On May 31, Schroder Ventures (London, UK) closed a new $402 million fund that adds to the pile of capital that is currently available to support biotech companies. Investors are generally hesitant to spend money in the current economic climate—and much of what they do spend goes to existing portfolio companies—but startups can still expect to tap these cash reserves if they have the right stuff.

Since the biotech bubble burst in March 2000, 20 or more life science venture funds, each worth over $300 million, have been created (see Table 1), generating the most private capital available for biotechs since before the bubble began in 1998. Many of these funds will allocate a significant portion of the money to seed and early-stage biotech companies, which will need to take notice of investor demands in order to attract the money.

Table 1 Largest venture capital fundraisings since March 2000
Full size table

For example, Addex Pharmaceuticals SA (Geneva, Switzerland) had to satisfy a number of demands from Sofinnova Partners (Paris, France) and Index Ventures (Geneva, Switzerland), the co-leads on Addex's €10 ($11.8) million Series A round of financing in 2002. The investors wanted the company to in-license a compound and make changes in the management and boardroom, all of which Addex did in order to get the cash. Startups should anticipate the need to perform such moves in order to outcompete their older, larger biotech brethren for funds.

The poor economy can be partly to blame for the raised bar that a startup must reach to obtain venture capital (VC) funding. "We have been looking at a publicly quoted company that has a market capitalization of $13 million, has $8 million in the bank, and two clinical candidates that are close to going into Phase 2 trials," says Kate Bingham, a general partner at Schroder's. Startups simply cannot compete with such robust publicly traded companies that can be bought at current low valuations.

Also, the absence of investment exits, such as initial public offerings, has forced many VCs to continue to bankroll their existing portfolio companies. This not only cuts into the amount of money left to invest in startups, but also forces VCs to stay on boards of directors longer, thus restricting opportunities to look for new investments and join the management teams of startups.

But the knowledge that the best returns have historically been achieved by investors who participated in Series A rounds persuades Michael Steinmetz, general partner at MPM Capital (Boston, MA, USA), to keep backing early-stage companies. "We have allocated about a third of our $900 million fund to support early-stage companies from Series A onwards," says Steinmetz.

Indeed, most venture fund managers recognize the value of investing early. The Schroder's fund has allocated 3% of its new fund for seed capital and 50% for series A and B rounds, says Bingham. And BioScience Managers (London, UK), led by biotech veteran Jeremy Curnock Cook, announced in mid-May that it was to establish, in collaboration with Imperial College London (London, UK), a £50 ($83.8) million fund to invest in 12 to 15 startup and early-stage opportunities.

Although MPM doesn't do seed financings, it is keeping a close eye on that space by investing in incubators. "We have put money into a business accelerator associated with Leroy Hood's Institute of Systems Biology (Seattle, WA, USA). We, and our fellow investors Versant Ventures (Menlo Park, CA, USA) and Arch Venture Partners (Chicago, IL, USA), have committed $15 million to the accelerator for investments and infrastructure. We anticipate investing in promising spin-outs from the institute," says Steinmetz.

Experienced investors such as Bingham, Curnock Cook and Steinmetz remain coolheaded during the current lack of capital available on public markets. The biotech industry faced two tough financing environments in the 1990s and emerged stronger than before the downturns began. These VC fund managers are convinced that financing startups now will give them the best returns when the current market turns for the better.