Biotech's wellspring: the health of private biotech in 2012

Academic tech transfer keeps on spinning out startups, but the pool of capital to sustain such ventures is dwindling.

The continuing decrease in venture capital for innovative biotech is feeling like a winter that won't end. Credit: Source: ThinkStock

For the biotech sector as a whole, 2012 was a good year for funding. Money raised from partnerships, debt and public equity was robust, and venture capital (VC) was at its best in five years. And yet a closer look at the VC figures reveals that private financing available for young, innovative, therapeutic companies has continued its slow decline, a trend that began in 2006.

Data from the trade publication BioCentury, which tracks financings on a broad scale, show 370 private financings last year that raised more than $6 billion—a figure bested only once in the past ten years—but our look at innovative biotechs (Box 1) exposes 2012 as the worst year for funding in nearly a decade. This is on top of our survey for 2011 (Nat. Biotechnol. 30, 395–400, 2012), which showed that the number of VC rounds placed into innovative biotech had already reached an eight-year low.

This trend is intersecting with data from the Association of University Technology Managers (AUTM), which suggest that university technology transfer continues to ramp up, spinning out more startups than ever. The combination of burgeoning commercialization efforts at universities with the lack of available capital to sustain fledgling companies does not augur well for the health of the innovative private biotech sector.

Dwindling away

The amount of VC money flowing to our group of private biomedicine biotechs (Box 1) dropped last year to its lowest in nine years, and it was parceled out through the lowest number of financing rounds seen in more than ten years (Fig. 1). For small, innovative drug development companies hoping to find funding, the past five years have grown increasingly treacherous.

Figure 1: Global venture funding of private biotech companies 2000-2013.

Source: Dow Jones VentureSource

This funding famine is not as serious in North America as in Europe. In the United States, financing levels fell only 4% (to ∼$2.5 billion) from 2011 levels, well ahead of the dismal numbers for 2010 and on par with both five- and ten-year averages ($2.5 billion and $2.7 billion, respectively; Fig. 2). However, the money going into US companies was spread across only 156 rounds—the lowest number since 2005.

Figure 2: Venture capital investment for biotechnology therapeutic companies.

(a) Investment in 2008–2012. (b) Investment by region. Source: Dow Jones VentureSource.

In contrast, Europe saw funding fall 31% from 2011 to 2012; deal volume fell 17%. In the past two years, the amount put into private therapeutic biotechs in Europe has been nearly halved (down 46.3%). If this continues, the prospects for innovative European biotech startups look particularly bleak (Fig. 2).

If the funding decrease for US companies is caused by a combination of cyclical downturn, fewer VC investors interested in early-stage plays, a shortage of qualified management teams and a general aversion to risk in biotech, Europe has all that, and then some. Noubar Afeyan, managing partner and CEO at Flagship Ventures (Cambridge, MA, USA), says investor confidence in Europe has been further shaken by the grinding debt crisis that has already laid low Portugal, Ireland, Greece and Spain, though it also has a more sector-specific problem: the efficiency of tech transfer in Europe is poor, compared to the United States. Indeed, a recent investigation by the UK Parliamentary Science and Technology Committee into biotech commercialization (Bridging the valley of death: improving the commercialisation of research (HC 348, Stationery Office, London, 2013)) has highlighted tech transfer as an area for concern in the United Kingdom.

To further put the financing numbers in perspective, consider that the funding amount raised in 2012 was $400 million less than the average raised in the previous five years and nearly $600 million behind the ten-year average.

More unpalatable data for innovative startups can be seen in Table 1. Though there were 235 financing rounds into innovative biotechs overall last year, only 11 of those rounds went to startups (leading to a paltry increase of one more startup founded in 2012 than in 2011). The amount of money going to these innovative startups was just 1.4% of overall VC funding in 2012.

Table 1 VC investment by stage of development

This decrease in VC funding is attributable mainly to the slowly diminishing number of venture capitalists allocating funds to this high-risk type of biotech startup (Table 2). The decrease continued in 2012, with 196 venture capitalists (including corporate venture arms) participating in at least one round. This is down from 213 in 2011 and 309 in 2008. Here again, the flight of VC funds from the early stage is most acute in Europe, which had 106 venture capitalists participating in rounds in 2010, but just 68 in 2012; the United States has mainly held steady the past three years.

