Dried Up: Venture Capital For Biotechs Is Disappearing Quick

Central Mass. firms must find new ways to stay afloat


Worcester Business Journal

 

By Shaun Tolson

Worcester Business Journal Staff Writer

February 16, 2009


For Kevin O’Sullivan, president and CEO of Massachusetts Biomedical Initiatives in Worcester, the message at the 10th Annual MassBio Investors Forum in December was a startling one.

“A third of the biotech companies in this country—never mind in Massachusetts—will not be here in a year for the simple reason that everybody is burning cash,” O’Sullivan recalled from the forum. “There’s no money to continue to support the research and development that these biotech companies are doing.”

Venture capital funding for biotechnology and most sectors of the health care industry has declined sharply in the past year. Impacted most severely, national biopharmaceutical investing is down $230 million from the more than $1.1 billion awarded to that sector in 2007, according to stats compiled by Dow Jones VentureSource.

The current recession in venture capital is challenging small businesses to generate alternative means of funding. For some, the process is an easy one; for others, challenges are plentiful.

Local Players
When Dave Robinson purchased New England Peptide in the spring of 2006, he did so with a private equity fund supported by 20 limited partners. Since that time, Robinson has maintained the fund as a foundation for future growth. It’s a decision that is paying dividends now, though the CEO acknowledged that as a manufacturer of raw materials necessary for drug research, his company would be an unlikely recipient of venture capital funding, even in better economic times.

“We chose each limited partner deliberately to find people who are interested in long-term investment horizons,” he said.

According to Robinson, it’s more difficult to find companies that are willing to be patient for a return, but individuals offer greater flexibility.

“Identify individuals as opposed to institutions who share your philosophy and your long-term objectives,” he advised.

By comparison, GenomeQuest Inc. in Westborough is venture-backed, but the company, which produces web-based data management software, represents the one sector of the health care industry (medical software and information services) that saw an increase in venture capital funding from 2007 ($41.9 million).

“We can demonstrate our revenue and growth that’s not predicated on some speculative outcome like a clinical trial,” said CEO Ron Ranauro. “So investors are a little warmer to invest in that type of business plan.”

Yet, despite the support of venture capitalists, GenomeQuest is not without its hardships.

“We have funds,” Ranauro said, “but they’re not unlimited. So we have to make it last. We have to anticipate that things may be more negative than we imagined and think through those scenarios.”

Other small, local biotech companies are surviving without venture capital funding or private equity funds. Their secret? Subsidiary partnerships with larger, more established companies.

“If you have an association with a larger company and you have a good development project on track, you’re certainly in better shape,” said Eric von Hofe, president of Antigen Express in Worcester, a subsidiary of Canada-based Generex Biotechnology.

Looking back on his humble beginnings, von Hofe recalled finding assistance in Small Business Innovative Research (SBIR) grants, and noted that many small businesses likely are taking advantage of that avenue of funding.

“That’s probably the best hope for small companies right now,” he said.

Although they offer an alternative to venture capital funding, SBIR grants are by no means an easy acquisition.

“For the most part, it’s more challenging to obtain venture capital funding,” said Edsel Brown, director for the office of technology at the U.S. Small Business Administration, “but the SBIR program has its own challenges. You have to go through an extensive evaluation process.”

Even considering the tough economic climate, many small, biotech businesses are taking comfort in the knowledge that they conquered similar hardships at the beginning of the decade.

“At the end of 2001, we had to reduce our staff to stay alive,” said Mitch Sanders, executive vice president and founder of ECI Biotech in Worcester. “It’s painful. Even now, we have a much smaller size than we expected.”

Ultimately, for Sanders, it comes down to thinking outside the box.

“You have to be more resourceful,” he said. “You have to beat the pavement harder. The best things that we can do right now are to find more strategic partnerships and really fortify ourselves to be successful in 2010. I think that 2010 will be a good year for investments,” he said, “but you have to make it that far.”

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