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Innovative Technology Attracts Investments, But Not Innovative Capital Structures, VC Says


“We like innovative technology, but not innovative capital structures,” Michael Lytton, general manager of Oxford Bioscience Partners, says when giving advice to early-stage companies seeking growth capital from venture capitalists.

Lytton recently spoke at Chips to Hits, a key microarray industry conference and his advice was targeted to those who are seeking funding for early-stage companies that engage in drug discovery.

His advice finds eager ears in the microarray sector because venture capital investment is a growth catalyst and one way — not necessarily the only way — for an enterprise to gain the fuel it needs for growth, and Oxford Biosciences is one of the big league players in venture capital. The Boston-based private equity firm manages nearly $1 billion of its own capital, investing in some 94 companies since 1994, at an average of $4.1 million each time it opens its wallet. Its successes range from companies like Arena Pharmaceuticals, Exelixis and Orchid Biosciences, with IPOs in 2000, to the bankrupt MedContrax and Collegiate Health Care. Its latest fund-raising, in 2001, collected over $400 million and was oversubscribed.

The firm is not sitting out the current economic downturn, having cleared at least a one investment a month since August, including an October $475,000 follow-on investment in MicroMed Technology, a Houston company that manufactures a ventricular assist device and has absorbed some $63 million in venture capital since 1996. Michael DeBakey, the famed Baylor heart surgeon, helped design this device, which is in clinical trials and is being considered as an alternative to heart transplants.

Oxford has announced that the next funds it raises, however, will be smaller as early-stage valuations are smaller. Lytton said Oxford looks at how much a company might be worth before it takes its next round of financing, and how many rounds it will take before an exit such as an IPO or a sale to another company. Forget about how much similar companies are worth, he said. “We don't look at comparable,” he said. “Comparables are what set off the tulip bulb craze.”

This attitude is a clear reflection of economic times when some venture capital firms, who either have to invest the money on which they collect management fees or give it back, simply return it.

Those that remain in the game set the bar higher for the companies with which they will establish relationships of the investment kind.

“We have to have a product that has multiple shots on goal,” Lytton told an audience at last month's Chips to Hits conference in Philadelphia. “We don't want to fund clinical trials.” Tools companies should have a business model that escapes the problem of commoditization and obsolescence.

The firm diligently inspects management, pay scales, individual investors and equity arrangements, boards of directors, intellectual property, and partnerships, according to Lytton. “We avoid situations where there is a brother-in-law,” he said. That's undocumented commitments to co-founders.

The companies that Oxford invests in have done one or two corporate partnering deals. “We have to assume that our companies are going to start with a pilot deal,” he said. “It's not going to be enough to fund a technology platform to commercialization.”

When assessing a corporate partnering deal, Lytton said the firm first looks at how the deal can be unraveled.

“Don't invest in a hypothesis,” he said.Management of a firm is critical.

“Good management will win with a B technology, but poor management will absolutely not win with an A technology,” he said.


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