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incrementalism. “No one wants a VC as an asset manager,” he says. “Make a drug curative and you’ll get paid. Anyone who invests in a drug that promises seven weeks of life extension should be shot. Too many VCs are chasing risk reduction for two-, three-, or five-x returns. As an asset class, we don’t take enough risk.”
By “asset managers,” he means the growing number of VCs building virtual companies around single products or programs, with a shorter R&D timeline in mind, and ideally, a buyer waiting on the other end of that timeline. Versant Ventures, Atlas Venture, Index Ventures, TVM Capital, VenBio, CMEA Capital, and Avalon Ventures are all systematically trying versions of this model (often while still making more traditional investments, it should be noted).
There have been a few exits, too. Most notably, VenBio has turned its narrower strategy into big returns, topped recently by Genentech’s purchase of Seragon Pharmaceuticals.
VenBio is an important example of another shift in the life-science VC world, to a different source of funding. The firm closed its first fund in 2011 with $180 million in commitments from three drug-industry companies—Amgen (NASDAQ: AMGN), Baxter International (NYSE: BAX), and PPD (NASDAQ: PPDI)—and pointedly not from traditional institutional investors such as pension funds or endowments.
Other VCs mentioned above are also turning to Big Pharma for help, either as limited partners or as the potential buyers of their virtual companies. (Versant’s new fund, as we reported here, leans heavily on what it calls its “build to buy” model.) GlaxoSmithKline has been particularly aggressive as both a backer of venture funds and potential buyer of venture-sourced startups, as I’ve written about before.
There’s another way Big Pharma has come to the rescue. Their venture groups, usually using a different pot of money from the LP and acquisition funds, are increasingly involved in early-stage syndicates. According to Silicon Valley Bank, the number of biopharma Series A rounds that included at least one corporate investor jumped to 30 percent in 2012 and 35 percent in 2013, the highest since SVB began tracking the data in 2005. (The previous high was 22 percent, in 2008.) More of that participation is significant, too. In 2012, for example, Novartis Venture Funds made six Series A investments, all as the lead or co-lead.
“Corporate VC has been the savior of early stage biotech innovation,” says Silicon Valley Bank managing director Jon Norris. “Without them getting involved early and forming syndicates, biotech could have fallen down like device venture did.”
Other non-traditional financial sources are playing prominent roles. Back to Juno for a moment: ARCH and Venrock are two familiar VC names, but much of the massive round was supplied by the State of Alaska’s Permanent Fund and Amazon CEO Jeff Bezos’s personal investment company. Elsewhere in biotech, angel investors, either alone or in networks of growing sophistication, provide seed capital and occasionally go deeper.
Nonprofit disease foundations want to use their cash to help move products into pipelines, not just fund basic research. And crowdfunders like Poliwogg have touted the disruption their platforms, once fully operational, could bring to venture.
If all these alternative sources suddenly disappeared, there would still be biotech startups. But in five years … Next Page »
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