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Despite Economic Climate, VC Cash is Available for LS Tool Firms, Say Experts

NEW YORK (GenomeWeb News) – With the wide-ranging financial crisis hitting economies across the globe and leaving virtually no industry untouched, access to capital has become a crucial issue for both publicly and privately traded firms in need of funding.
While the public financing market has virtually dried up and most IPOs have been pulled over recent months, venture capital cash is still available to life science tool firms with innovative products and a compelling business strategy, a couple of venture capital investors told GenomeWeb Daily News in recent interviews.
“I absolutely think there is money out there,” Bill Ericson, managing partner at Mohr Davidow Ventures, told GWDN recently. But, “I think everyone’s quite conservative right now, quite risk-averse, and quite interested in making sure they maintain their visibility and cash so that they can support their existing companies,” he said.
That sentiment was echoed by Chad Waite, managing director at OVP Venture Partners, who stressed that revolutionary technologies will still attract venture capital dollars. “There is no shortage of good ideas just because the economy is bad,” he said.
“If you’re a VC investing in this area, you’ve got to ask one fundamental question: is unfair advantage being created in these companies?” said Waite. “If you truly believe the technology is revolutionary … you’ve just got to make the investment.”
Ericson agreed, saying, “Our view is that there is no safety in conservatism. Often, it is the disruptive technologies that are the only ones that turn into value companies, because you’ve got to do something that is differentiated enough to get people excited. If you look at the historical big winners they’ve done something remarkable.”
Ericson cited Applied Biosystems’ sequencing instruments and Affymetrix as examples of companies that offered VC investors a chance to invest in revolutionary technologies.
Both Ericson and Waite have track records of investing in and helping to guide life science tool firms during their time as privately held entities. Among the firms MDV has invested in are ParAllele Bioscience, Pacific Biosciences, RainDance Technologies, Tethys Bioscience, and Navigenics. OVP’s roster of companies includes Complete Genomics and NanoString.
Though both investors believe that cash is available for start-up tool vendors, they cautioned that firms looking for money should not expect to get the level of funding they would have gotten several months ago.
“It’s without doubt a slower environment than it was even [six] months ago,” said Ericson. “It’s also a more price-sensitive market because people have seen the public comps and multiples get compressed so that it’s a little hard to value companies at the moment.”
He added, “There are still groups that are very interested in the area, and I think companies will get deals done. Maybe not at the price they might have been able to get months before. They may raise less money, and they may have to be more efficient with their money.”
Indeed, Ericson said that capital efficiency is more of a focus for VC investors in the current economic environment. “If you’ve got an enabling technology that’s going to require a huge amount of capital to get to market, that’s going to be a harder one, even if it’s a very attractive long-term opportunity,” he said.
Similarly, valuations of private tool firms seeking a buyer are likely to be much lower than they were before the stock market tanked in the fall.
“I think the buyers will expect lower prices, and some deals may not get done because the sellers, or prospective sellers, aren’t willing to take a price,” said Ericson. He said that multiples right now are below historic levels, but that will work out over “a period of months.”
“The prices have come way down,” said Waite. “I would say that the desire to own the right technology is still there. What would have been from a VC standpoint and a founder’s standpoint some sort of slam-dunk prices that were being paid up to nine or 10 months ago, they’re not being paid now.”
Like Ericson, Waite believes some firms and their VC investors will pass on potential deals. “If we think we have the right technology and we think we can finance it, let’s build a bigger company, or at least build a more mature company,” said Waite.
In addition to M&A valuations being hurt by the current economic climate, both investors agreed that there is no initial public offering market right now. “Until we get stability there’s no IPO market to speak of,” said Ericson.
He said that it’s hard to get a price and interest when investors are as distracted as they currently are. “We’ve seen similar cycles in the past ... I would not predict a super-robust 2009, but if I were a betting man, towards the end of 2009 the IPO market may start to pick up,” said Ericson.
In the meantime, private firms needing funding should rely on their current investors and make efforts to conserve cash, they said.
“You need to depend on your existing investors,’ said Waite. “What you don’t want to do is go out and raise money looking weak, because then your price goes down.”
Ericson added that firms need to “be very conscious of [their] cash, because funding takes longer now. Six months is a reasonable amount of time for funding to take these days,” he said. He also said that he would advise them to understand before starting the fundraising process that they need to look at the VC firms’ track records in the life science tool industry and be careful of others who may have just “dabbled in the area.”
Ericson also said that firms should focus on their commercial value proposition. “In this environment people are less willing to add on things that are a technology looking for a market,” he said.
Despite the current economic climate and the potential barriers to raising money, Waite and Ericson said the silver lining for the life science tools sector is the continued demand for the products being sold by the firms they’ve invested in.
“If the technology is truly disruptive, people have to have it, and they’ll find a way … or create a way of financing it,” said Waite.
“The companies that we have in this area, tools specifically, but also on the molecular diagnostics side, are not seeing reduced interest” from customers, said Ericson. “If anything, it’s exactly the same as it was” several months ago.