VCs Abandoning Biotech for the Web? 
Posted by Carlos on Apr 07, 2011

Fred Frank, a highly respected investment banker, greeted us on Tuesday morning with this missive:

Venture capitalists, who make high-risk investments in start-ups, are tired of waiting years for biotech companies to generate real products and be marketable as initial public offerings, bankers said. They’d rather invest in companies that could go public in just a year or two.

This sentiment is not new. Indeed, many Limiteds may be pressuring their General Partners to look at shifting their investment mix for future funds. However, as Bobbie Johnson at GigaOM points out:

In fact, Frank’s comments about revenue and profitability are concerning in and of themselves. Not only haven’t there actually been that many technology IPOs in the last few years, but they are not always from companies who have great financial stability — just look at Pandora, hoping to raise $100 million on the stock market, but still losing money. It’s a mistake to think that getting your social media company or Web 2.0 firm to IPO is the way to short circuit the machine. While early investors may be happy with their chance to cash out, it comes at somebody’s expense: let’s not forget that a company apparently worth $850 million can be just a footnote two years later.

Biotech industry veterans are well aware that our industry has long-ago shifted from an IPO exit model to a partnership-acquisition model. It is not news that a 10-year limited partnership model is not always compatible with biotech product development (especially early-stage investment). Yet the comments from Mr. Frank are somewhat perplexing, given his long history of biotech investment banking.

From our vantage point, major pharma & biotech companies continue very active in seeking partnerships with and acquisitions of smaller, venture-backed companies. They simply need the pipeline, and it makes little sense for them to ignore what is happening outside their own labs.

Further, as yesterday’s announcement of the SuperGen/Astex merger noted, it is possible to develop products, partner them, and become profitable, listed companies with minimal venture capital investment.

For an excellent analysis of “The Bubble” as it pertains to the web and advertising-dependent businesses, we recommend this post from Rick Webb.

 

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