Table 2 No. of active VC firms

Where the action is

A listing of the most active VC firms for early-stage investing—from preclinical research up to and including clinical trials—is presented in Table 3. Note that the funds represented here invest in all types of private biotech company, not only in innovative startups. New Enterprise Associates (NEA; Menlo Park, CA, USA) tops the list with 13 investments in life science firms, putting nearly half a billion dollars to work in 2012. This is a big jump from 2011, when it placed $223 million into five entities, though last year it closed its fourteenth fund, with $2.6 billion in commitments, and thus had fresh money to invest. NEA last year was part of an $18.9-million A round into Ra Pharmaceuticals (Cambridge, MA, USA) and a $34.5-million C round into Mirna Therapeutics (Austin, TX, USA). It was also part of the $160 million placed with Intarcia Therapeutics (Hayward, CA, USA) (Table 4).

Table 3 Top ten VC firms 2012

Table 4 Top VC deals in 2012

Also with 13 investments was Novo A/S (Hellerup, Denmark), a sizable increase from the 7 it made in life sciences in 2011. A corporate venture arm, Novo joins several others—Pfizer (New York), Novartis (Basel), SR One (Cambridge, MA, USA) and Shire (Dublin)—in Table 3. Given that only SR One and Novo made the top ten in our 2011 list of most active VC funds (see Nat. Biotechnol. 30, 395–400, 2012), the presence of five corporate venture arms in the top ten highlights the growing importance of this source of VC investment for early-stage biotech. Novo, on average, participated in smaller rounds than NEA, but it still invested more than $350 million.

Atlas Ventures (Cambridge, MA, USA) totaled six investments in 2012, up one from 2011. New to the top ten list is Alta Partners (San Francisco) as well as Edmond de Rothschild Investment Partners (Paris), an independent, family-owned group focused on private banking. In 2012, it announced a first closing and launch BioDiscovery 4, with €125 million ($164 million) committed for the life sciences in Europe (the expected total raise is €200 million ($262 million)). Notably, considering the meager number of investments in innovative European startups, Rothschild participated in a CHF25-million ($27 million) Series C extension for Genkyotex (Geneva), which is pursuing NADPH oxidase inhibitors for treating oxygen radical–mediated diseases such as diabetic neuropathies.

Also represented is 5AM Ventures (Menlo Park, CA, USA), which has a stated mission of investing in newly created companies—academic assets or corporate spin-outs. It invested in six biotechs last year, including co-leading a $23-million round into Novira Therapeutics (Radnor, PA, USA) for the company's capsid-targeting antivirals against HIV and chronic hepatitis B infection.

Of the companies that connected with investors last year (Table 4), the largest private round went to Intarcia, which is developing a device for continuous, long-term delivery of exenatide, an incretin mimetic for type 2 diabetes that is marketed by Amylin Pharmaceuticals (San Diego) as Byetta. The company is a restart, having previously existed as BioMedicines, and the $160-million round it secured in 2012 was accompanied by a $50-million debt financing to support a clinical trial. The product, if approved, would stand as a year-long diabetes therapy that does not require self injection. In this case, investors are betting their money on the clinical validation of a delivery device for an existing drug (rather than a novel first-in-class mechanism drug); thus, the large round is somewhat of an outlier in the therapeutic space.

Further down the list is Bluebird Bio (Cambridge, MA, USA) also a restart, having once been Genetix Pharmaceuticals. Most of the other large financings are third rounds or beyond. The exception is Ultragenyx (Novato, CA, USA), a company focused on rare diseases, run by biotech veteran Emil Kakkis, and already in the clinic with an in-licensed product, UX001, being evaluated for hereditary inclusion body myopathy. This type of company, with a clinic-ready asset, does well in today's financing environment—it raised $45 million in its Series A round and added the $75 million B round last year.

