Tag Archives: venture capital

Networking Your Medication

by Steven Dickman, CEO, CBT Advisors

By far the coolest company I saw at JP Morgan last week was not even presenting at the conference: Proteus Biomedical and its “Digital Pills”. This company probably also had one of the best weeks of any company there: After I met with them on Monday, Proteus on Tuesday (Jan. 12) announced an agreement with Novartis and on Thursday (Jan. 14), this story entitled “Smart Pills” appeared in the Science & Technology section of The Economist.

Photo of Proteus Biomedical's digital pills - white pill with tiny chip embedded on top

Digital pills tell all

“Digital Pills” carry standard doses of medicine but they include embedded sensor chips – fully digestible! – that transmit to a receiver placed just outside the body. This allows a “Digital Pill” to communicate via the internet using the patient’s cellphone that the pill has been taken, at what hour, at what dosage and so on. In this YouTube video, Proteus founder-CEO Andrew Thompson drew an analogy between “digitized medicine” and the modern automobile, festooned with embedded sensors and chips. These devices have made cars more reliable – “it means that your car rarely breaks down and if it’s going to break down, you would know about it in advance and be able to go see a mechanic.”

The immediate promise of “Digital Pills” is the ability they could confer to pharmaceutical companies to monitor patient compliance with medical regimens both during clinical trials and also after they are on the market. This might turn failed trials into successful ones e.g. if patients have been forgetful or medicines are less than good-tasting. The data from those patients could simply be dropped from the analysis and drug efficacy could be determined just on those who took the pills – a drug developer’s dream! And it might create a feedback loop between patient, physician and payer that alerts all of them when compliance is the cause of treatment failure rather than a lack of efficacy. Proteus also has a vision of “Digital Pills” taken by infirm or forgetful seniors alerting caregivers about their loved ones’ medication status.

In contrast to the gold-plated technologies developed by many a medical device startup that increase the cost of care, “Digital Pills” can ultimately be very inexpensive. Thompson told the Wall Street Journal in August, 2009, that in high-volume production, the digestible digital transmitter will add less than a penny to the cost of a pill. Venture capital investors consulted by Boston Biotech Watch were a bit skeptical about whether this is a realistic estimate. If true, it could make “Digital Pills” one high-tech invention that could truly be aligned with health care reformers’ goals of smarter, more cost-effective healthcare.

Proteus’ dynamic founder Thompson and his co-founder and company CTO Mark Zdeblick set out in 2001 toward a mind-bending goal: to implant a networked computer into a patient in order to improve medical treatment. In a burst of original thinking, Thompson realized that future medical products – even those as small as pills – would have their usefulness magnified if they were network-enabled. This required several technical breakthroughs. The company had to make sure that the “hardware” was also “wetware” e.g. that its sensor-transmitter chips would not be destroyed by stomach acid; devise a scheme to deliver short-range signals from inside the body to outside; and invent a “smart Band-Aid” that could relay these signals to a nearby handheld device (“medical BlackBerry”), which in turn could relay them to a server.

The company had to come up with a chip built from food or at least materials that already qualified as GRAS [Generally Regarded As Safe]. The proprietary chips they invented, once activated by body fluids, can broadcast a pill-specific signal that says something like “I’m Lipitor, I was synthesized on Thursday, I contain so many milligrams of active material.” Then Proteus came up with sensor-receivers embedded in the “smart Band-Aids” to read these signals (e.g. via Bluetooth) and then transmit them on.

According to the company web site, “Digital Pills” are in clinical trials in one indication area, heart failure. Furthermore, trials have begun of medical devices incorporating embedded technology from Proteus. These trials also are in the area of heart failure.

Part of the magic of Proteus’ story lies in the backgrounds of its founders. CEO Thompson is a venture capitalist with Spring Ridge Ventures who successfully built and sold publicly traded medical device company FemRx to J & J in the 1990s. CTO Zdeblick spent part of his career in optoelectronics (with K2 Optronics) and part of it in creating “electro-fluidic integrated circuits” (with Redwood Microsystems.) He did PhD work in the lab of micro-mechanical systems pioneer Cal Quate at Stanford, where he invented a key part of the atom-manipulating atomic force microscope.

