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Genomics Investment Burns Bright in Void of Dot-Com Retreat

NEW YORK, Aug. 20 – Venture capital investment in US biotechnology companies, which include genomic and bioinformatics firms, has increased by $100 million to $1.1 billion since the beginning of the year, even as overall venture financing plunged by 58 percent to $25 billion, according to a recent analysis.

VentureWire , a daily newsletter that follows trends in venture financing, reported last week that there were 15 investments made in genomic firms totaling $127 million during the first half of this year, and five deals in bioinformatics companies that totaled $67 million.

The newsletter was unable to compare the data with the same period in 2000 because genomic and bioinformatics companies have traditionally been folded into the broader category of biotechnology, according to Ken Andersen, editor of VentureWire .

Most analysts agree that the increase in financing in biotech—and therefore in genomics and bioinformatics—represents a retreat from dot-coms, which were the benefactors of so much venture capital during the recent economic boom. To these financing firms, an investment in biotechnology represents a steady, longer-term return compared with the hoped-for quick returns that often defined investment during the dot-com era.

“Investors in a lot of firms who had focused 100 percent on going after easy dot-com money got burned, and all of a sudden are looking for more substantial places to put their money,” Andersen told GenomeWeb .

While he could not provide specific figures, he said “anecdotally, more investors are moving into genomics and proteomics ventures, and more opportunities appear there.” Also, “drug discovery and the opportunities in bioinformatics are driving a lot of this [venture capital investment],” Andersen added.

Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, agreed. “The trend in the [biotechnology] industry has been up,” he said, adding that his firm tracked a 6 percent rise in biotech-related venture capital investment during the first half of 2001.

“Biotech is where the returns are,” Lefteroff added.

Genomic and bioinformatics companies are included within PricewaterhouseCoopers’ definition of biotechnology.

According to the company's most recent MoneyTree survey of venture capital financing, which it conducted with VentureOne, there were 226 investments in biotech companies totaling $334 million for the first half of 2001. In the first half of 2000, by comparison, 130 biotechs won a total of $1.6 billion.

There were 248 biotech investments in the whole of 2000 worth roughly $3.3 billion, according to the MoneyTree survey.

“I think you’re going to see a lot of interest in this area,” Lefteroff said. “In the next three to five years you can see a fairly significant amount of money flowing into this sector.”

He said that financing companies most active in biotech are Versant Ventures, based in Menlo Park, Calif., and Skyline Ventures, of Palo Alto, Calif.

However, VentureWire ’s Andersen cautioned that too much cash might hurt the industry in the long run. “One danger, of course, is that people can throw a lot of money at an industry, and you can get a shake-out of sorts”—a development in which there is too much money being directed at too few opportunities.

Andersen cited the optics sector as an example, saying that even though there may be “strong technology” there, “if there’re too many firms throwing money in, as good as the technology is, you don’t need 10 companies doing the same thing.”

And within genomics and bioinformatics? “This industry might not have the capability to absorb much more capital than [what it has already recorded], at least not in good deals,” said Andersen.

“Biotech is a difficult market to invest in,” he said. “A lot of investors who may have jumped into biotech because it seemed like the safer place may start to learn a lesson in investing there.”

“This is particularly relevant because a lot of firms shut down their biotech investment practice over the past couple of years,” Andersen explained. “And now that it’s hot they’re trying to scramble back in, and they don’t necessarily have partners on board who really know the industry—they let them all go.”

He said that Accel Partners, Sequoia Capital, and Mayfield Fund, all in California, are three that come to mind. “They essentially shut down their healthcare investment practice over the past few years, and since then you have these [venture capital] refugees who are coming together and forming new funds right now that are focused exclusively on biotech investing. It’s a good time for that.”

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