Table 5 shows investment in innovative companies by therapeutic modality over the past five years. The biomaterials space tumbled from 22 rounds of investment worth $108 million in 2008 down to seven last year, worth ∼$29 million. The immunotherapy/vaccines area has had an equally dramatic fall, going from 70 rounds and almost $1.06 billion invested in 2008 to 33 rounds and $367 million in 2012. Cell therapy, gene therapy and small molecule therapeutics (the mainstay of drug development) have all trended downward, although gene therapy has done unusually well in the United States over the past two years. Unsurprisingly, companies developing small molecules or protein therapeutics remain the top recipients of VC funding.

Table 5 Investment by therapeutic modalities

Finding the exit

There were a meager ten initial public offerings (IPOs) last year for innovative therapeutic companies, raising $511 million. This is an increase from 2011 and more in line with 2010, when there were 12 (Table 6). Seven of the IPOs were from companies headquartered in the United States, the remaining three were in Europe—an improvement over 2011, when Europe saw no public offerings.

Table 6 Exits

The current expectation from investors as well as company founders is that companies should be built not for an IPO but for an eventual acquisition, most probably by a pharmaceutical firm. In years past, big pharma has had a voracious appetite for innovative companies as it tried to revive flagging pipelines, though in reality, this meant only a few tens of transactions annually. Things changed in 2012, with a dramatic downturn in pharma acquisition activity. The slice of the private biotech sector we surveyed shows a marked decrease in mergers and acquisitions (M&A) activity last year—a 50% drop from 2011, with the US landscape doing the bleeding (Table 6). The 16 acquisitions last year are the lowest in our five-year table. Private biotech acquisitions raised just $2.7 billion, down from ∼$5 billion in 2011.

The higher amount raised in Europe last year (>$1 billion, easily the highest for European acquisitions in the past five years) was buoyed by the purchase by Jazz Pharmaceuticals (Dublin) of EUSA Pharma (Oxford, UK) for $650 million up front, with another $50 million in milestone payments tied to EUSA's lead drug Erwinaze (an asparaginase derived from Erwinia chrysanthemi). Jazz is a specialty pharmaceutical company, as is EUSA, but EUSA is also developing Asparec, a polyethylene glycol–decorated (PEGylated) version of Erwinaze now in phase 1 testing for acute lymphoblastic leukemia, and Leukotac (inolimomab), a monoclonal antibody to CD25 now in phase 3 for steroid-refractory acute graft-versus-host disease.

Also in Europe was the $61-million outlay by GlaxoSmithKline (GSK; London) for Cellzome (Heidelberg, Germany). The companies had two collaborations in place at the time of purchase, and GSK already owned 19.9% of Cellzome.

Other notable purchases in 2012 included the $350-million acquisition by Celgene (Summit, NJ, USA) of Avila Therapeutics (Bedford, MA, USA) and its covalent drug platform and drug AVL-292, a Bruton's tyrosine kinase inhibitor now in phase 1 trials for cancer and autoimmune disease. Avila was founded in 2007 and had raised $51 million through two rounds of venture funding. Beyond the upfront, the buyout provides investors Abingworth (London), Advent Venture Partners (London), Atlas Ventures, Novartis Option Fund (Basel) and Polaris Venture Partners (Waltham, MA, USA) $195 million in milestones tied to AVL-292 and $380 million attached to other candidates churned out from the Avilomics platform.

There was also the $315-million purchase by Amgen (Thousand Oaks, CA, USA), in cash, of KAI Pharmaceuticals (S. San Francisco, CA, USA), picking up KAI-4169, a peptide agonist of calcium-sensing receptor being studied for secondary hyperparathyroidism in patients with chronic kidney disease on dialysis. KAI was founded in 2003, and a syndicate including Investor Growth Capital (New York), Aberdare Ventures (San Francisco), Skyline Ventures (Palo Alto, CA, USA), InterWest Partners, Intersouth Partners, Delphi Ventures, Thomas Weisel and MDS Capital put $63 million into it via two rounds.