Top-tier VC and private equity investors (see Table 1 for a list) have jumped on Proteus to the tune of a reported $100 million ($32 million in a 2008 Series D financing alone), providing a big cushion of capital to help push the technology to market.

Investor Location
Adams Street Partners Menlo Park, CA
Asset Management Palo Alto, CA
Carlyle Group San Francisco, CA
Essex Woodlands Palo Alto, CA
Fletcher Spaght Boston, MA
Kaiser Permanente Ventures Oakland, CA
Spring Ridge Ventures Menlo Park, CA

Table 1: VC and PE investors in Proteus (data courtesy Proteus web site)

The Novartis deal is significant not just because, as The Economist points out, Novartis is the largest pharmaceutical company to form a partnership with Proteus, but also because it portends great future value in the company’s technology. To wit: for the $24 million in announced deal value, Novartis appears from the press release to receive worldwide commercial exclusivity to only one indication area, namely transplantation medicine, along with “certain option rights in cardiovascular and oncology product applications, as well as rights to use Proteus technologies in its clinical development of pharmaceutical products.” This last clause might be troublesome to Proteus in the event that it imposes limitations on the company’s ability to move forward simultaneously with clinical trials in many indication areas; on the other hand, Novartis is presumably paying for applied R&D that Proteus can later apply in collaborations in other therapeutic areas.

Other “networked medicine” companies mentioned by The Economist (Boston-based privately held MicroCHIPS to the Netherlands-based multinational Philips are developing implantable devices for precise drug delivery and monitoring. There are yet others with transmitting ingestibles, such as Given Imaging, with its FDA-approved, wireless PillCam that views the GI tract from inside; and Remon Medical, acquired by Boston Scientific in 2007, which has worked on heart monitors for many years.

But Proteus seems poised to be first-to-market with a truly transformative technology of low-added-cost, digitally enabled medications: Cool pills filled with promise.

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Disclosure: Proteus is not a client of CBT Advisors.

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Medicine Gets Personal – But How Do VCs Make Money?

Boston Biotech Watch has been keeping a close eye on three big trends and their impact on VC deal-making: real-world applications of genetic data, personalized medicine and health care reform. Can startups use genetic data to drive down drug costs? To what extent will genetics become the high-value gatekeeper for future pharma industry success? And will VCs be able to exit from companies in this sector quickly enough to reap outsized returns?

Judging from the VC activity in the space, some venture investors apparently think that strong exits are likely. What a radical departure! Right up until the early years of this decade, “diagnostics” was a dirty word in biotech venture circles. Most diagnostics deals smelled bad to most VCs whether the deals were sample-prep focused (like Cytyc, which was a massive success) or cancer biomarker repositories like DiaDexus, a high-profile joint venture between SmithKline Beecham and Incyte that raised $102.5 million in 2000, is still privately held and, despite one commercial test for coronary disease that finally achieved Medicare reimbursement in 2007, does not appear to have provided much – if any – of a VC return.

It has long been a VC maxim that “you could wait forever for the US health care system to move in a more rational direction” and that therefore VCs had to do deals that were consistent with the existing models no matter how broken these models were. Cynicism was rewarded, idealism punished.

Yet suddenly the United States appears to be on the verge of the largest health care reform (HCR) in its history and, perhaps not surprisingly, what feels like dozens of deals related to diagnostics, genetics and HCR have begun to materialize. The deals reflect many different ways of looking at the personalized medicine opportunity (see Tables 1 and 2).

Boston Biotech Watch recently attended the sixth “Personalized Medicine Conference” at Harvard and did some additional reading and research. This, along with proprietary information from CBT Advisors serves as basis for this snapshot. Our goals here are threefold:

(1) To explain – with examples – what sorts of companies are getting funded;
(2) To disclose the rationale driving the deals for some of the key investors in the space; and
(3) To hold up one recent high-profile deal, Generation Health, as the sort that other investors were clamoring (mostly without success) to get into.

