Tag Archives: venture capital

Sure, Biotech is Hot. But Are Biotech IPOs a Good Investment?

A Guest Post to Boston Biotech Watch by Christoph Bieri, Managing Partner, Kurmann Partners*

This year will see an unprecedented number of biotech IPOs at a record high investment volume. But  is it wise to invest in them?

We tracked the performance of about 350 biotech and life sciences companies which listed on NASDAQ, NYSE, LSE/AIM and the Swiss Exchange SIX beginning in 2000.  As shown in Figure 1 below, we would divide those fourteen years into four distinct phases:

  • The years 2000 and 2001, which we call the “millennium vintage”
  • The years 2003 to 2007, the “post-millennium”
  • The years 2010 to 2012, the “post-Lehman”
  • The current period, the “13/14 boom”

Figure 1: Funds invested in biotech IPOs, cumulative, Jan. 1, 2000 - Oct. 9, 2014


We then tried to estimate the performance of each newly issued stock. Our model assumed that somebody invested at the IPO and held the shares until today, until the company was bought or until it went out of business. We calculated the gains or losses made under these assumptions, correcting for stock splits where applicable. Grouping the individual performance by the date of IPO in the above phases results in Figure 2:

Figure 2: Performance by vintage of biotech IPOs


You can read the bar graph top to bottom. The top blue bar represents the total of all amounts invested at the IPO. This is followed in light green with the total appreciation (or depreciation) of the share price until today (October, 2014) if the respective company is still listed. In case the company was sold, the next bar (in red or green) shows the profit or loss the initial investors made.  The next red bar reflects the total funds invested in those companies that later went bankrupt. The net of all of these changes is shown above as gain or loss in percentage of the total investments made.

As you can see, the millennium vintage did not perform well at all. In our (simplified) assessment, investors on average took a loss. According to our analysis, the best vintage was those companies that went public in the extremely risk-averse climate post the 2008 Lehman Brothers bankruptcy. As of today, those investments have almost doubled.

We admit that there are many caveats to our analysis. The biggest factor skewing this analysis is what we see as the current valuation inflation, which has had a disproportionate effect on those companies that listed in the post-Lehman phase (hence the big contribution of “share appreciations” to the net gain). Also, those companies which went public post-Lehman had less time to go out of business, so to speak. We may have missed stock splits (reverse or “real”) or some of the other tools which companies resort to when in dire straits. We did not account for cash pay-outs, and secondary offerings, non-dilutive funding or licensing transactions are also not included. But we think we still got a pretty clear picture.

Figure 3 puts the current climate into context. This chart shows IPOs on a time axis. The bubbles indicate the size of the initial offering in millions of US dollars. The y-axis gives the stock appreciation as of today (or until acquisition) on a logarithmic scale. Not surprisingly, the “cloud” of new IPOs of the 13/14 boom are still clustered around the 1x mark on the y-axis since they have not gained or lost much value in this short time. We can also see the diverse fate of the millennium vintage, when a similar IPO boom took place.

The IPO weather forecast: Clouds on the horizon?


Is the current frenzy just the “return to a healthy normal”, as some industry leaders say? Or is it “the folly of year 2000 all over again”, as some others state?  We don’t know.

Biotech always makes for exciting investments, in all shades of the word “exciting”. The combination of money, science and the potential to be part of something really new and important may be satisfying all by itself for some private investors. So there is the fun factor (if you can bear the potential losses). Those who intend to profit will spread their risk broadly and time their investments carefully.

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*Kurmann Partners is an M&A and strategy advisory firm based in Basel, Switzerland, advising globally on mid-market transactions in the Pharma, Biotech and MedTech industries.


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Biotech VCs, Stung by Startup Returns, Elbow into Royalty Financing

By Steve Dickman, CEO, CBT Advisors

Aug. 21, 2013

(Originally published on Xconomy)

The new landscape for venture capital investing does not seem to leave much room for classic company formation. Investor after investor has shut down or moved beyond startups into what seem like greener pastures.

So it should come as no surprise that at least a few VC firms are now expanding into the royalty space, as shown by a deal announced this week. Aisling Capital and Clarus Ventures, two top-tier VC firms, acquired 20 percent of the royalty stream created by sales of ibrutinib, a novel tyrosine kinase inhibitor developed by Pharmacyclics (NASDAQ: PCYC) and partnered with Johnson & Johnson (NYSE: JNJ) for use in B-cell malignancies such as chronic lymphocytic leukemia (CLL).

