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Venture Capital: Dead or Alive in the 21st Century?

Rita Baron-Faust

Or is venture capital merely a survivor of the last market bubble fighting for its life, asked Gregory C. Simon, CEO of Poliwogg, as he opened a panel discussion on the subject at the fifth annual Partnering for Cures conference co-sponsored by the Kauffman Foundation and held in New York City this month.

Ilan Ganot, of Solid Ventures, had a quick answer. "Just like every other industry going through a tough time, it will struggle, go back to basics, the strong will survive and the weak will die," he said.

While venture capital as a business model may be on the verge of extinction (a financial "dinosaur," as Simon put it), the venture capitalists will survive, other panelists said.

"Venture capitalists have the expertise required to develop innovative companies, particularly in biotech. But I think that venture capital is a severely challenged business model for biomedicine," said Andrew W. Lo, professor of finance at the MIT Sloan School of Management.

For one thing, biomedicine requires a large amount of funding - much moreso than many other types of industries - before you even get to the point where you have a concept, Lo said. It then takes many more years to fully develop that concept.

"And there is also a lower probability of success because the science is so complex," Lo said. "This uniquely challenges the traditional funding model, the traditional cycle of venture capital, and it will have to change as a business model. The venture capitalists will have to lead the charge."

Paul Meister, chairman and CEO of inVentiv Health, agreed. "We have to come up with a model that drives costs down, so the venture capital industry is more aligned with companies," he said. "One of the principal problems in drug development is misalignment. A lot of service providers were incentivized to make drug trials more complicated and they took longer, while the CROs were incentivized for man hours. So the longer it took, the more they got paid. We have to reverse that model; lower the front-end cost to developers."

Lack of Capital With Which to Venture?

There's actually a lack of venture capital on the market, said Erika Smith, deputy director of the Yale Entrepreneurial Institute.

In fact, the Milken Institute found that only 3 percent of accredited investors in the U.S. had ever invested in a private company, Simon said. "Is that a lack of capital in the market? Or we're just not asking enough people to be part of the system?"

Smith said downstream capital is readily available once ideas have been validated, but it's not easy to get funding in the early stages of development because the science is still unproven in many ways. "You have to attract people to take that risk, that heightened sense of uncertainty, and come into it at that early stage," said Smith, who is also an advisor with Rock Spring Ventures.

"There's no question there's high risk here. But for high risk you need better returns. The returns have not been enough for investors to care," Ganot said.

Panelists agreed that a diversified portfolio approach, one that combines a wide range of early-stage investments, is one way to make more capital available. "If we can get the right portfolio approach to reduce the risks, there are huge amounts of money out there to be tapped," said MIT's Lo.

He also suggested tapping into the debt market as a source of funding for biotech, as opposed to private or public equity.

Fostering New Partnerships

Creating funding opportunities means finding new partners as well as containing the cost and streamlining development.

There is a public misperception on how long it takes from the discovery of a molecule to a drug, Meister said.

Smith suggests shrinking the development path by developing new relationships from the university side to overseas partners, "so you are directly engaged in innovation and actually go directly to where the market is, and bring more capital into the marketplace." The quicker you can get ideas and concepts validated, the quicker they can be attractive to downstream financers, she said.

Ganot said early investors may be willing to take risks if they care about an issue or a disease. He spoke about his own work in trying to find a treatment for Duchenne muscular dystrophy, which his son has.

This is where patient-focused groups and crowd-sourcing may play a bigger role, said Jeff Rowbottom, managing director of KKR Capital Markets for the Americas. "I think the empowerment of the patient getting involved, using their resources, using social media, using their passion to bring capital, focus and a sense of urgency" is key, said Rowbottom, who serves on the board of the Melanoma Research Alliance.

"Patients are able to be on message boards and ask about clinical trials. This will force companies to become more transparent and be more involved," he said.

Meister said the for-profit community and the nonprofit community can also play some important complementary roles. For example, he suggests the venture capital community might issue bonds and the philanthropic community guarantee those bonds for a variety of research projects.

Then there will be the effect of those just emerging from colleges and universities, young entrepreneurs who will look to crowd funding and other new ways to raise venture capital for biomedical and pharmaceutical research, said Smith. "In 10 years the world will look different. We are on the cusp of great changes," she said.

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