Partners HealthCare Center for Personalized Medicine and Genomics logo

Just judging by the attendance at this high-quality conference, put on annually by the Partners HealthCare Center for Personalized Genetic Medicine (PCPGM) as well as Harvard Business School (HBS), the field is gaining momentum. More than 600 participants registered, compared to just 237 at the inaugural conference in 2005.

Our breakdown of VC deals in the personalized medicine space follows in Tables 1 and 2 below. Why are VCs convinced – despite such a negative history for investing in diagnostics – that personalized medicine is where the big money will be? Try “tenfold growth,” a squishy yet thought-provoking projection included in the December, 2009, report entitled “The New Science of Personalized Medicine” by PriceWaterhouseCoopers (PWC). Even allowing for the typical hyperbole associated with such reports, there is apparently more money than ever to be made from genetics, genomics, diagnostics, theranostics and related technologies.

Business model Company Market status Indication Technology VCs in Amount raised Exit
Content – algorithm Genomic Health Commercial Breast & other cancers Biomarkers + algorithm Kleiner Perkins, Versant & others $103M total IPO in 2005
Box Handylab Commercial Hospital infections Rapid DNA assay Arboretum, Ardesta, Dow Ventures, DuPont Ventures, EDF, Lurie, SBV, Wolverine $46M total Trade sale to Becton Dickin-son 2009 for $275 million
Technology platform (+content) GeneOhm Commercial Staph & other ID Rapid DNA assay CB Health, Domain, CHL, Kaiser Permanente, QuestMark,
Raised $26M Series C in Jan. ’05 Trade sale to Becton Dickin-son 2006 for $255 million

Table 1: Diagnostics and genetic testing companies from which top-tier VCs have exited

San Francisco-based venture capitalist Dion Madsen, a Managing Director at Physic Ventures, affirmed the newfound VC enthusiasm for personalized medicine when Boston Biotech Watch paid him a December visit. Physic is one of many VCs looking hard at the diagnostics space and one of the few to have diagnostics as a mandate. The firm’s tagline is “Investing in Keeping People Healthy.” So Madsen is an especially apt guide to the promise and the pitfalls of the space.

Ahead of a shift to test-prompted care
VC dealmakers usually like to tell themselves that they are just ahead of a paradigm shift and this field is no exception. The idea that genomic information is useful for drug discovery and clinical testing is starting to “percolate” through pharma, Madsen said, and is already leading to better drug design. But the use of genetic information related to the individual patient, for example in the form of genetic-based diagnostic tests, he said, is “only just beginning.”

Behind the big numbers is a firm conviction that payers in the US healthcare system (insurers and government programs like Medicare) will actually come to rely upon and reward molecular and scientific information instead of simply succumbing to ever more expensive marketing campaigns by pharmaceutical, biotech and medical device companies.

Comparative Effectiveness compares treatments

If I take them all, will they cancel each other out?

There is very little in the current package of health reform bills being negotiated in both houses of the US Congress that deals with molecular testing. The closest that HCR comes is in mandating a relatively modest $1 billion for so-called “Comparative Effectiveness” (CE) funding which is meant to determine which therapeutic regimes – be they surgeries, implantable devices, dietary regimes or drugs – are actually working in contrast to the traditional approach of casting each and every clinical trial in the form of a validation or rejection of a single new medication or device. Still, for Madsen, the CE trend is a friend. “Comparative Effectiveness is already a reality,” Madsen said. “That card has been turned.”

Physic has developed four simple criteria – they fit on one side of a sheet of notebook paper – that characterized “doable deals” in the personalized medicine space. For Physic, an investment must be:

1. Actionable – it informs a decision around treatment, preventive action or behavior

2. Cost-effective

3. Based on validated science; and

4. Clinically meaningful.

To pick a widely publicized group of companies that, in our view, fail on “actionability,” consider the consumer genomics companies 23andme, Navigenics and Knome. These companies have won some high-profile backers – 23andme, for example, has Google as a key investor. “What 23and me and DNA Direct are doing is really interesting,” Madsen said, “[it is] just ahead of its time.” These services – which have been dubbed “recreational genomics” – are not actionable enough, he said, for them to be good VC investments. Madsen: “The utility of learning every base pair is very low.”

Genomic Health: A Pioneer, Yes, But a Replicable One?