According to the press release, Aisling and Clarus each invested $48.5 million for matching 10 percent shares of a $485 million royalty-financing deal that Royalty Pharma struck last month with Quest Diagnostics Inc. (NASDAQ: DGX). Ibrutinib recently was designated by FDA as a “breakthrough” therapy. Analysts cited by FierceBiotech expect the drug to hit $5 billion in revenues in a short time, making the royalty stream very valuable. Under a deal structured like this, Aisling and Clarus are essentially wagering that the drug will be a blockbuster, and will provide them much more than $48.5 million in steady royalties over the lifetime of the product’s patent – if they or their limited partners do not choose to take profits first. It would not surprise me to see some of the royalties later bought back at higher prices by Royalty Pharma or acquired by third parties.

There is no doubt in my mind that the choice to invest in royalties had to be explicitly approved by the funds’ limited partners (LPs), either in the fund charter or, more likely, in an ad hoc fashion before this deal was done. I can’t imagine there was much resistance when the Aisling and Clarus general partners described the risk-reward in the ibrutinib deal. The LPs probably asked them to do more of this type of investing, given the product’s high-reward/low-risk profile.

The announcement answered two questions in my mind: first, what will VC funds do now that the returns make it harder to justify raising more money to support traditional models? Second, what will royalty funds do to make money now that they are facing a more efficient (read: barbarously competitive) market for the royalties of approved drugs?

Royalty deals as likely winners

In some ways this deal looks like a one-off: maturing VC funds that need to deploy large amounts of capital setting themselves up for near-term (if more modest) returns in lieu of typical home-run, long-term bets on early-stage biotech. Once they get a few of these out of their system, the VCs will swing back to their true nature as swashbuckling, entrepreneurial investors, right?

I am not so sure. In fact, I would argue that actually the royalty play illustrates the “new normal” in life sciences VC investing: a search for investments with short time horizons; a lack of faith in preclinical or even phase I molecules and the teams developing them; and an irresistible pull to “sure-fire” deals of a more financial nature.[1]

These are the same trends that have led to the rise of the asset-based strategies deployed by life science VC funds like Atlas Venture and Index Ventures. Those strategies build portfolios of assets, rather than management teams, and flexibly deploy those teams in ways that can be changed depending on the success of the molecules.

The trends have also led to a much more active market in secondary positions of VC funds. In secondary investing, funds buy up positions in VC-backed companies. They buy them either from general partners who are exiting the business or choosing not to manage older funds all the way to exit; or from limited partners who prefer up-front cash to hoping for later exits from their illiquid VC investments. Sales in the secondary market of overall private equity investments, including those in venture capital, were reported to hit a record $26 billion in 2012.

Some long-time VCs have told me recently that their firms are promising limited partners to do secondary investing as part of their core business, just as secondary funds such as Omega Funds have branched out into direct investing. Whereas royalty investing is more of a numbers game, secondary investing to me feels like a true hybrid of VC skills (assessing value in early-stage or mid-stage companies and managing portfolios of such investments skillfully) and financial engineering skills (pricing the portfolios well enough to stave off competition and still leave room for an arbitrage).

Late last year, a client approached my firm CBT Advisors and asked us to make a case for investing in life sciences venture capital. The client, a family office with a private equity bent, was preparing to deploy some capital in life sciences and wanted to know what strategy made the most sense for a potential limited partner.

CBT Advisors teamed up with Fred Meyer, another Boston-area consultant, and the team carried out some strategic and financial analysis based on our knowledge of the industry and on the limited available data. The upshot of our work: there are several alternatives, including secondary investments, that can provide what look like better returns than VC (especially when considering the 10-year historical figures) at what looks like considerably less risk.

One of the approaches on our list was royalty investing. We concluded that, strictly from a risk/return perspective, royalty firms were a very attractive way to participate in pharmaceutical finance. Royalty Pharma, in particular, has built a stellar track record investing in the royalties on marketed drugs such as sitagliptin (Januvia), a diabetes drug from Merck that accounted for $5.7 billion in revenue in 2012 and adalimumab (Humira), a treatment from AbbVie for autoimmune diseases that recently hit  $9.3 billion in annual revenue, making it one of the best-selling drugs of all time.

But Royalty is at some risk of becoming a victim of its own success. The fund, which had little competition when it was founded in 1996, has grown to over $10 billion in assets, and it is facing a much more competitive market for royalty streams of approved drugs.

