaboration and partnership, risk-sharing, and early-stage engagement. This trend provides important feedback to biotech and biopharma startups which hopefully translates into improved relevance of the work done and financed in the early stage.

—Creativity around biotech-pharma deals has definitely increased and no structure is off the table. Buzzwords around Union Square were “option deals with negotiated upside” and “structured acquisitions.” The trend clearly points towards earlier collaboration and cost-sharing, albeit with fairly modest technology access fees or upfront payments. As a consequence, investors see their exit options dragged out more and more; simple all-cash acquisitions remain rare and might only be achieved in competitive situations created by high strategic value of assets.

—The discussion continues around the strategies of bringing innovation into healthcare. The recent mergers in pharma—Merck and Schering-Plough, Pfizer and Wyeth—have resulted in … Next Page »

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I spent an enlightening week in Tokyo earlier this month participating in the Kauffman Fellows Japan Summit. This summit was the brainchild of three visionary Kauffman Fellows who are on a mission to instill entrepreneurship into the Japanese culture. During the three days we heard about the current (dismal) status of venture capital and entrepreneurial success in Japan—especially in the life sciences—in contrast to the unbelievable track record of Japanese engineering and precision manufacturing, as well as the country’s output of patents, which rivals that of the U.S.

Walking around Tokyo and interacting with the many smart minds at the summit, I had to scratch my head—at first blush, the ingredients of great entrepreneurship in life sciences are there. But why is there no soup? One of the most staggering statistics presented at the meeting was that just $200M was invested in local life science companies in 2008, with one pharma spin-out venture taking half the total!

And then it started to sink in how privileged we are in the Boston area, where the next successful or aspiring entrepreneur, scientist, engineer, venture capitalist, IP or venture lawyer, skilled technician, teaching hospital, pharmaceutical company, or device company is just a door away. We are steeped in this culture of entrepreneurship and have been so for many years now. This Boston life science ecotope is as unique as Silicon Valley is for the techies, and it behooves us to make sure we take full advantage of this incredible competitive edge.

People outside of our unique Boston ecotope understand how powerful our “soup” is—Japanese investors searching for attractive opportunities in private equity and venture capital are looking first to the U.S., then checking out Europe and China, only to search their own home market last. How discouraging that must be for the few life sciences pioneers in Japan! I will make it a habit now to remind folks in our industry, as well as local government officials, that we should cherish what we have and work hard to keep things intact and healthy.

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New England is indeed a fertile ground for new technologies in healthcare and the life sciences, but the number of VCs doing the early and risky stuff is dwindling. We will probably see the number of start-ups in our space dive this year. Keeping to ol’ Darwin’s creed of adaptation, we simply have to find new and creative ways to keep early-stage VC alive, and to redefine roles and responsibilities among the inhabitants of the healthcare ecotope, or we will all perish together.

Yes, big biotech and Pharma have moved into earlier-stage deals to access breakthrough technologies—‘they sneak a peek,’ so to speak. But on the other hand, they spend tremendous amounts of cash to buy each other, or to purchase their own outstanding shares to prop up share prices, and I am skeptical that they will have the persistence and vision, the personal engagement, and the relationships to budding or serial entrepreneurs required to drive innovation in the long run. ‘Great ideas often start in small garages,’ and the big guys simply aren’t equipped to play in this space. Both mid-cap biotech and large Pharma rely on folks like us to take the earliest and highest risk in the innovation game. We work diligently, and more often than not fruitlessly, to search out what’s really innovative, a bit crazy, and differentiated.

It has been said in these challenging times that there are too many VCs, but whatever one’s opinion is, they are undoubtedly an essential part of the life sciences ecosystem. At the end of April, the National Venture Capital Association’s annual meeting here in Boston and Xconomy’s Biotech Forum offered glimpses into the function of the life sciences VC as a major driver of innovation-but we were preaching to the choir. VCs have to make a credible and high-profile case to the public and to Washington, for that matter: we are not the same as revenue-stage private equity, hedge funds, and leveraged buy-out! In fact, we are being hurt tremendously by being put into the same bucket as proposed in the current debate on taxes and financial industry regulation. Doing so simply takes the risk incentives out of innovation opportunities and will force the ecotope to grind to a halt.