Historically, only a handful of VC-backed diagnostics companies have managed to fulfill Physic’s criteria and make their investors money. Genomic Health (NASDAQ: GHDX) is perhaps the most prominent of these. The company raced from its first institutional funding to Medicare reimbursement in just five years and pulled off a successful IPO in 2005. In the meantime, its single marketed test – an algorithm-based test

called OncotypeDX for guiding breast cancer therapy – now earns more than $140 million in annual revenue. It helps physicians choose treatments that are on the extreme end of the cost spectrum – a $3,500 test that can allow patients – and payers – to avoid bills of $30,000 or more for chemotherapy. That value proposition – along with Genomic Health’s compelling retrospective data – convinced Medicare and other insurers to agree to reimburse the test beginning in January, 2006.

But OncotypeDX is an imperfect example in several ways: First and foremost, not many therapies cost $30,000, so very few tests will be reimbursed at $3,000 or more. Second, FDA has signaled that tests based on algorithms like OncotypeDX will require a greater degree of validation in the future. (How much tougher the regulatory regime will be is likely to become clear in mid-2010, when FDA issues its long-awaited guidelines for so-called “IVD MIA” tests – in vitro diagnostic multivariate assays.) And finally, the return on the $103 million invested in Genomic Health before the IPO was probably more like 3x than the usual 6-8x that VCs consider a “home run.”

Brook Byers

Brook Byers, Kleiner Perkins’ diagnostics VC visionary (Image Justin A. Knight)

Genomic Health was a Kleiner Perkins deal and the other two “DX” companies in which Kleiner invested, CardioDx (founded 2004) and XDx (2000), have apparently not made it to big revenues or VC exits nearly so quickly. Indeed, both are still privately held. One East Coast VC to whom Boston Biotech Watch spoke said, “Yes, CardioDx has found a potentially relevant market opportunity, but they had to do a 4,000-patient study.” CardioDx is reported to be raising money at a lofty valuation.

Business model Company Marketing Status Indication(s) Technology VCs in Most recent financing
Content On-Q-Ity R&D Monitoring of cancer progression via DNA repair biomarkers Biomarkers, microfluidics Mohr Davidow, Bessemer, Physic, Northgate, Atlas $26M Series A Dec. 09
Content Artemis R&D Prenatal diagnostics Microfluidics Mohr Davidow, Alloy, Sutter Hill $9M in Oct. ’09
Technology platform (+content) T2 Biosystems R&D Not announced POCD – nanoparticle MR assay Flagship, Polaris, Flybridge, Partners Healthcare and In-Q-Tel $10.8M Series B Aug. ’08
Long-range disease prediction & risk assessment Tethys Bioscience R&D Diabetes Blood test; panel of biomarkers Aeris, Kleiner Perkins, Mohr Davidow, Intel Capital Raised $25M Series D Nov. 09
“Genetics Benefit Manager” Generation Health One corp. partnership announced All genetic tests esp. in high-value treatment areas Evaluate tests for payers; bridge payers, providers, patients Highland Capital $5M Series A Nov. 08, Deal with CVS-Caremark Nov. ’09

Table 2: Private diagnostics and genetic testing companies in which VCs have invested

Table 2: Private diagnostics and genetic testing companies in which VCs have invested

Among the still-private companies identified in the CBT Advisors screen (see Table 2 for examples), several are looking for ways to capture content and use it to provide immediate value to patients and payers. We consider these the “content” companies. Genomic Health, CardioDx and XDx all fall into this category. These companies run the gamut of indications, with existing plays in cancer (many including Genomic Health, Genomic Vision, Precision Therapeutics, Claros, MTM Labs and On-Q-Ity, which will be discussed further along in this post); cardiovascular disease (CardioDx, XDx), rheumatology and inflammation (Crescendo), diabetes (Tethys) and the ever-popular (and close-to-market) infectious disease, particularly point-of-care tests for nosocomial infections (Opgen, Progentech, Curetis, AdvanDx).