One other acquisition that illustrates the deep pockets and patience now required from VC investors when backing companies with innovative therapeutic modalities is the acquisition of BioVex (Woburn, MA, USA) by Amgen. VC fund Forbion (Naarden, The Netherlands) invested in BioVex's Series C round in 2003. BioVex has been at the forefront of oncolytic therapy commercialization, taking OncoVEX (a herpes simplex 1 virus with deletions in the genes ICP34.5 and ICP47 that is modified for immediate-early expression of US11 and production of granulocyte macrophage colony stimulating factor) into human testing. The company had compelling efficacy data from a phase 2 trial in melanoma, but could find no big pharma buyers, owing to concern about the risk of moving a new type of therapeutic from phase 2 to multicenter trials. Forbion was the largest shareholder at that point, with nearly 20%, and insiders raised $40 million to begin the phase 3 trial then expanded the funding to add another $30 million from new investors. Ultimately, BioVex was sold to Amgen in January 2011—while the phase 3 was ongoing—for $475 million up front, with another $575 in potential milestones tied to regulatory and sales goals. The final price tag for the acquisition represented a steep increase in valuation from that quoted for a BioVex trade sale based on its phase 2 data.

That sale can be considered a victory for both the company and investors, but clearly there is a limited universe of investors with pockets deep enough to back a large-scale trial of an experimental therapy for an additional tens of millions of dollars.

Increasing demand

At the same time as the number of VC funds equipped for early-stage investment has dwindled, the number of those seeking funding—startups spun out of universities—has continued to increase. This is a result of university administrations and researchers awakening to the upsides of starting businesses.

According to data from AUTM, this trend is seen across sectors and in the growth in number and size of university technology transfer offices (TTOs). In 1992, AUTM reported 95 US universities having more than 430 employees collectively (full time or otherwise) in their TTOs. By 2011 (the latest data available), this number had grown to 218 universities with >2,500 employees. The trend is also reflected in the number of spin-outs these universities are producing. In 1994, data from AUTM show 120 US universities spawned 175 spin-outs. Both have increased: across disciplines, 153 universities produced 617 spin-outs in 2011.

In Europe, the recent years highlight a similar trend. The Association of European Science and Technology Transfer Professionals reports that 42 universities produced 126 spin-outs in 2009, a number that had jumped to 154 spin-outs from 39 universities in 2010.

AUTM does not break down their data on spin-outs by industry sector, but Table 7 shows the number of life science spin-outs over the past five years from the universities with the most active TTOs, according to AUTM's survey data. The TTOs from these universities are well established, yet a slight upward trend is still present: these ten universities or systems spun out 80 companies in 2008, 115 in 2011 and 96 in 2012, a year that does not include the number of life science spinouts from Texas, which was not yet available.

Table 7 No. of life sciences spinouts from ten most active US universities

Our sampling of the top universities gives some insight into what percentage of new spin-outs are in the life sciences. For this group of established universities over a four year period, half (49.6%) of the ∼750 total spin-outs were focused on life sciences. A rather unscientific extrapolation, then, suggests consistent growth: about 306 life science spin-outs from AUTM members in 2011, up from 272 in 2008.

Two factors are driving this increase. First, state and federal funders are placing increasing pressure on academic centers to produce quantifiable results from their grants. One way to do this is to provide numbers on spin-outs, and thus, job creation. “It's easier to count startups than it is to gauge the impact of licensing a project to Merck—that can't be easily counted,” says Robin Rasor, the past president of the board of directors at AUTM and the director of licensing at the University of Michigan, Ann Arbor.

Second, students (and academics) are becoming more entrepreneurially minded. This may not only be driven by a scarcity of jobs and grant funding, but also indicative of a cultural shift. “There's been a huge change since I've been in this business,” Rasor says. “Students used to all want to go work for big pharma, but now they want to start their own company.”

This is being further fed by the growth of entrepreneurship programs worldwide beyond the main academic centers, such as Boston and the San Francisco Bay Area in the United States, or the Golden Triangle in the United Kingdom. For example, the University of Nottingham (Nottingham, UK) offers a program in 'applied biopharmaceutical biotechnology and entrepreneurship', and, in 2011, Columbia University (New York) began its 'biotechnology–entrepreneurship in biotech' course, and the University of Michigan started its master's in entrepreneurship program.

This raises an interesting question about timing: do universities realize that the investment climate for sustaining the companies they spin out is increasingly troubled?

The academic IP grab

The boutique patent analytics firm IP Checkups (Berkeley, CA, USA) has examined the biotech patent space for this feature both this year and last, tabulating patents issued to universities from US and European authorities (Fig. 3). This shows which universities have created the largest patent war chest in biotech and which are investing in the cost of patenting discoveries. The information covers issues patents from the beginning of 2007 to mid-March 2013.

