MENLO PARK, Calif.--What do venture capitalists look for in a bioinformatics company? According to Sam Colella, an investor with Institutional Venture Partners (IVP) here, "that's an easy question to answer." Last year, IVP invested in Pangea Systems, a bioinformatics software and services provider in Oakland, Calif., because, Colella said, Pangea had the "differentiating element" he sought in a bioinformatics firm.
IVP currently manages $1 billion of investments in information technology and life sciences companies. The partnership, which seeks out entrepreneurs on the front end of technology waves of innovation, has invested in 250 companies since its founding in 1980. Of $350 million in IVP's newest investment fund, the partners said about 30 percent will be used to fund life sciences businesses.
"There are a ton of people calling themselves bioinformatics companies. But it became our conclusion that these are merely applications companies."
Colella, who sits on Pangea's board of directors, and IVP partner Beckie Robertson recently discussed their investment philosophies with BioInform.
Robertson said there are two types of investments that attract IVP investors: "brave new world" and "faster, better, cheaper" opportunities. She explained, "Faster, better, cheaper opportunities are more abundant. They provide enhanced products or services that fulfill a known need in a higher quality or more cost-efficient manner." By investing in startups in this category, Robertson said IVP is, "investing in the next-generation solution."
In a company producing a faster, better, cheaper product, the business plan and model is clear and management can be recruited easily from model industries, Robertson said. "They're largely execution plays, where a better solution to the same problem has been identified. There may well be some unique intellectual property or unique know-how, but the problem itself is well understood and what you're trying to do is execute effectively against a defined business model."
Businesses built around concepts
Brave new world investments, on the other hand, are those that attempt to capitalize on a new wave that is just beginning to form. Robertson observed, "Brave new world opportunities are very high concept. You're building a business around a great concept, not necessarily a great product. You're often creating a new industry as opposed to selling a new product into an existing market or industry."
These companies are doing something that has not been done before, Robertson explained, "perhaps addressing a problem that has evolved because other solutions in other areas have been provided. Fairly often the problem itself is not understood by the entrepreneur bringing the idea to us. They just know there is a problem that needs to be solved."
Robertson said management is usually difficult to find for these companies. "You don't know precisely what skill sets you're looking for," she observed.
Bioinformatics is a brave new world opportunity that the IVP partners said they discovered by looking at their own investments. Explained Colella, "Among our portfolio companies we were seeing an explosion of data. Right before our eyes we were seeing companies grappling with this immense amount of new information."
Colella said he saw some companies start to create unique software solutions. "IVP portfolio companies like Microcide, Sequana, and Pharmacopeia, with their combinatorial libraries of up to 6 million compounds, were trying to develop solutions internally because they couldn't find external solutions," he said. "The light bulb went on and we said wait a minute guys, we're not software people and there's got to be a solution out there."
When IVP failed to find a company that could provide a solution, the investors decided to start their own. IVP backed a pair of entrepreneurs in San Diego to come up with an answer. Then, he said, he discovered Pangea.
"The Pangea folks had developed the LifeSeq product for Incyte. They were just a contract software group. We said, you're our answer," Colella recalled. IVP folded the technology developed so far by its own startup into Pangea. "It was like we acquired our little startup," he said.
In February 1997, Pangea closed its first venture round of $10 million from IVP, the Mayfield Fund, and Kleiner, Perkins, Caufield, and Byers's Java Fund.
Asked what he saw when researching bioinformatics firms, Colella said, "There are a ton of people calling themselves bioinformatics companies. During our due diligence I think we listed over 60 companies that were calling themselves informatics companies. But it became our conclusion that these companies are merely applications companies."
Colella said he saw no one but Pangea actually integrating data, taking a conventional software technology approach and applying enterprise software to the biology, genomics, and chemistry world. "We wanted to buy a company that could work with all the third-party algorithm guys or the universities or all the myriad people developing all these applications."
"Pangea is really a company that can manage databases. We have some content, but we can work with Incyte's, Perkin Elmer's, or Affymetrix's content and public content, and we provide a system of integration analysis as well as navigation tools that allow you to get around the database and, on top of that, be able to work with applications."
"We are really the integrator. We're the company that's going to allow people to warehouse, mine, analyze, and store their data. There is absolutely nobody else who can do this. We're starting to book the orders after the pharmas and biotechs have looked around and figured out we're the only ones who can do that."
Colella said Pangea has just kicked off a mezzanine financing round, having been advised that the company get a couple more quarters under its belt. "We're only shipping three products now. We'd like to expand the pipeline before we go public," he said.