For information technology this is a nuclear winter, a meltdown, call it what you will. But for life sciences, the time is now.
Last year venture capitalists invested nearly $3 billion in life sciences companies. This year that number is expected to get even bigger as venture funds target the sector and institutional investors pour even more money into the funds that are focusing on the life sciences.
Just ask Stuart Weisbrod, a former Wall Street health-care analyst and now head of Merlin, one of the most successful hedge funds of the last few years. He is launching a private equity fund focused on the life sciences, which offers plenty of new ideas and opportunities. Weisbrod’s problem isn’t raising money; it’s attracting the right mix of investment professionals who understand the life sciences and are willing to bet on the long term. Another fund, Prospect Venture Partners, just raised a record $500 million exclusively for life sciences investments.
Prospect was launched by Kleiner, Perkins, Caufield & Byers’ partners Alex Barkas and David Schnell in 1997 with $100 million. But within the last year, the fund has added two new partners: Russell Hirsch of the Mayfield Fund and Jim Tananbaum of Sierra Ventures. And now it has raised a record amount for life sciences. In a difficult environment for most in the fund-raising markets, Prospect’s success underscores the institutional interest in the life sciences.
Even funds where IT had become the dominant star are now turning to their life sciences specialists for more deals. Firms such as Venrock Associates, which has a reputation for investing wisely in health care, and Whitney & Co., which helped start such companies as Genetic Institute, say they are being flooded by new life sciences business proposals, more real and tangible than most of the IT plans that crowded out life sciences investing over the last few years.
The reasoning behind the new life sciences boom is simple. Americans are more health and disease-conscious than ever and willing to do something about it. There is an ever-increasing population of elderly Americans who are living longer and want new drugs and health-care services that will keep them healthier. And since Americans are willing to pay top dollar for new drugs, that means any drug or device that solves a significant problem can command premium prices.
“What makes life sciences products so enticing is that they have huge market windows and long product life cycles,” said Weisbrod. “They are not like IT businesses where competition springs up overnight and the window opens and shuts too quickly.”
At the core of the new investments is the ability to look at smaller and smaller cells and molecules. Investors are confident that the two new areas – proteomics and nanotechnology – will yield a slew of products and services that will make drug discovery faster and more efficient.
The hottest area is proteomics, the science that attempts to understand the role of proteins in the human body. And although the field is young and yet to uncover anything of significance, there are an estimated 200 companies that label themselves as doing something in proteomics or protein research. VCs see the area as a more focused attempt to develop drug targets. “It allows you to look more closely at a disease population,” says Whitney’s Jeffrey Jay. While genomics simply identifies and isolates disease-related genes, proteomics can further break down the genes and pinpoint the processes that lead to diseases.
If proteomics is hot, so is nanotechnology, a manufacturing technology that allows thorough and inexpensive control of the structure of matter. The term has sometimes been used to refer to any technique able to work at a submicron scale. Investors are confident that nanotechnology will help create a slew of products and devices that will enable them to look closely at molecules, especially in the identification of diseases and discovery of new drugs. “The ability to design and manufacture devices that are only tens or hundreds of atoms across promises rich rewards in electronics, catalysis and materials. The scientific rewards should be just as great, as researchers approach an ultimate level of control – assembling matter one atom at a time,” noted Jay.
The buzz around both proteomics and nanotechnology is big. But everyone involved will tell you that real products and services are still years away. And while many of the companies involved are attempting to generate some revenues out of contract research, databases and other related services, the payoff is not in the immediate future.
As VCs and companies hit the road to raise more money for proteomics and nanotechnology they need to learn from the last biotechnology cycle. That was in the late 1980s when VCs, rebounding from computer technology excesses, funded a plethora of companies that would discover new drugs and therapies. The promises made and the expectations raised were great but very few companies actually delivered. Not surprisingly, many of the companies soon found themselves scrambling for money and skeptical investors unwilling to ante up.
For proteomics and nanotechnology investments to be healthy and continue to inspire investor confidence, VCs and the entrepreneurs need to cut down on the hype this time. They need to convince the pharmaceutical companies that they truly can accelerate the drug discovery process. Most of all, however, they need to execute.
Udayan Gupta is the author of Done Deals: Venture Capitalists Tell Their Stories.