Figure 3: Top university patent assignees.

Source: IP Checkups

As somewhat expected, especially given its high number of life science spin-outs, the sprawling University of California system is at the top of both the US and European patenting authority lists—and quite far ahead, at that (Fig. 3). It is followed by the University of Texas system in the United States, and the Parisian Institut Pasteur in Europe. Stanford University (Stanford, CA, USA) and the Wisconsin Alumni Research Foundation (Madison, WI, USA) also are represented. It is no coincidence that the universities shown in Figure 3 bring in large amounts via licensing revenue, highlighting the monetary benefits of patenting discovery. For example, according to AUTM's STATT database, the University of California system reported more than $182 million in gross licensing revenue in 2011; WARF reported more than $57 million; Stanford more than $66 million and the Massachusetts Institute of Technology (Cambridge, MA, USA) more than $76 million.

A mixed picture

The picture for financing of innovative life science startups that emerges from our survey is one of stark contrasts and pronounced change over the years (Box 2). On the one hand, those in the traditional VC community who are still involved in early-stage biotech investment have never had it so good in terms of opportunities. Because so few VC funds are focusing on early-stage innovative science, a surfeit of investment opportunities is coming across desks and through networks. This means that they can invest in the cream of the crop. For example, in early 2012, Canaan Partners (New York) closed a new $600-million life sciences fund, with $100 million earmarked for drug development firms and another $100 million for devices, diagnostic firms and healthcare information technology. Canaan was “flooded” with more than 1,000 pitches in 2012, according to venture partner Tim Shannon—a 30% increase over the number of pitches received the previous year.

What's more, many life science VC firms are based in Boston and the San Francisco Bay Area. Because they have such a wealth of startup opportunities on their doorsteps—and VC investment remains very much a local activity (long distances do not facilitate attendance at board meetings or hands on participation in management issues)—the likelihood of investing in biotech startups at any considerable distance away from their base is lower. When they do invest, VC firms, such as Atlas, are stretching their funding further through the use of capital-efficient enterprises, by contracting out research, quickly (and inexpensively) killing off programs that miss early marks and keeping startup payrolls low (sometimes employing just an entrepreneur in residence).

One positive trend seen in our previous survey (Nat. Biotechnol. 30, 395–400, 2012) and continued in this year's data, is the increasing number and participation of corporate venture arms. These funds are not only bringing their advantages of links with parent/affiliated companies but also helping to supplement traditional VC funding so that companies have the resources they need to bring biomedical discovery science to clinical proof of concept.

On the other hand, the demise of the IPO means that big pharma or big biotech trade sale is often the sole viable exit for innovative life science startups. This is a constraint on the types of companies that can attract VC finance. Only those that fit the pharmaceutical innovation agenda are likely to ever achieve an exit. According to Pharma/Biotech M&A Report 2012 from HBM Partners, 21 VC-backed companies were bought for their products in 2012, but only three for a platform or technology. This is echoed in the experiences of two companies that raised funding in 2012, outlined in Box 3 and Box 4.

The importance of the trade sale as exit to biotechnology, as well as the limitations it presents, cannot be overstressed. There is only a limited number of pharmaceutical and biotech companies with pockets deep enough to engage in M&A. And each of these companies can carry out only a certain number of transactions per year. This year's survey shows a downturn in M&A activity for innovation. This is not particularly surprising, as the pool of acquirers is small, and buying splurges do not last forever. Unless existing buyers find a way of doing more transactions or the pool of buyers increases dramatically, the number of exits available for life science VC investors is unlikely to increase any time soon. The lack of exits will continue to shrink the number of VC rounds put into innovative, early firms. This, in turn, suggests that it will be difficult to spur meaningful progress from startups, as only a limited number will ever receive VC funding to sustain them, and an even smaller amount will be bought.

This is sobering, in light of the evidence coming out of AUTM detailing startup increased activity from academic institutions. These startups may very well be acquiring seed funding from angels and grants. But data suggest that they are unlikely to receive VC funding and survive to a trade sale and profitable exit. If the academic institutions that are engaging in increased startup activity are in areas in which there is no established pool of VC investors, this problem is likely to be exacerbated.