Another group has developed a proprietary technology that either grabs the content (e.g. the microfluidics of Artemis Health, a prenatal diagnostics company) or that prepares it for analysis (Handylab, acquired in October by Becton Dickinson for a reported $275 million). Some technologies do both (T2 Biosystems, a Boston-area Polaris investment based on technology from the prolific Robert Langer lab at MIT). We consider these to be “box” or “sample prep” companies although some of course are also offering unique content.

Recently Physic Ventures acted on its strategy and put its money into a Boston-area diagnostics startup, On-Q-Ity, that meets all four criteria. Like Genomic Health, On-Q-Ity (from Oncology + Quality + Clarity) will provide actionable information in the form of decision support to physicians treating cancer patients. . The validated science consists of (1) biomarkers found in tumor cells that determine their level of progression and therefore the advisability of treating patients at a particular moment; and (2) assays that determine susceptibility to specific chemotherapeutic agents based on mutations in the genes involved in DNA repair. As with the “box+content” companies, On-Q-Ity not only has the rights to these biomarkers and mutation assays but also a proprietary microfluidics technology that is able in principle to pluck circulating tumor cells out of the bloodstream even when these cells are quite rare. The company then applies the two technologies, yielding an unprecedented snapshot of both “treatment response and tumor cell composition … at a molecular level,” Madsen said. Both cost-effectiveness and clinical validity will have to be determined by clinical trial, presumably done prospectively.

On-Q-Ity’s management is something of a dream team. The CEO, Mara Aspinall, was the long-time president of Genzyme’s genetic testing division, which under her leadership developed and commercialized many new tests. Aspinall, who is also on the board of one of Massachusetts’ largest health insurers (Blue Cross Blue Shield of Massachusetts) has about the best track record imaginable for a genetic testing company CEO. In her spare time, she serves as a lecturer in health care policy at Harvard Business School.

In our view, On-Q-Ity scores highest on the first criterion, actionability. As we will address again when we get to Generation Health, oncology diagnostics are already high-value due to the high cost of treatment. In an article on personalized medicine published in 2007 by Aspinall and her HBS colleague Richard Hamermesh, she identified five cancer indications (pancreatic, liver and so on) in which patients typically have low one-year survival and therefore “do not have time to spare” for traditional, “trial-and-error” medicine. If On-Q-Ity can use biomarkers to inform physicians when to treat aggressively or even which chemotherapeutic agents to deploy, then its tests will undoubtedly be reimbursed at or perhaps even above the levels seen for OncotypeDX.

The wild card for On-Q-Ity is the level of validation that will be demanded by FDA and payers. Madsen said that even in the honeymoon phase following the investment, “We are still struggling with, do we need a prospective trial? If so, how do we design it?” These demanding constituencies – FDA, payers, oncologists, cancer patients – will, it seems to us, insist on such a trial. As Madsen put it, “How do you tell an oncologist not to treat a patient with the standard of care? This is our challenge.”

Even when a company meets all of Physic’s criteria, the road may still be uncomfortably long. After all, these companies – like CardioDx and its 4,000-patient study, not to mention DiaDexus and its single approved test – are all attempting to achieve validation under the “old” criteria. How soon can HCR change that?

Generation Health: “The Consumer Reports of Genetics”
These struggles are what make Generation Health stand out. GenHealth

Generation Health logo
seemed to be the darling of the Personalized Medicine Conference and VC firms have been “pounding down the doors” to get in, according to a couple of top-tier VCs (the only announced VC investor is Highland, which made a first institutional investment in the company in 2008, though rumor has it that a second Boston-area fund has joined the syndicate).

GenHealth has the potential to be a high-flyer because it stands in a far different corner of the health care system – next to the payer. GenHealth intends to “help employers and other health care payors manage medical costs and improve their employees’ and members’ health by assuring optimal utilization of genetic testing.” To do this, according to its web site, it will perform three tasks:

• Establish a rational basis for covering or excluding genetic tests based on clinical validity and utility;
• Negotiate discounted rates for tests; and
• Identify patients who would benefit from testing through analysis of medical and pharmacy claims.