So the announcement of what is, according to VentureWire (paywall), one of Royalty’s first three investments in a not-yet-approved drug was not a total surprise. Today’s press release completes the picture. Royalty Pharma got an assist on the due diligence on ibrutinib from Aisling and Clarus and the VC funds got a piece of the action.

The end of VC? Hardly

Where does this all end? To me, it does not spell the end of VC as we know it. To the contrary. Even those investors (like Aisling and Clarus) making headlines for investing in royalties are still actively looking at direct investments into startups and (especially) later-stage companies. At the end of the day, most venture capitalists like these funds who have made it to 2013 with any dry powder at all are in a position to make the case that early-stage, high-risk investing will continue to play out well for selected investors. The recent wide-open biotech IPO window has certainly bolstered their case.

Part of my argument has to do with both the skill sets and the personal wishes of VCs, who are usually more adept at (and more interested in) the messy reality of picking management teams, intellectual property and assets that will make companies work instead of primarily crunching the numbers. Many VCs would rather find other jobs if all that was left in VC was financial analysis.

But more of it has to do with the returns. When I look at the stellar track records of folks who have recently raised funds (Jean George, Mike Carusi, Jim Broderick, Chris Christofferson and Hank Plain of Lightstone Ventures; Martin Murphy of Syncona), I am encouraged in thinking that royalty investing is just one of many ways that VCs are finding to raise new funds that they hope will make money for investors. First, the ibrutinib deal has to go well, along with others like it that are undoubtedly in the works. At least in this case, the likelihood of ibrutinib becoming a commercial success is high and the timeline is short. If the drug and deal do, in fact, succeed, then the benefits will accrue to the entire ecosystem.

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[1] VentureWire (paywall) quoted Clarus managing director Nick Simon saying that Clarus invests “opportunistically” in royalties and that late last decade, Clarus had obtained a royalty interest in Lexiscan, a medication used in cardiac stress testing, and later sold that interest to Royalty Pharma.

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“Alternatives to VC” panel video (actually very much about VC, especially in Europe) – BioEurope Spring, March 2013

This is not a traditional post but rather a link to a video of a fun panel that I moderated at BioEurope Spring in Barcelona in March, 2013. The discussion touched on several hot issues in funding innovation in life sciences, especially translational research.

Here’s the link: http://www.partnering360.com/insight/showroom/id/0_p9ec32p3

To help you find points of interest, I’m listing some approximate time stamps below.

PANEL DATE: March 11, 2013


With the shortage of classical VC investing and the ongoing boom in early opportunities and strong entrepreneurs, traditional VC is beginning to share the spotlight with alternative models. For therapeutics companies that have already raised some capital or especially those that have products in the clinic, there are some new alternatives to choose from, including option deals, one-product financings from VCs, and pre-IPO royalty-based financing.

Steve Dickman – CEO, CBT Advisors


  • Sinclair Dunlop – Managing Partner, Rock Spring Ventures
  • Joël Jean-Mairet – General Partner, Ysios Capital
  • Kevin Johnson – Partner, Index Ventures
  • Melissa Stevens – Deputy Executive Director, FasterCures


  • 0:00 Panel intro (Steve Dickman)
  • 3:19 FasterCures (Melissa Stevens), channeling non-dilutive foundation cash into therapy development
  • 4:29 Index Ventures (Kevin Johnson) intro and description of pharma-backed fund
  • 4:50 Rock Spring (Sinclair Dunlop) intro – UK VC
  • 5:20 Ysios (Joel Jean-Mairet) intro – Spanish-European VC
  • 7:25 What are the mechanics of asset-based financings? We’ve done 27 of them… (Johnson)
  • 12:15 Ysios (Jean-Mairet) view on asset-based financing “experiment” in molecular diagnostics
  • 14:00 Why Index would love to invest in diagnostics but can’t do it (Johnson)
  • 18:30 How things are better in lean, asset-based companies (Johnson) “Working in a tinpot biotech is more fun” than in an old-fashioned fully integrated company.
  • 19:55 How Rock Spring (Dunlop) does early-stage platforms & products
  • 21:15 Refinancing risk has grown (Jean-Mairet)
  • 22:45 How times have changed in LS VC (Jean-Mairet)
  • 24:15 The key to avoiding “zombie” companies – suicide (Johnson)
  • 25:40 More (interesting!) details on FasterCures and how foundations are changing the investing game (Stevens)
  • 28:48 National MS Society’s “Fast Forward” venture-like group (Stevens)
  • 30:55 CF Foundation and its Vertex and now Pfizer relationships (Stevens)
  • 32:55 American Heart Association (AHA) learning more about venture philanthropy (Stevens)
  • 36:15 Venture philanthropy in Europe (Dunlop)
  • 46:15 Tech transfer report card (Dickman, panel)
  • 57:00 How European & Israeli seed funds are trying to bridge the venture gap (panel)
  • 1:04:00 How to ensure succession in biotech (Johnson, panel)
  • 1:08:00 Why there are not more young entrepreneurs in life sciences (Johnson)
  • 1:15:00 The Andrew Lo “Megafund”: will it fly (Stevens, panel)
  • 1:18:00 Other debt models for supporting translational work (Jean-Mairet)
  • 1:22:00 Cross-border seed-stage investing (Dickman)