Moving forward

All is not lost for innovative life science entrepreneurs, however. There is some reason to think investing will pick up this year, simply because stocks performed well in 2012. This has left limited partners' portfolios—normally a mix of stocks, bonds and VC investments—underrepresented on the VC side.

And there is money to put to work, after all. Last year, Wellington Partners (Munich), reported a first closing of its Wellington Partners IV Life Sciences Fund, for €70 million ($92 million), with a goal of €120 million ($157 million), looking to invest in innovative companies in diagnostics, devices and biotech across Europe. Index Ventures (London) in June 2012 announced a €350-million ($458 million) early-stage technology fund. More has been raised already in 2013: in January, Rock Spring Ventures (Bethesda, MD, USA) launched a £50-million ($77 million) fund, based in Scotland, to focus on early-stage life science and health technology; in February, Lux Capital (New York) announced a $245-million fund to be spread across the energy, technology and healthcare sectors; and in March, Third Rock Ventures (Boston) said it raised $516 million for its Fund III.

It is also important to note that the venture capitalists still in the game are making money: the HBM Partners Pharma/Biotech M&A Report 2012 shows that since 2008, the estimated average multiples for venture investors from VC-backed trade sales of private biotech companies have been on a consistent rise in the United States, from a multiple of 1.8 in 2008 all the way to 6.7 last year. Even Europe has been consistently plugging away, with multiples increasing from 1.3 in 2009 to 2.7 last year.

This is welcome news, and it could mean that venture capitalists sitting on the sidelines will be attracted back to the sector. That is not to say that biotech investing will rebound to previous levels, particularly with the finite number of exits available, but the rise in multiples is nonetheless a positive sign.

At this juncture, then, there is undeniably a void in funding for innovative life science. The question is: what happens to all those ventures that deserve VC funding—or feel certain they do—but do not attract it? One answer may be that the VC-funded startup is becoming a relic, an increasingly endangered species in the biotech industry. If so, universities should perhaps place less emphasis on startups and more on developing in-house capabilities for further validating discovery assets and getting them to the stage where they are attractive licensing options for the biotech and pharma industry. There is already evidence that this is starting to happen at some centers, such as the MD Anderson Cancer Center (Houston) and the Dana-Farber Cancer Institute (Boston).

Alternatively, as more public biotech companies successfully bring their first products to market, they could become acquirers themselves, and in this way, the pool of purchasers would increase. This could also lead to well-capitalized and profitable biotech companies beginning to put more investment into corporate VC arms—another positive for early-stage biotech.

A final possibility is that new sources of capital will be found to supplement VC funds. Certainly, venture philanthropists, wealthy individuals) and patient groups such as the Leukemia and Lymphoma Society and the multiple-sclerosis group Fast Forward are increasingly active in finding early-stage seed companies to fund, injecting amounts ranging from $250,000 all the way up to $1 million. What's more, in the wake of the credit crunch, a swath of 'family offices'—wealthy individuals and family estates around the world—are now looking to more closely manage their investments, and according to groups such as Life Science Nation (Boston), this collective group is beginning to invest in biotech on its own, circumventing banks.

Box 1: Private biotech defined

For the purposes of this article, biotech is defined narrowly as biomedicine. We do not consider agbiotech or bioenergy. We have included any firm that uses technological applications centered on biological systems or living organisms, or their derivatives, to develop medicines. Thus, the term 'biotechnology' includes the disciplines of genetics, molecular biology, biochemistry, embryology and cell biology, and can be linked to biomaterials, cell therapy, gene therapy, immunotherapy and vaccines, protein therapeutics and some specialty pharmaceuticals and small-molecule therapeutics. This definition was created by us and dictated to Dow Jones for much of the data set that powers this article. In cases in which the companies we refer to are different from this definition, we attempt to clarify this in the main text.