These activities would make GenHealth a “filter” for insurance companies and employers. Madsen dubbed them “the “Consumer Reports of Genetics” – a company perceived to be a fair arbiter of the value of genetic tests. “We’ve seen other companies such as DNA Direct do this for HMOs and payers including some we know very well,” Madsen said. “But no other company can do it to the extent that Generation Health would. GenHealth will have better decision-making data,” presumably from aggregating anonymized data across insurers or analyzing claims. In November, 2009, GenHealth signed its first public collaboration with CVS Caremark, a pharmacy benefit manager that already has a pharmacogenomics program. (No surprise about the identity of the first deal partner – CVS Caremark’s Chief Medical Officer Troyen Brennan sits on GenHealth’s board).

What gets VCs excited about GenHealth is its ability not only to take advantage of HCR but to actually participate in it by driving down health care costs and increasing use of gatekeeping genetic tests. GenHealth styles itself a “Genetic Benefit Manager [GBM],” analogous to the Pharmacy Benefit Managers (“PBMs”) Medco and the like – a company where GenHealth founding CEO Per Lofberg served as chairman from 1993 to 2000.

Raju Kucherlapati, Harvard professor and Personalized Medicine Conference founder

Raju Kucherlapati, Harvard professor and Personalized Medicine Conference founder (Image Justin A. Knight)

The discussion about GenHealth’s business stimulated one of the more interesting exchanges of the conference. PCPGM founder and conference organizer Raju Kucherlapati asked CVS Caremark’s Brennan exactly how many tests CVS Caremark is already reimbursing for or including in its decision-making process about providing pharmacy benefits. Brennen did not answer the question, but he did say that the first inroads are in “high-cost disease.” If a treatment costs $100,000 a patient, for example, and a test costs $1,000, even one patient being safely spared the treatment more than pays for the cost of the test for many patients.

“Right now [our testing] is limited to a series of cancer diagnostics,” said Brennen. “Like most PBMs, we operate a specialty pharmacy with high-cost medications and that is where we do the most genetic testing,” he added. In the non-specialty areas, there is not yet “reasonable evidence” for incorporating it into practice, although testing is more prevalent there than it was five years ago. However, the amount spent on testing is expected to grow quickly, he said, because “at Caremark, we will be leaders in cost reduction. That is why it is important for us to incorporate genetic tests. We want to stay away from provider-driven modes,” that is, to pay for care that matters to the patient.

(At the same moment as this edition of Boston Biotech Watch went up on the morning of December 21, 2009, CVS Caremark announced that it was taking “an increased ownership interest” in Generation Health. The press release quoted CVS Caremark Chairman Tom Ryan as saying that, with the additional investment, CVS Caremark is “accelerating our commitment to personalized medicine and making genomic benefit management an integral part of our PBM offering.” Indeed, in the same announcement, CVS Caremark named GenHealth CEO Per Lofberg as the President of the company’s PBM business; GenHealth co-founder will become its new CEO. Although the release said that GenHealth will continue to operate as an independent business, “offering a full range of GBM services to health care payors,” it was left unclear how free GenHealth would be to do strategic deals with other PBMs. Terms were not disclosed.)

Meanwhile, new genetic tests keep pouring in to payers at a rate of what feels like “100 a week,” said Madsen. Each new test faces the traditional gauntlet of long-term, prospective studies before it can start making investors money. So not only are new tests needed but also, as Aspinall and Hamermesh described in their 2007 article, better regulatory and reimbursement regimes. Until these key pieces are in place, most VC deals in the space will be vulnerable to the cash and momentum drain of drawn-out prospective testing.

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Disclaimer: CBT Advisors has worked with Precision Therapeutics and Genomic Vision. When he was a venture capitalist, Steve Dickman was part of a team that invested in Precision Therapeutics.


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Clouds Over the VC sky

Clouds Over the VC sky

by Steven Dickman, CEO, CBT Advisors

Last week I attended a one-on-one podium discussion put on by Xconomy featuring two Boston gods of private equity and venture capital, Peter Brooke, founder of TA Associates and Advent International, and Terry McGuire, Managing Partner at Polaris, who is also currently Chairman of the US National Venture Capital Association.

Peter Brooke, founder of TA Associates & Advent International. Advent’s global buyout fund (GPE VI) raised $10.4B in April, 2008.