In short, I believe life sciences investors must take an oath to adhere to the following principles:

• Keep the spirit of venture alive and seek out the new and crazy stuff. Don’t follow the crowd—being alone could either mean that you are crazy, or that you are first!
• Always take the opportunity and time to explain what ‘venture capital’ is to people who either don’t know or confuse VC with traditional banking. Explain the difference between equity and debt.
• Work with your entrepreneurs to help explain the VC/company relationship. They are your best cheerleaders.
• Help your academic community technology transfer efforts. Volunteer to listen to and critique researchers and budding entrepreneurs. Use the same degree of thoroughness as you employ for investment due diligence.
• Find a mechanism in your partnership to do seed investments. Help early-stage ventures find and address the killer issue or experiment as early as possible.
• Become a notch more political—know the impact of venture capital on our economy. Work with community leaders and your fellow VCs to find constructive ways to further entrepreneurship and early-stage venture.
• Keep a steady dialogue with the buy-side to understand what their needs and issues are. Check your assumptions regularly.

While not an all encompassing solution to the challenging times ahead, the innovation industry as a whole stands to gain when venture capital not only stays the course, but pushes to become a more integral and vocal part of the entire life sciences ecotope.

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“Thinking Globally, Acting Locally…”

… this was a headline in the New York Times the other day reflecting on the recent March Madness Cinderella story of Davidson College and Coach Bob McKillop. Struggling to compete for players against bigger, more entrenched basketball programs like Duke and Georgetown, Coach McKillop started recruiting aggressively in Europe and even Africa in addition to regularly teaching at basketball camps abroad. He was willing to recruit raw talent at places far away, and then shape it in North Carolina by offering players not only the opportunity to play basketball, but also a top rate, personalized education afforded by the small school atmosphere. In other words, Davidson College was willing to take a risk and devote resources on a global level but then relied on strong local leadership and culture to build a first-rate, successful team. Matching a global idea with a strong local network and culture was the winning ticket—until Davidson faced No.1 seeded Kansas, anyway.

Now, why does this remind me of our venture capital business? We can all agree that the world is dramatically smaller now. As a venture investor, I’m seeking businesses that will not only pull from the global economy for innovation and talent, but also have the ability to grow into sustainable firms that service or successfully compete in global markets.

I’m certainly not alone in this. The venture industry is increasingly willing to invest in regions that were classically off limits, in terms of both airplane time and culture. According to the 2006 Deloitte study on Global Trends in Venture Capital, 58 percent of venture capitalists indicated that they are increasing their global investment focus. And their justification for doing so depends heavily on particular characteristics of the local “entrepreneurial ecotope” where they are seeking investment opportunities, including lower investment costs, higher-quality deal flow, the emergence of an entrepreneurial culture, diversification of industry and geographic risk, and access to foreign markets and capital.

Coach McKillop used global resources, then applied local support and expertise to create a franchise that was able to compete on a broader scale. The same strategy can prove successful for emerging innovation businesses as well.

While it’s important to never lose sight of the global market opportunities, the support required for growing fundamentally strong companies has historically come from, and should continue to come from, their local community. As part of an international venture firm, we certainly don’t shy away from growth strategies that will require our portfolio companies to tap our global networks to succeed—in fact, we consider the firms’ ability to do so to be one of our key strengths. But in each region we invest, we put investment partners on the ground to work closely with entrepreneurs and strategic partners to develop local networks. The best firms all do this—and when local entrepreneurs evaluate out-of-town investors they should look for far more than just money or expertise, they should look for local presence and commitment.

Even with an eye on globalization, all businesses are still best built locally.

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is coming soon

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