Box 2: Changing times

Nolan Sigal is CEO of Tunitas Therapeutics, a San Francisco–based company focused on protein drugs against allergy. His previous experience includes vice president of R&D at Cytokinetics (S. San Francisco, CA, USA), and he helped found and build Pharmacopeia. When he was setting up Pharmacopeia in 1993, getting funding “seemed so easy,” he says. “You pitched to ten [venture capitalists] and you got three new investors.” The company was able to raise about $24 million in VC funding and then went public, selling 2.6 million shares at $16 apiece. Sigal's next enterprise was Cytokinetics in 2000. By this time, the industry had changed; the company needed to be much further along before attempting the public markets. The company was able to raise $75 million in VC money on animal data alone and eventually raised more than $130 million through five rounds. It put several drugs into the clinic and had an IPO of >$100 million—a success story—although Sigal doubts that after the IPO, “anyone made much money.”

Now, at Tunitas, the science is “as good as anything I've seen,” Sigal says. He went to raise funds around the turn of 2008–09 and, based on past experience, thought he would call up his old investors and get “$10 million in no time.” That wasn't the case, and Tunitas has subsisted on $10 million in grant money. He anticipates attracting VC money in the near future, as the company is now close to having its first drug in the clinic, but he recognizes that investors will wait for the clinical data if they can.

Box 4: Who is going to buy you?

The company formerly known as PhyloTech, which has leveraged portions of its platform to those working in the microbiome field and generated about $3 million in non-dilutive revenue to date, in 2011 changed its name to Second Genome (San Bruno, CA, USA) and began aiming its microbiome discovery platform at therapeutics in inflammation and metabolic disease. The reason was that Second Genome, like other biotechs, understood that creating value today means advancing therapeutics programs and not relying on platform technologies alone.

After the J.P. Morgan Healthcare Conference in 2011 and with this new focus, company management went in search of a Series A round. What CEO Peter DiLaura found was a “bias toward later-stage assets,” which made Second Genome a tough sell, he says. He met with 40 firms and winnowed that down to 15 second meetings. By June 2011 he had term sheets for the two leads—Advanced Technology Ventures (Palo Alto, CA, USA) and Morgenthaler Ventures (Palo Alto, CA, USA)—and the $5-million round was announced in August 2011.

This illustrates that, to a great extent, only those companies that fit the expectations of a pharmaceutical company buyer are ever likely to find an exit and, by definition, a VC backer. What's more, the further away a company is from having clinical data, the more stellar its science, management team and connections have to be. In the current environment, 95% of VC firms met during fundraising will ultimately decide not to finance the company.

Box 3: Finding a backer

ImaginAb (Inglewood, CA, USA) was founded in 2007 and, like many other current entities, began life in a faculty-led accelerator, Momentum Biosciences (Culver City, CA, USA). The company received around $500,000 in seed money from Momentum, and since then it has sparred with venture capitalists. ImaginAb is developing targeted molecular imaging agents for prostate, breast and pancreatic cancers, among others, but describes its field as “therapy management”—partially because precision medicine is about improving outcomes, but partially because investors dislike diagnostics.

With the financial crisis arriving just one year after the company was founded, raising funding was hard, but in the end the difficulty helped keep ImaginAb lean. Even financial downturns have a silver lining—the company was able to find commercial space “dirt cheap,” says CEO Christian Behrenbruch, and with unemployment on the rise, recruiting was also easier than it might have otherwise been. In fact, the company attributes part of its success to recruiting talent from cities beyond Los Angeles who might not have moved away from “traditional” biotech hubs such as the San Francisco Bay Area or Boston in better times.

When Behrenbruch began visiting investors to gather a meaningful round of financing, some venture capitalists asked whether the company was amenable to changing location. The answer was no, says Behrenbruch, and that in itself shut many doors. So the company harnessed local resources—particularly at the University of California, Los Angeles, and the California Nanosystems Institute in Santa Barbara—and achieved first proof of concept for less than $100,000.

With this in hand, he found better traction. He was able to get significant interest from about two dozen venture capitalists, he says, giving him “plenty of followers” but no one to lead the round, until he came in contact with Novartis Venture Funds. Behrenbruch liked the fact that Novartis Ventures could take a long view and was also aggressive about building an investor syndicate. From a due-diligence perspective, it didn't hurt that ImaginAb already had a partnership in place with Novartis itself. With Novartis Ventures as lead, the $12.5-million A round came together.