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“Quant” VC Correlation Ventures: VC’s New “Dream Date”

Those venture capitalists lucky enough to remain in the drastically smaller pack are constantly cruising for the perfect co-investor. Like the perfect spouse, it’s hard to imagine finding it all in one person:

  • Quick decision. Even if it is a no, I want to hear it quickly.
  • Ready money. If it is yes, please be ready to close very soon.
  • No diligence. If a lead investor has already “kicked the tires” on the deal, don’t you do it too. Trust their diligence. Don’t bother our key customers or partners.
  • No backtalk. We already have plenty of board members and lots of opinions. Be a board observer. Or, better yet, trust us. Don’t come to the board meetings at all.
       When Managing Partner David Coats and his colleagues founded San Diego-based Correlation Ventures, they had sat on the other side of the table – lead investors looking for co-investors. When they went looking for a fund concept, applicable in both life sciences and high-tech VC, that would both be new and would match the needs of the market, they decided to explore how such a “perfect” co-investor could also make money. They deployed heavy-duty predictive analytics on what they claim is one of the most complete databases of venture capital financings and outcomes, including the fifty thousand deals in their database – ninety per cent of VC deals closed since 1987. This information was scrounged the hard way, according to this recent post on the Nature blog site: Correlation forged relationships with Dow Jones and multiple VC firms to access historical non-public data. That way, they were able to find a mathematical model, described below, that should lead to a strong return while still offering all the advantages listed above.

        Fund-raising went surprisingly well, given the current constrained environment. Correlation Ventures blew past its $150 million target and raised $165 million. This amount will be invested over three to four years in up to fifty companies in chunks as small as $250,000 or as large as $4 million over the lifetime of a company. The list of limited partners (LPs), whose identities were not disclosed, reads like a who’s who: endowments, pension funds, family offices and individuals. I chatted with Coats at Convergence Forum in Chatham, MA, in May, 2011 and again at the JP Morgan conference last week. He said that the fund-raising was so successful in part because of the early and enthusiastic support of thirty top-tier venture fund partners who themselves wrote checks. That sort of endorsement opened doors with limited partners.

Correlation had a first closing in 2010 and started investing then. Two of its first thirteen investments are in the healthcare space, one in medical devices and one in therapeutics.

Lies, damn lies and…

So what’s the secret sauce? Statistical analysis. Correlation feeds in data on all the variables, including co-investors, the level of management experience, and, especially outcomes such as internal rate of return and multiple. Correlation then runs multiple regression analyses and identifies those variables that account for the most variance.

Cartoon on regression analysis       Surprisingly, success in individual deals does not correlate all that well with the “top-tier” nature of the VCs involved. “When you look who the winners are in VC,” Coats explained, “the industry is not nearly as concentrated [at the top tier] as some assume.” Coats is defining winners as investors whose deals generate large cash on cash multiples. In actual fact, he said, “The winners are widely dispersed and the distribution is not random. When you actually look at the data, every year there are hundreds of financings generating large multiples. Most, however, are small deals that are not even led by the top sixty VCs.” And in many of these deals, the lead investor winds up looking for a co-investor to fill out a round. That’s where Correlation comes in.

       It expects to push aside funds that might have contended for the open slot but would not make as quick a decision and that would not in any case have been as cost-effective for LPs. This implies that Correlation takes less carried interest and lower fund fees than “active” funds, but the fund understandably chooses not discuss its fees publicly.

The surprising distribution of success poses a dilemma for limited partners, who tend to invest again and again with those funds that have made them money. This is generally a rational hypothesis, Coats agrees, and a disproportionate number of Correlation’s investments are with top-tier firms. In that regard, Coats admits, Correlation is acting like a limited partner, maximizing relationships. However, Coats and his partners decided to broaden their fund diversity and go after the long tail of investors and deals that are not necessarily in the spotlight.