Peter Brooke, founder of TA Associates & Advent International. Advent’s global buyout fund (GPE VI) raised $10.4B in April, 2008.

Though generally upbeat in tone, the event did not dispel the clouds that have rolled in over the world of VC. Just as Wall Street bankers are facing salary caps and nagging questions from the government, VCs and private equity heads like McGuire and Brooke are struggling with changes in the ecosystem that hit them in the place it hurts the most – their ability to raise funds.

The discussion did not dwell on the challenges of their own next fund-raisings. Both McGuire and Brooke have proven to be adept at raising capital over many fund generations and through very tough times. “This is my fifth economic downturn,” quipped McGuire.

Indeed, large and established fund groups are having some success raising new funds in 2009. For example, Domain closed on $500 million in August (down from an original target of $700 million announced in January but still a strong and quick raise) and PEHub reported last week that New Enterprise Associates (NEA), one of the world’s oldest and largest PE and VC partnerships, had submitted an SEC filing announcing that it had raised $2.45 billion of its $2.5 billion thirteenth fund with $300 million coming in since its previous closing in April, according to the Wall Street Journal.

But McGuire and Brooke touched ominously on the potential re-allocation of limited partners’ funds away from PE and VC. The mood among LPs lately, Brooke said, has been sullen, even mutinous. Therefore, Brooke said, GPs everywhere are asking themselves, ‘Will limited partners find new types of investment?’ And ‘If the LPs’ VC allocations go lower, where will we find our capital?’

Brooke mentioned the report in Forbes that Harvard has $11 billion in unfunded commitments to VC and PE funds. Brooke linked that figure with the earlier data point that Harvard’s endowment has lost $11 billion of value. “If that faucet is shut off, it will have a real impact.” (Read Forbes’ initial coverage of the crisis in university endowments here.) Detailed numbers follow in Addendum 1 below.

Many VC GPs would agree that too much money was pumped into the system in the 2003-2007 time frame. The tail end of that period was extreme by any estimation – too much capital chasing too few deals.

But driven by forces arising from the wider capital & credit markets, the pendulum seems to be swinging back to the other side. The amount of VC raised in 2009, McGuire said, will be less than the amount raised in 2004. This sets up VCs and entrepreneurs for a “new normal” that, while capital efficient, may prove challenging in the short run.

Longer-term, Brooke and McGuire were optimistic. “There is no question that the industry will continue,” McGuire said. “There is no question any more that the system works.” The basis for good VC investments, McGuire said, is seeing a path to solving real-world problems. The sun will doubtless come out again before long for VC since, as McGuire put it, “There are problems that the world and the economy face that have the makings of great investments.”

Addendum 1: The numbers.

Between 1999 and 2008, the size of Harvard’s endowment increased from $14.4 billion to $36.9 billion. It then fell $11.1 billion to $25.8 billion by June 30 of this year. Stanford, whose endowment is down from $17.2 billion in 2008 to $12.6 billion this year, has $6.1 billion of unfunded commitments and told Forbes earlier this month that it was putting $1 billion of its private equity assets up for sale. The issue, according to this August, 2009, Vanity Fair piece, is that there may not be buyers for these positions at anything close to the sellers’ asking price. The stalemate further increases the pressure on LPs’ liquidity.

Addendum 2: Harvard’s dilemma

Here’s a telling excerpt from the VF piece, written by Nina Munk:

>>A money manager I spoke to described his meeting late last year with Jane Mendillo, who in July 2008 became president and chief executive officer of Harvard Management Company. Knowing that Mendillo was trying to unload assets, he offered to buy back Harvard’s sizable stake in his private fund. As he recalls, the surreal dialogue went something like this:

He: “Hey, look, I’ll buy it back from you. I’ll buy my interest back.”

She: “Great.”

He: “Here, I think it’s worth—you know, today the [book] value is a dollar, so I’ll pay you 50 cents.”

She: “Then why would I sell it?”

He: “Well, why are you? I don’t know. You’re the one who wants to sell, not me. If you guys want to sell, I’m happy to rip your lungs out. If you are desperate, I’m a buyer.”

She: “Well, we’re not desperate.”<<

Maybe they are now.

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