NEW YORK--As the bioinformatics industry booms, more and more start-ups are looking for funding. To stand out from the crowd, new firms need to convince potential investors that they have solid, committed management, a sensible business plan, and a product with decent market potential, according to a number of biotech venture capitalists BioInform spoke with.
Biotech firms need to show plausible strategies for commercialization that have two- or three-year time horizons, said Jeff Clark, general partner at the Aurora Funds in Research Triangle Park, NC. Showing quick commercialization strategies is important because it helps assuage some investors' concerns that the entire biotech field is risky, he noted, although he added that he didn't share that opinion. Aurora has yet to make a bioinformatics-specific investment, but would consider doing so if a good opportunity presented itself, Clark said.
A new firm's management team should have a solid track record at past jobs, according to Tom Laundon, vice-president of the North Carolina Biotechnology Center's Business and Technology Development Program. The center is starting up a $30 million, multipartner investment fund to support new and expanding bioscience companies in the state (see BioInform, November 10). It looks at how the management team presents itself to potential investors and how much time and effort they're willing to put into the business. Laundon observed that investors are especially impressed by executives who are willing to work for little money while building their business. In addition to management expertise, the center also considers the academic and professional experience of the company's researchers and scientists.
Laundon noted that from an investment perspective, bioinformatics companies are appealing because they can generally go public faster than the average biotech firm, since they don't need to deal with the FDA approval process. That's important because going public, which takes the average biotech firm three to seven years, is "where the big bucks are," he explained.
Start-up activity in the biotech industry in general is pretty high, said Kyle Lefkoff, owner of Boulder Ventures, a venture capital firm in Boulder, Colo., that invests in genomics companies in the state. The firm raised its first fund in 1995 and now manages $25 million for institutional and high-net-worth investors. Addressing the question of what makes a biotech start-up a good investment, Lefkoff agreed that an experienced, quality management team is important, but added that having a proprietary technology that solves a problem in the market is also very important to a firm's success. A unique product makes it easier for a firm to carve out a competitive niche, he remarked, observing that investors generally expect their holdings to become liquid within three to five years.
As an example of a firm that appeals to investors, Lefkoff mentioned Genomica, a local bioinformatics software company that recently received $7.5 million in funding from several private investors, including Boulder Ventures. The year-old firm's management team had genomics experience from their work at Cold Spring Harbor Laboratory, he noted, and its product is unique and needed by the industry. The software Genomica is developing stands out because it can maintain information on all aspects of the gene discovery process and can integrate different databases, he said, explaining the product's marketability. Research into the possibility of investing in Genomica was a focus of Boulder Ventures for the last six months, Lefkoff said.
The bioinformatics field will likely mature over about the next three years, predicted Brian Atwood, general partner at Brentwood Partners, Menlo Park, Calif., and be dominated by a small number of large players. Things are different now. "Three or four programmers with a few credit cards between them constitute a company," he joked. Atwood named Human Genome Sciences, Incyte Pharmaceuticals, Millennium Pharmaceuticals, and Sequana Therapeutics as the largest bioinformatics players today, but none of them yet dominates the market, he said.
Venture capitalists like bioinformatics firms because they aren't especially capital-intensive and they have a quick turnaround, Atwood continued. "You don't have to wait 10 years for a drug to come out," he remarked. "You can typically see if you have a real company in a relatively short period of time." Brentwood has looked into three or four bioinformatics firms in the past and is currently reviewing one intensively, but has yet to make an investment in the field. "We're looking for true differentiation," Atwood concluded.