“The big ‘aha,’” he explained, was realizing that “many big [returns] come from financings that are undersubscribed or take a long time to close.” This is due to a pair of what Coats calls “natural inefficiencies.” One inefficiency arises when funds without long track records find good deals and have trouble finding appropriate co-investors. Another occurs in deal selection by funds that may not be seeing the best opportunities. In a conservative time like the past five years, these inefficiencies would seem to have increased as funds become more conservative about who they follow into deals and as there are fewer and fewer “blue-chip” co-investors to choose from.

The beauty of the Correlation model, according to Coats, is that “the top fifty VC firms could shut down and we believe we would still generate strong returns.” There would be enough deal flow and plenty of winners. It certainly is an alternative approach to an otherwise confounding market in which much of the VC muscle now seems to be concentrated at the top.

Piggybacking to success

Won’t this model, if successful, spawn competitors? And will the inevitable rise of additional “quant” VC funds piggybacking on the success of others distort the market in ways that limit or even destroy the yield? Look at what the Moneyball approach did to major league baseball: the team that applied the statistical analysis of player performance, the Oakland Athletics, had an initial advantage despite having less to invest in superstar players. This worked fine until their approach was cloned by virtually every other major league team, returning the Athletics to mediocrity and the league to its previous imbalance of power.

Perfect date image

But will he give me deal flow in the morning?

There will be imitators. In VC, every new fund concept that makes money attracts them. Just look at the proliferation – some would call it an explosion – in royalty-based funds (for example, the new billion-dollar fund raised by Cowen earlier this month). What about the overall impact if copycats generate “clean-room” (reverse-engineered) co-investing models and what if every syndicate starts to have a quant fund as a co-investor? Predictably, Coats had a statistical answer for this. “We have already modeled what we think will happen to the VC industry with our success. Obviously there is greater unpredictability” if and when that happens.

It is too early to say for sure whether the Correlation model – or that of another new fund, Ulu Ventures in Palo Alto, which uses Bayesian analysis to predict the success of internet-enabled consumer and business service companies – will prove successful. After all, plenty of confounding factors not predictable by any model contribute to make investing risky. The risks are especially pronounced when the exit takes several years and the capital needs are as high as they are in life sciences. Holding times for VC-backed healthcare companies are up over five years now, according to this analysis by Silicon Valley Bank.

Some VCs I know see Correlation as a threat, at least to their egos. Others raise the specter of quant-based models such as the notorious Long-Term Capital Management, whose derivatives investing nearly brought down the world financial system in 1998. Please comment, publicly or privately – if there are enough comments, I will post a summary.

To me, their concern seems overblown. The model will work, or it won’t. Either way, Correlation will put more money into the market at a time when it is sorely needed. If the fund succeeds, and I tend to believe that it will, then the impact will be self-limiting. Some VC-backed companies will refuse to take additional money and those that do will not take so much that the market will be warped. One VC summed it up nicely: Correlation’s approach does not have to outperform that top ten or fifteen per cent of VC funds, which will likely keep doing better by actively selecting the best deals. It just has to perform well enough to deliver consistent “bottom of the top quartile” returns to its LPs.

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How Sanofi Could Start Off on the Right Foot in Cambridge

To: Chris Viehbacher, CEO, Sanofi Aventis
From: The Boston Biotech Community
Re: Making the Most of the Impending Merger

Dear Mr. Viehbacher,

In the heat of the discussions regarding an acquisition of Genzyme that now look like they are on track for rapid completion, you may not have had much time to think about exactly what will happen in the aftermath. Sure, you have plans for Genzyme’s products as well as for the teams and facilities involved in producing them. Those products—and their revenue streams—are presumably why you are buying the company.

But don’t forget Genzyme’s excellent R&D….If you downsize Genzyme the severe way that some expect, you might be throwing away enormous potential for future products to benefit human health.

To read the rest of today’s post, visit Xconomy here or copy-paste the link:


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Google Meets Healthcare VC

The Boston Biotech Watch Take on Google’s Healthcare Investing Approach Based on an Interview with Google Ventures’ Krishna Yeshwant

by Steve Dickman, CEO, CBT Advisors

Now that most private-company biotech CEOs have given up on “IPO window reopens” and “VC bidding war,” three of the most galvanizing words for someone raising money these days are “Google might invest.” Fund-raising for the CEO of a young biotech is always a war of attrition and corporate VC funds are the current weapons of choice.

