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Q&A: Life Sciences VC Talks about Raising Capital During the Downturn

NEW YORK, May 11 - The Aurora Funds, a Research Triangle Park, NC-based venture capital firm, announced last week that it was hiring Douglas Gooding, a business development executive from Paradigm Genetics, as its new life sciences associate.

Gooding, who also completed a stint at Incyte, said he decided to make the switch in order to have a hand in many different technologies. Aurora’s life science fund certainly does that. The $52 million fund invests in biotechnology, healthcare IT, medical devices, genomics, drug discovery, and other platform-based life science companies, and has made investments in companies such as Xanthon, Cogent Neuroscience, and Norak Biosciences.

GenomeWeb recently talked with Gooding about venture capital trends in genomics, as well as what genomics companies should do to survive in this tough economic climate.

GW: You’re jumping into the VC arena in a pretty tough economic time. What do you see as the prospects for funding of emerging life sciences companies?

GOODING: Although the overall dollars invested in life sciences and in venture capital has decreased significantly this quarter, life sciences from a venture capital perspective is not doing that poorly in the short term. Relative to dot coms and IT, where we’re seeing down rounds (decreases in the valuation of a company from one round of financing to the next) or people not getting money at all, it’s not as hard to raise money now. But there is less willingness to fund new companies or enter into other people’s deals. Funds like ours are holding on to their dry powder to support our portfolio companies by funding them while the capital market is down. 

GW: So it seems like small, early stage private companies can survive the downturn if they have a VC backer that is committed to take them through or to eventually take them public. What about companies that have already gone public?

GOODING: From October ’99 to the crash in March, there were quite a few follow-on offerings and a substantial amount was raised. But some companies missed out. You can see it now that there are the cash haves and cash have-nots. For more cash-strapped companies that don’t have access to capital markets, you can now see potential mergers. A lot of [genomics] toolbox companies running low on cash could be attractive acquisition targets for companies utilizing these technologies from a pharmaceutical discovery aspect, from mid-tier biotech companies looking for novel discovery methods to large pharmaceutical companies.

GW: When you talk about already public cash “have nots,” Hyseq comes to mind. With this company down to their last few million in financing, what do you think their funding prospects are?

GOODING: Their options are going to be somewhat limited, but there’s probably a good opportunity for companies interested in their technology to come in with an acquisition.

GW: As genomics companies have been reporting their first-quarter revenues, most seem to have grown, at least from a revenue standpoint. But most of the companies have also said they aren’t going to be profitable in the near-term. Are investors going to hang in with these companies or do the companies need to start working toward a faster profitability track?

GOODING: The momentum investors seem to have fled, but the investors committed to the industry will probably stay and give the companies the benefit of the doubt.  In the past, with companies saying, ‘just wait and see, we’re going to be profitable,’ a lot of people got burned. A lot of companies’ prospects for profitability have gone down. But it’s a double-edged sword just to strive for profitability. Incyte, for example, was profitable, then they had to take a step back and invest more in R&D to ensure growth. We prefer big growth and prospects down the line.

GW: What kind of growth?

GOODING: With early stage genomics companies, they can’t just rely on revenues coming in from partnership deals. They have to develop growth opportunities with internal discovery and development programs. This is where models are really moving. It’s not just about information any more, it’s about utilizing the data internally to develop products, and partnering in areas that are not core to the company.  This allows a company to really maximize the value of their data and/or technology.

GW: So are you saying a company like Incyte or Celera, which derives its revenue from subscriptions to information, does not have a viable business model?

GOODING:  We are seeing so much information out there that the industry is really awash in it. It’s not enough to generate reams and reams of data, without the ability to utilize it. The information is somewhat commoditized, and sole information companies are somewhat limited. Over time the margins companies derive from partnerships [such as database subscriptions] are decreasing as more and more people get the information. You can’t get the money you got in the early days. In the case of Celera and Incyte you are seeing them now looking to move towards utilizing their own data to develop products themselves. It is a natural progression for these companies similar to what Millenium, Myriad, and HGSI, for example, have done.

GW: You’ve been in North Carolina now for some time. Besides Paradigm Genetics, how do you see the Research Triangle Park area fitting into the post-genomic life sciences industry?

GOODING: This area is really a hotbed of discovery due to the combination of a strong entrepreneurial spirit and the world-class science being done at the universities in this area. You are also seeing a real push in bioinformatics and proteomics in this area, best exemplified by the University of North Carolina’s very large investment in developing a cutting-edge proteomics research facility and the newly-established North Carolina State University Bioinformatics Research Center. There are also companies like Cogent Neurosciences, which is looking for specific gene function in neurological disorders, and Paradigm. Then there are the tool companies like Xanthon, which is developing an electrochemical DNA, RNA, and protein detection and analysis system.

GW: What would your advice be to a startup in your area that wants to raise funds and move its idea forward?

GOODING: I would really focus on applying together the three legs of the investment stool, the technology, the management, and large, high-growth markets. Entrepreneurs need to realize that the technology part is only one part of the puzzle. The management team is most critical for early stage companies. I’d rather fund a B idea with A people than an A idea with B people.

But you do need an idea, and you need a business plan for executing your idea. There are large markets and [you need a] real commercial strategy of how can you attack those markets. A lot of business plans just throw out buzzwords such as ‘proteomics,’ but  rarely can you say ‘in the proteomics market’ when you have a tool that targets a small portion of that market. You have to understand how the market is divided and how you fit in.

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