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Success in a dynamic VC biotech environment

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Venture capital funding is necessary to drive biotechnology. Without this support, the development of protein-based therapies from recombinant DNA technology and repurposing monoclonal antibodies from basic research may never have been applied to the wide range of human diseases. In the hopes of high rewards, venture capital is willing to fund novel, high-risk ideas, which are also at high risk of failure.

San Diego biotechnology companies have been in a mix of good and bad news. According to Ernst and Young, San Diego finished 2006 in second place for biotech venture capital funding, ahead of the Boston-Cambridge area and behind the four sub-regions of the San Francisco Bay Area. Biotechnology also secured the lead over other sectors in venture capital raised in the first quarter of this year, but this amount was a 40 percent drop compared to last year. So how does a company attract venture capitalists and continue to build its business when times are tough?

Be adaptable, maximize strengths

While it may take 10 to 12 years to bring a drug to market, the venture capital funding environment in biotechnology is very dynamic. New discoveries, technologies and business models are constantly creating an evolution of ideas and excitement. A company must maintain a vision for building value, but flexibility and adaptability are key elements for success.

Phenomix Corp., a San Diego biotechnology company, provides a good example. The company was founded in 2002 based on forward genetics, a technique that was the basis of three Nobel Prize Awards. At that time, venture capital was highly attracted to using genetic technologies to understand human diseases. The forward genetics platform could be partnered with other drug discovery companies, and in turn this could fund Phenomix' own drug discovery and development programs.

Shortly after Phenomix was founded, private equity funds shifted their focus from platform technologies to drug development. In-licensing became a popular strategy for biotechnology companies to enter into drug development. This business model became known as NRDO (no research, development only). While new companies could start up as NRDOs, Phenomix was established based on a specific technology and had to find another way to adapt to survive in this funding environment.

Instead of rebuilding the company, Phenomix figured out how to apply its technology and expertise to leap into drug development. The company took an important aspect of the technology -- the early use of animal models to assess how a drug works or might work -- and crossed it with a medicinal chemistry approach to quickly discover better drugs for human diseases.

Today, Phenomix has two lead programs for treatment of diabetes and hepatitis C virus infection, which combined affect over 25 million people in the United States. Phenomix has secured one of the highest levels of venture capital support in San Diego and thrived in the dynamic funding environment by analyzing the company's strengths and adapting accordingly. The company has focused on high-value therapeutic targets with large commercial opportunities and then worked rapidly to secure intellectual property and invent improved compounds.

Build relationships, communicate regularly

There are many different ways to obtain venture funding. Knowing the investing principles for each venture capital firm is an obvious step, but understanding the trends and directions in venture funding before raising money is essential.

Meet with venture firms prior to formally raising a new round of financing. This approach provides knowledge on the expectations and preferences of the investors. The feedback can be used to design programs, obtain insight into commercial implications and determine the competitive landscape.

Use the time in between rounds of fundraising to build relationships and meet with venture capitalists to receive feedback. After explaining what the company does, follow up with questions, such as: Do you like the story? If we get to the next point in our programs, would you be interested in hearing the story again? Would you invest in the company at point B to get to point C?

A "no" answer to any of the above questions leads to an opportunity to listen and learn. Phenomix asked investors to expand on how the company did not fit their investment strategy. Listening and learning, Phenomix began utilizing its technology platform for drug discovery in the second year, so that drugs were in the pipeline by the next round of fundraising in 2004.

The Phenomix approach may be longer and more time-consuming, but the resultant relationship that is built will help the company and its investors survive difficult periods, such as development hurdles or direction shifts. Regular communication with a company's investors establishes a higher level of trust that the company will handle the issues and deliver on its promises.


Shawver is chief executive officer, and Burnley is executive vice president and chief operating officer at Phenomix Corp. in San Diego.

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