It is one thing for cash-strapped management teams to want Google’s shiny new healthcare venture arm to invest. But should Google Ventures invest? Would it be the right thing for Google and the right thing for the sector if they came into more deals? We recently spoke to Google Ventures’ Cambridge-based healthcare representative Krishna Yeshwant, M.D., and we did some reading up on Google, including plowing through Ken Auletta’s widely reviewed (and bombastically titled) book Googled: The End of the World As We Know It“. Now here’s our take not just on what Google Ventures is doing in healthcare but also what we think they should be doing.

(One caveat is that the bulk of investments that Google Ventures will do in the coming years will not be in the healthcare space. The fund ambitiously intends to invest $100M a year into startups and new ventures, and the vast majority of those dollars will flow into IT-related endeavors. Our focus is on the fund’s life sciences- and healthcare-related activities.)

Google Ventures would seem to fit right into the current dominance of corporate VCs within the universe of VC life sciences dealmaking. On the surface, it’s another cash-flush corporate fund wading into VC as part of a parent-company mandate to move up the food chain and generate insight as well as returns. (As if the “generate returns” part isn’t hard enough by itself!)

We think Google Ventures (GV) actually does not fit the typical corporate VC mold at all and, based on its provenance, we think it has the potential to do amazing work. More about our views in a moment. First, we’ll look at how GV sees itself in the context of the deals they’ve already done. Then we will pull back and imagine what GV could do that might let it rise above and make a true mark on the healthcare investing and on healthcare itself.

Krishna Yeshwant photos

Krishna Yeshwant, photos courtesy Google web site

Aside from cleantech, most deals lately in the life sciences and healthcare space are in therapeutics. By and large, GV does not do those. “We are probably not the investors to go after moving a molecule from Phase 2 to Phase 3,” GV’s Yeshwant said. “We are not ready to have a portfolio of molecules. [Furthermore,] it would be hard for us to invest in a single molecule.”

So what does GV do? So far, platforms, as embodied by GV’s first two healthcare deals: Adimab and iPierian. Although the former is on the East Coast and the latter on the West Coast, these companies have a few things in common. Both are funded by top-tier life science investors (Polaris, SV Life Sciences, Orbimed in Adimab; Highland Capital, Kleiner Perkins, MPM Capital in iPierian). Both are working on groundbreaking platforms and own enormous amounts of potentially valuable IP. Adimab works on antibody therapeutics; iPierian is a novel stem-cell-biology company with a big vision for overhauling the current clinical trials process by offering streamlined testing on ex vivo platforms derived from a patient’s own stem cells. There is more about Adimab’s and iPierian’s approaches in these linked news articles from Xconomy.

The companies differ in some key ways that give us some insight into GV’s parameters: Adimab is run by a charismatic and battle-tested CEO, Tillman Gerngross, who successfully sold his previous company GlycoFi to Merck in 2008 for $400M and thereby provided investors with a return of 9X or better. So in some sense, it’s a “bet on the jockey” play in the crowded space of antibody platforms. By contrast, iPierian is run by an experienced but not-quite-so-high-profile CEO, Michael Venuti, and in fact let go of its previous CEO, John Walker, the month before GV invested.

Tillman Gerngross, Dartmouth engineer extraordinaire

Tillman Gerngross, Dartmouth engineer extraordinaire

“We are clearly attracted to platforms,” said Yeshwant. “We can understand the science, we see the potential {for large exits} based on the early examples that a platform can produce. If there is room for the platform to go beyond what it is doing, we can REALLY get excited about it.”

Avoiding the corporate VC “bump”

In these cases, GV’s preference was not to invest in pure startups but to wait until some experienced investors took the early risk. In one or both of these cases, GV may have “paid up” in order to get into the syndicate. Lest that leave the wrong impression, Yeshwant hastens to explain: “Almost everyone at Google Ventures has started companies and looked at VCs from the other side of the table,” said Yeshwant. “I remember that: when a corporate VC comes in, you look at it as an opportunity to bump your share price. The way we are trying to place Google Ventures is really as an institutional investor. The track record we want to create here is not ‘here comes Google, let’s get a bump on our valuation.’ People LIKE to have us at the table. We are a VC firm that has [access to] a host of programmers and statisticians. We have former programmers on our team who can help our portfolio. Take our user interface experts, for example. This may not be relevant for therapeutics platforms but it might be very relevant for healthcare IT companies. That programmer’s role is to be dropped into some of those companies and create value.”

