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Number of Resident Biotech Entrepreneurs, Not Tax Breaks, Influences Flow of VC Cash

BOSTON – The greater the number of biotech professionals who live in an area, and not the kinds of tax breaks that area promises, can help biotech companies in that area receive private equity investment, a panel of venture capitalists agreed at the 2007 Biotechnology Industry Organization’s International Convention, held here last week.
“Ultimately, I don’t think a tax incentive is going to lead to the creation of great companies,” Camille Samuels, a managing director at Versant Ventures who specializes in biotech investing, said during the panel discussion, entitled “Mining for Gold: Top Biotech Venture Capital Markets.” She said that tax incentives, which she calls “a waste of money,” lead to “adverse selection.”
Art Pappas, managing partner with A.M. Pappas and Associates, based at North Carolina’s Research Triangle Park, said his firm invests in areas where it believes large numbers of startups can be created through spinoffs from universities, institutes, and life sciences giants. Indianapolis, he noted, has drawn GlaxoSmithKline and Eli Lilly, among other pharma companies.
“Those areas are the ones that might have a chance of creating … I wouldn’t call it a cluster, but certainly some business opportunities to allow the entrepreneur of a corporation to get to a point where he can be successful in whatever way he defines success, whether it’s by a sale or an IPO or further expansion in the market to be able to draw back in additional CEOs,” Pappas said.
Among overseas bio regions, he said, Ireland has generated critical mass of activity while Singapore has recruited top talent for its Biopolis cluster.
Michael Lytton, a general partner with Oxford Bioscience Partners in Boston, said his firm has turned down funding from sources that require a startup to be based in a specific geographic area. “Frankly, we were apprehensive that that would push us to do deals we would otherwise not do.”
Samuels said Versant, which has California offices in Menlo Park, Newport Beach, and San Francisco, invests in a couple of spinoffs from San Diego’s Scripps Research Institute, where the firm has found researchers have much latitude with startup ventures. California Institute of Technology and Massachusetts Institute of Technology, she said, have also shown experience dealing with entrepreneurial startups by faculty members and are easy for VCs like herself to deal with.
“That sort of a relationship makes it much easier to take technology out of the area, and the faculty out of there ends up being serial entrepreneurs [who] create more and more entrepreneurship,” Samuels said.
“I think the entrepreneurs and executives are what drive these regions, not the tax situation,” she added. “If you’re going to try and create a [biotech] region, then learn the entrepreneurs. And then wait. Because it will take a long time for that region to develop.”
It might take longer than many states expect, according to Pappas. “A lot of states [competing for venture capital] compare themselves not just to what’s happening in Boston or California; they do look at North Carolina,” he said during the panel discussion. These states “have a tendency to forget that Research Triangle Park is a 30-year endeavor. It has helped build a lot of infrastructure, but we’re still on the low end of the growth curve.
“We found [that RTP] is not the right place to do solid regional investing,” he said. “We have an emerging entrepreneurial area developing in North Carolina, which in our view doesn’t have the unique CEOs that you have in California or Boston or other sectors. We’re getting there but it’s still taking some time to get there.”
Historically, Pappas’ firm has awarded one-third of its capital to companies in the Northeast and one third on the West Coast, leaving the remaining third for university-driven regions in the Southeast, Midwest and Mid-Atlantic that he said are emerging yet underserved. Among those areas is Indiana, where expansion by pharmas in recent years has generated new spin-off companies; and Florida, where state and local governments have set aside close to $1 billion since 2003 to attract Scripps Research Institute and private companies in hopes of creating a biotech cluster.
Michael Lytton, a general partner with Oxford Bioscience Partners in Boston, said his firm’s home base offered a key advantage given the metro area’s high concentration of talent, academic institutions, and research facilities. CEOs who do fail, he said, can find their next company more easily in established versus emerging biotech meccas.
“We are very happy to be here because our customers are here,” Lytton said. “It’s really important to our business, because we need to know in biotech what the customer is interested in, what targets they’re interested in, what their goals [are] to spend money on in terms of collaborative research, what they plan to do three to four years from now.”
Venture Divide
Over the past 12 months, northern California was the top biotech region both in the number of dollars invested by VC shops and the number of deals, followed by New England and southern California, according to the quarterly MoneyTree Reports issued by PricewaterhouseCoopers and the National Venture Capital Association (NVCA). [See sidebar and accompanying chart.]

“I think the entrepreneurs and executives are what drive these regions, not the tax situation.”

VC spending in New England companies slipped over the past year – to $221.11 million in the first quarter of this year from $309.878 million in the first quarter of 2006, though the number of deals remained the same, according to MoneyTree.
Panelists were not worried. “The fact [is] you have great co-investors here so syndicating a deal is never a problem; you have an immense pool of talent at executive levels, [so] I’m not worried at all about the biotech industry here,” Lytton said.
“As a California venture capitalist, pharma’s investment in Boston makes me nervous,” Samuels added.
According to MoneyTree, between 1998 and 2006 the share of VC investments in life sciences companies – a category that includes biotechs, health care-service providers, and medical-device makers – jumped to 28 percent from 17 percent. Life sciences investments by all VC firms in the US accounted for 39 percent of the venture capital awarded during the first three months of this year.
Risk differs greatly among these companies. Versant, for example, said its preferred size, or “sweet spot,” participation over the life of a company is between $12 million and $15 million. By comparison, Oxford Bioscience prefers between $10 million and $12 million, and A.M. Pappas favors between $8 million and $10 million.

Four-quarter trend
Biotech Venture Capital Awards
Second Quarter 2006 through First Quarter 2007
Investment # ($ millions)
of Deals
Northern California
Southern California
Philadelphia region
New York
D.C. Metro
SOURCE: MoneyTree Report, Q1 2007, PricewaterhouseCoopers and National Venture Capital Association with data by Thomson Financial.
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