Funding Gap? Ha!
Ever since I came back to Seattle in 2003 to help get Accelerator up and running, I have been barraged with rhetoric about something euphemistically referred to as the “Funding Gap.” Everywhere I went seeking interesting emerging biotechnologies, or to tell the Accelerator story, people I met constantly lamented the Funding Gap. So I started asking, “What do you think the Funding Gap is? What do you think caused it?”
Venture Capitalists (VCs) seem to think the Funding Gap is the funding it would take to move technologies far beyond the level of development they normally encounter in academia. VCs are demanding that these technologies be “de-risked” before they warrant venture investment, and of course they think this should be accomplished using other people’s money. (On another day I will tackle the term “de-risk” which is yet another word completely made up by VCs in order to have a credible sounding excuse to tell an entrepreneur that their idea is not ready for investment; or, to justify to their Limited Partners (LPs) why they should put money in their next fund even though all of their previous funds are smoking holes…) VCs are happy to blame the Funding Gap on everything and everyone (but themselves), from recalcitrant academic ivory tower scientists to bureaucratic technology transfer offices to the NIH to the public markets…
VCs that spew this propaganda either need to admit that they are no longer in the “venture” business, where there is—by the very nature of the activity—risk; or, they need to find mechanisms and models that will enable them to invest earlier and pull some interesting emerging technologies forward.
Talking to academics (including tech transfer officers) about the Funding Gap is no more satisfying. For them it is the great chasm between their hair-brained schemes and the easy folding money that their colleagues/rivals made back in 1999 for founding any “company” whose name ended in “omix.”
“What do you mean that my thought-experiment describing an as yet undiscovered target isn’t sufficient proof-of-concept to warrant venture capital investment? If you would just give me a few million dollars, we could go back to the lab, discover the target, make a great drug to inhibit it, and solve everything from constipation to hair loss to toenail fungus!”
Academics are just as scattershot in their assignment of blame for the funding gap, including cuts in NIH budgets, jealous unimaginative grant reviewers, the economy, and other things (anything but their own lack of focus or commercializable development). But most of all, they attribute it to myopic, greedy, cowardly, sheep-like VCs. (That last one may be right…)
Again, too easy.
Academic investigators need to face facts. If you have a great technology, with reasonable and lucid proof-of-concept, addressing a significant unmet need, and that can be protected as proprietary; and, if—and this is the big IF—you have reasonable expectations in terms of valuation and risk-sharing, then you will be able to attract venture funding. Plenty of it. Even in Seattle.
And I can prove it.
Accelerator has been in operation since 2003. In the five years we have been operating, we have invested in seven companies. Between day one and the day we closed the seventh investment, we have never been capital constrained. That is to say that we have invested in every single deal in which we wanted to make an investment. There was not an eighth deal that we sit around at Friday Happy Hours cursing ourselves about not being able to finance.
Rather than bemoaning the Funding Gap, we have been spending our Happy Hours discussing how full our pipeline is with incredibly interesting new technologies in which to invest.
The companies in which we have invested, and those we are currently contemplating, have been truly groundbreaking emerging biotechnologies. In a number of cases they have consisted of only minimal laboratory data and a plan drawn on a white board in our office by a passionate entrepreneur. There has been no shortage of potentially fantastic ideas (if they work) that could both meet a significant unmet medical need and make our investors, scientific founders, and entrepreneurs a boat load of money.
Of our seven previous Accelerator investments, three have already “graduated” collectively raising $114 million in follow-on financings. And there is more good news to come.
Accelerator is just one piece of a vibrant early-stage biotech investment community in Seattle. Three of our investors at Accelerator are local venture partnerships: OVP Venture Partners, ARCH Venture Partners, and WRF Capital. Between them, since 2003, there have been at least a dozen additional Series A investments in emerging biotech companies (outside of Accelerator). By my count, therefore, between Accelerator and its investors, we have made no less than nineteen investments in emerging biotech companies in Seattle in the last five years. In addition to these deals, other funds are also investing in emerging biotech in Seattle (although, since they are not Accelerator investors, for the life of me I cannot recall any of their names or any of the deals they have done…).
Funding Gap? Ha! Does not exist. Instead, there is an Expectation Gap. And both sides need to move towards the middle to solve it.
If you are an academic and you cannot get someone to back your idea, do three things: take a hard look at your technology (or even ask someone else to do so); take a hard look at your expectations; and, take a hard look in the mirror. Honest assessment in these three efforts will tell you why.
If you are a VC crying crocodile tears over all of the impediments between your partnership and early-stage biotechnology investment, quit it. You make us all look like complete asses. Pull up your britches, wipe your nose, and admit it—“I am no longer a VC. I am now a private equity investor with an exceedingly small fund.” (Feelings of inadequacy to follow…time to buy a Ferrari.)