And yet neither diagnostics nor healthcare IT seem to be on GV’s radar screen yet. Yeshwant: “We are excited about the diagnostics field. We are watching it very closely. [But w]e have yet to find a great investment.” Most life science VCs who have looked at diagnostics would say the same thing – many more have looked than have actually done a deal.

When speaking of healthcare IT, Yeshwant reflects the melancholy wisdom of someone who knows the US healthcare system all too well. Yeshwant is in fact not only an experienced programmer and IT entrepreneur who has founded two companies that were sold to big IT players; he is also a current resident at Harvard Medical School working at Brigham & Women’s Hospital. “The healthcare market still does not really make sense [to us as venture investors]. Working in a hospital, we [as physicians] try our best to do what is right for the patient but the patient is only one of our customers. That distorts what [GV] as a service business [or investor in service businesses] can do. That setup does not let us get into this natural harmony of a company that can really serve the needs of the consumer and succeed because they did a good job by the consumer. As a medical doctor, I want to serve my patients, but it is very difficult to conceive of a great IT company [in this space]. There are so many needs IT can serve that would help patients. But what is the business model that does not involve so many confusing different stakeholders?”

Yeshwant has similar reservations about companies developing electronic medical records (EMRs) despite the inclusion of EMR subsidies in the stimulus and health care reform packages. “Despite a lot of money coming in from the government, it is not clear that the opportunity is really there yet,” he said. “Yes, that government money will drive M&A activity and there are ideas being thrown back and forth. We do not feel compelled yet by the companies we have seen.”

A common theme across all areas in which GV is considering is its very high bar for investing. Indeed, it has been nearly three months since our conversation with Yeshwant and GV has not announced a single new life sciences deal. Although it is inappropriate to draw conclusions from this absence of announcements (a flurry of new deals could be announced next week), the fund’s measured pace reflects the realities of being a VC in 2010 – when a lot fewer new-money deals are closing than in the years between, say, 2003 and 2007 – and the realities of being Google.

When we asked Yeshwant whether Google Ventures would prefer to start companies on its own rather than wait to be shown “doable deals” by the VCs in its network, Yeshwant cited the fund’s need to stay on the right side of its sole limited partner, Google itself: “Especially in healthcare, we are still looking for those [right] companies [for us]. We are looking for the entrepreneurs, the teams that will make those companies great. We are meeting a bunch of entrepreneurs and VC folks. If there is something we can put a good thesis around, then, yes we would be open to starting something, seeding a company and incubating it. We are still a bit early – we’d hate to hastily put something like that together and have it fall apart. That would sour Google proper. So for now we have to have a very high threshhold.”

Reluctance? What reluctance?

Googled book jacketWe think the threshhold does not have to be so high. This is where our recommendation comes in. From reading Ken Auletta’s book

Googled: The End of the World As We Know It, we were reminded of Google’s roots and its winding path to $23 billion in 2009 revenues. The company is an advertising behemoth with now 99% of those revenues coming from ad sales. And the ethos underlying Google’s birth is still true for its many new ventures:

  • We are engineers.
  • We are scientists.
  • We want to change the world.

Auletta’s book shows that Google is all about two mentalities: the engineer on one hand; the consumer-minded marketeer on the other. Sometimes – as when the founders built the first search engine – these are embodied in the same person. More often the roles are played by different people within the company’s leadership. The process works like this: the engineer comes up with an idea about what is technically doable and at the same time inherently elegant; the marketeer relentlessly orients it toward the “real user.” Born of a dynamic tension between these two forces, product after product has emerged from Google (think Google News, Google Earth, Gmail and Google Maps and) More recently, products and technologies have been acquired to take advantage of perceived opportunities (Android, YouTube).

Admittedly, it is hard to see how either mentality – better engineering, better consumer focus – will work in healthcare investing unless and until the healthcare system is reformed to be more responsive to incentives, more consumer-driven and especially more data-driven. The Google fund would seem to be able to apply its overwhelming leverage more efficiently in other fields – mobile computing, location-aware mobile apps, data storage and retrieval, even hardware – at least for now.

