Biotech startups find venture capital hard to come by

At a recent meeting of Washington biotech executives and scientists, an entrepreneur addressed the gathering and lamented a local "valley of death" -- a reference to the difficulty that scientists have in finding money to take their ideas from the laboratory to the marketplace.

His concern was not new, but it pointed to a hole in the state's biotech community. Biotech startups, which are heavily capital dependent, need venture capital firms -- with their connections and big pocketbooks -- to finance research and ultimately get products to market.

But in Washington state, only a handful of biotech companies get early-stage venture capital funds each year, according to the quarterly MoneyTree Report, which tracks venture capital investments. So far this year, only three Washington biotech companies have received early-stage money.

Local entrepreneurs say it's difficult to raise money because there are only a few venture capital firms with Seattle-area offices that finance biotech startups. But venture capitalists say the shortage is related to a broader problem. As the cost of developing and bringing drugs to market has increased, venture capital firms have had to become more selective when deciding what ideas to finance.

"It is increasingly difficult to get money because it's been increasingly difficult for the venture capitalists to make money themselves," said Alan Frazier, the founder and managing partner of Frazier Healthcare Ventures. "Why go through all that work if your IPO is difficult and not particularly successful?"

The paucity of early-stage venture capital is significant enough that the Washington Biotechnology and Biomedical Association has recently stepped up its efforts to help researchers and entrepreneurs raise money.

Over the past four years, the association has held a conference called Invest Northwest, which brings together investors and scientists. Those events have been somewhat successful, according to WBBA President Jack Faris.

Other ideas are now in the works. The WBBA is looking to hire somebody who will help researchers and entrepreneurs raise money. And the group is also talking to the state's pension fund to see if it can invest more of its resources locally.

"We do not have as many companies as some ... other regions," said Faris, who added that the group's "No. 1 organizational priority" is to create more companies. "It's not just important to the WBBA but for the whole region."

Entrepreneurs such as Thomas Ranken, the former CEO of VizX Labs, argue that a healthy biotech community needs to generate many young, venture capital-backed companies in order to make up for companies that fail.

Ranken, who has tracked the number of local venture capital-backed businesses in the area for the past seven years, said that a company could do "everything right" -- business and science-wise -- and, in the end, "the science just plain doesn't work."

"You need 24 companies to be started to get one or two that have developed a product and have become profitable," he said.

Ranken said angel investors financed VizX Labs, which is developing software to help scientists analyze collections of genes, when he started it in 2000. He said it was difficult to raise money since he had to repeatedly call potential investors to get individual checks, rather than get one larger sum from a team of venture capital companies.

But Robert Nelsen, the co-founder and managing director of Arch Venture Partners, which has an office in Seattle, said the state's lack of new venture capital-backed biotech firms isn't necessarily a problem.

"What's the goal?" he asked. "To me the goal is to get successful, large companies that make people lots of money and employ lots of people. And create lots of cures for disease.

"The goal is not a hundred mediocre companies that can never go to market and go under. And the goal is not to subsidize local entrepreneurs or anything like that. The goal is to make the best possible companies we can."

He said that the companies that have gotten funds in recent years -- startups such as Spaltudaq Corp., Alder Biopharmaceuticals and VLST Corp. -- had a higher probability of success.

Indeed, one of the firms that has received early-stage venture capital funding this year -- Calistoga Pharmaceuticals -- licensed potentially leukemia-fighting compounds from Seattle's Icos Corp. (which was purchased by Eli Lilly & Co. earlier this year). Icos already had spent five years researching the compounds.

Michael Gallatin, a venture partner at Frazier Healthcare Partners and the president of Calistoga, said that Calistoga had been able to get funding because its compounds were at a "sweet spot" -- a "fair amount of risk had been taken out" for the venture capital firms since the compounds already had been researched, but since the compounds had not yet entered clinical trials there was not so little risk "that it was going to cost you a fortune."

Seredigm Corp., another firm that landed some early-stage funding this year, according to the MoneyTree Report, had a product at a much earlier stage of development, which could potentially prevent or reduce inflammatory responses after heart attacks or strokes. It was backed by the Accelerator Corp., a Seattle investment firm that finances concepts that venture capital firms might otherwise shun as too risky.

Since venture capital firms look not only for good science but also good management, Accelerator allows young businesses to develop their ideas in its South Lake Union facility and, in turn, takes care of the business side.

Over the past four years, Accelerator has financed six businesses, according to Carl Weissman, Accelerator's CEO, who is also a venture partner at OVP Venture Partners, which has offices in Seattle and Portland.

He said that the Accelerator alleviates "some of the venture capital's risk by taking over the management piece and more efficiently expending the capital and by letting it be known that we are going to invest at modest and fair valuations but bring more to the table to give a greater chance at success."

But Weissman emphasized that Accelerator had been able to fund every concept it was interested in.

"I don't see any VCs saying anything like, 'Wow, we just aren't able to put our money to work,' " he said. "The things that they feel are fundable they're funding."

He said that it was possible, however, that there were fewer "great technologies emerging from academic institutions" in the state and therefore fewer new companies.

"While the Hutch (Fred Hutchinson Cancer Research Center) and the other great institutions in Seattle are really truly world class institutions, they're not Harvard and not Stanford and not MIT and UC-Berkeley," Weissman said. "The places where (there are) more seed deals are places where there are more venture capital companies and more money. The reason that the venture capital companies are there is that there are more great technologies emerging from academic institutions."

Gregory Sessler, chief financial officer of Redmond-based Spiration Inc., which is developing a device to treat emphysema, offered the "valley of death" reference at the conference.

In an interview, Sessler said that if there were more venture capital companies around or initiatives like the Accelerator, it would be easier to raise funds and, therefore, more companies.

"While there is some venture capital money locally, most of it is in California," Sessler said. He said that since early-stage companies need "a lot of attention," venture capital firms want to have offices close to the firms they fund. "There are a lot of doors in California, so you go to where the money is."

Spiration has raised $76 million -- all from out of state, he said.

"Where do you start? (With) the scientists with the idea or (with) the money?" Sessler asked. "If there was money you know there (would) be more ideas that would turn into companies."