While the country was divided over the results of the November presidential election, the venture capital community was uniformly happy about voters’ approval of a controversial stem cell research initiative in California.
Venture capitalists agree that Prop. 71 will translate into a financial win for their industry, though many warn not to look for an overnight, VC-fueled stem cell boom. The proposition will allow California to issue bonds to raise $3 billion to fund stem cell research in the Golden State over the next 10 years through the authority of the California Institute of Regenerative Medicine.
Prop. 71 came to life after the Bush Administration enacted a policy in 2001 that barred the National Institutes of Health from doling out grants to support stem cell research that involved the destruction of human embryos. The issue became part of the national debate during the presidential campaign, and VCs generally favored Sen. Kerry’s position over that of President Bush.
Some VCs, like Jim Breyer, a managing partner at Accel Partners and chairman of the National Venture Capital Association, found themselves in the unusual position of donating to the Yes on 71 campaign even while they supported the reelection of President Bush. Breyer says that he and other venture capitalists backed the initiative because it was the right thing to do and because the VC industry as a whole will benefit. (Accel won’t benefit from Prop 71 directly because it only invests in information technology companies.)
“Over the next five to 10 years it absolutely will translate into increased investment opportunities for venture capitalists,” Breyer says. “There is always a risk that the expectations are simply too high, but at the same time this is a profound program.”
Mark Mendel, a managing director RiverVest Venture Partners, says that the initiative “may have a very significant effect in taking ideas that are just a little too risky to be backed by venture capitalists and making them attractive to a much broader audience. It may free up some capital to get some good ideas backed, with the understanding that the venture dollars are not going to have to do all the heavy lifting alone.”
“This is a basic research initiative,” notes Peter Wagner, a managing partner along with Breyer at Accel and president of the Western Venture Capital Association. “This is about driving a center of innovation that will ultimately yield a lot of benefits.” Wagner adds that there is a dearth of stem cell research being conducted and that the ballot initiative will remedy that.
As much as the venture industry will benefit from the initiative, Wagner and others say VCs support of Prop. 71 had nothing to do with business interests. “It was a decision for the greater good of the United States,” says Sonja Hoel, a managing director with Menlo Ventures.
Hoel adds that the United States is in danger of losing scientists to other countries where laws regarding stem cell research are more relaxed. Funding such research in California guarantees that the best research will stay stateside, she says. “Really this is about science. We’re going to be the research center of the world for this very cutting edge technology.”
Supporters of the initiative had an overwhelming financial advantage. The Yes on 71 Coalition reported spending almost $28 million this year. Four groups opposed to Prop. 71 reported raising about $300,000.
VCs donated about $2.6 million to help get the measure on the ballot. According to documents filed with the California Secretary of State, VC donors to the Yes on 71 Coalition included Brook Byers, John Doerr and Vinod Khosla of Kleiner Perkins Caufield & Byers; William Draper of Draper International; J. Taylor Crandall of Oak Hill Capital Management; Michael Gordon of Meritech Capital; Jonathan Fieber of Mohr Davidow Ventures; and Bill Bowes and Philip Schlein of U.S. Venture Partners.
The Kleiner Perkins partners as among the most generous, with Doerr along shelling out $1 million in loans and about $487,000 in “non-monetary” donations to Yes on 71. Another big contributor was Bowes, the founding partner of USVP, who gave about $664,000 in “non-monetary” donations to the cause.
By throwing their financial support behind the initiative, VCs risked facing the wrath of religious groups who are opposed to the use of human embryos in some types of stem cell research.
Other opponents of the initiative cited concerns over a lack of ethical safeguards and the potential misuse of public funds for corporate gain. Some critics have charged that stem cell research won’t return money to investors in time to repay the $3 billion in bonds, plus interest, within the next 10 years. Bond payments and interest may eventually cost the state $6 billion over a 30-year repayment period.
Supporters of Prop. 71 cited the altruistic benefits of stem cell research in life-saving medical advances and lower health care costs. One of the proposition’s chief organizers was Robert Klein, CEO of real estate development company Klein Financial Group. Klein, who says he has relatives who suffer from maladies that could be helped with stem cell research, was firmly outside the pharmaceutical and biotech industries.
The effort yielded bipartisan support. In addition to being widely supported by Democrats, Prop. 71 also drew the backing of Republican luminaries such as California Gov. Arnold Schwarzenegger and former Secretary of State George Schultz. The issue gained momentum earlier this year with the passing of former President Ronald Reagan, whose family has advocated for greater efforts in stem cell research.