At the same time, the apparent hesitation by the GV team to do most healthcare deals and especially to start companies of its own – the “high bar” that Yeshwant was talking about in our interview – strikes us as inconsistent with the basic premise of the fund’s corporate parent. There seems to be a reluctance – if not an all-out refusal — to get too involved in truly risky deals that at the same time could be truly transformative. After all, in the letter that accompanied their 2004 IPO filing, the Google founders themselves wrote that they are looking to “make big investment bets” on technologies that have only a 10% chance of achieving a billion-dollar level of success. To paraphrase the loud, lascivious Sean Parker character in the hit movie “The Social Network,” “You guys think it’s all about making a million dollars?! It’s not. Think billion, baby!”


What we have heard from Yeshwant (echoed in this interview published by Wade Roush of Xconomy back in May, 2010) sounds not much different from what we hear from generic corporate VCs. What we’d love to see instead would look more like this:

  • More attention from the top: You want to change the world, Sergey & Larry? Pay attention to healthcare.
  • More experiments in combining bandwidth with healthcare. The Google project to “wire” a US city with ultrahighspeed broadband capability comes to mind. There have to be HC opportunities in that, perhaps in conjunction with an existing startup or a new one
  • Pioneering programs outside the developed world that, for relatively low initial investments can improve upon technologies initially developed here and roll them out in developing-country markets. Then, when the “boomerang” comes back (see our earlier post on “boomerang” technologies), Google will be thinking ahead about how to make money on these technologies in the developed world.
  • Start more companies! Forget the “high bar” and the “sour taste”. Instead, use your cachet and market power to start companies that might take a while to incubate but that can be truly transformative. This is already the approach of some top-tier US-based pharma company VC funds who have told us that they have grown impatient waiting for VC syndicates to form from the ever-shrinking pool of active VCs, so they’ve begun to dive in and fund the companies they want to see all by themselves.
  • Focus on diagnostics. Yes, Yeshwant said GV has not seen its favorite deal yet. But Yeshwant himself wrote an award-winning business plan for a company, Diagnostics for All, that could provide a valuable prototype. That company, which we highlighted in our blog post on “boomerang” technologies, is working on filter-paper-based diagnostic kits that can be manufactured for pennies. And Google founder Sergei Brin invested in personal genomics company 23andme.com, an investment now owned by Google itself.
  • See our “shopping list” below for specific opportunities

We hope GV does all of these things. Because of its potentially long time horizon and its amazing market power in search and advertising, GV has a huge advantage over traditional VC funds. The exit from most of these businesses will be traditional ones – IPO or, more likely, trade sale – but another potential exit could be the creation of a new business unit for Google.


But not as many as there used to be

Right now, with the convergence of high-powered data collection through genomics and better sensors; better analysis of that data using high-powered computing; and a reorientation of the healthcare system toward prevention, there is no limit to what an active and visionary investor could achieve. To us, the potential for improving actual human health by taking advantage of available data is endless – and Google’s own track record in improving data access makes it an ideal player.

Therefore we’d encourage Google Ventures as follows:

  • Think long-term, not near-term.
  • Think big, not small.
  • Focus more on strategic and societal benefit.
  • Reach for the stars.


  • Personalized medicine
  • Computer-aided medical devices
  • The “human-machine interface” in medical devices
  • Electronic medical records
  • Global health (investments in “boomerang” technologies would be perfect for GV – they will have the time & patience to wait for the boomerang to come back)
  • Analysis of “Big Data” e.g. from patients or payers that could rationalize the US healthcare system or piggyback on the move toward comparative effectiveness

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The Next Feeding Frenzy? VCs Rush Toward diagnostics (!?)

By Steve Dickman, CEO, CBT Advisors

There was a time not long ago when no amount of persuasion could have made most venture capitalists do a diagnostics deal. The reasons abounded: markets were too limited; margins were too low; and the number of potential acquirers too small. So imagine our surprise when the most upbeat session of this year’s c21 investor conference in late May was a panel discussion focused on – you guessed it – molecular diagnostics.

If this is not a feeding frenzy, then at least it seems to be a period of high marketability for private diagnostics companies seeking acquisition exits. Session chair Bill Kreidel of Ferghana Partners described four sell side diagnostics assignments his firm is working on for which multiple bidders had appeared.

What sells? Proprietary content, improvements in speed or sensitivity/specificity, robust datasets, and large markets. Who are the buyers? Clinical labs like Labcorp, naturally, but also instrumentation companies and companies in the imaging business like General Electric that “see diagnostics cannibalizing some of their revenue” and are trying to capture it back, said panelist Dion Madsen of Physic Ventures.

To read the rest of today’s post, visit In Vivo Blog here.

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