VC's biotech interest hits new heights

Venture capitalists complain they are finding it ever-tougher to coax fresh funds from investors. Yet paradoxically, the total Australian pool of life science risk capital stands at record levels.

Roughly $500 million appears to be committed or available in current investment funds drawn from institutional and private equity. That doesn't include the $40 million available in grants under the Federal Government's Biotech Innovation Fund, which are leveraged by the venture capital industry.

Those sums are spread over multi-year periods (up to 10 years in the case of most managed funds) and do not represent an annual amount.

And the figure is rubbery because of the Australian Venture Capital Association's 47 members - who collectively have $6 billion under management - few focus squarely on life science and healthcare.

The handful of pure biotech funds, led by Rothschild Bioscience, BioTech Capital and Start-Up Australia, have funds totalling $150 million to $200 million either committed or available.

Another group, which includes CM Capital Investments, Nanyang Ventures and Starfish Ventures, make 25 per cent to 50 per cent of their funding available for life science and health care opportunities. That adds about $140 million to the total, or will once CM Capital and Starfish close two new funds. Each of the new vehicles will hold about $100 million, of which it is anticipated that 50 per cent will be oriented toward biotechnology.

A majority of the remaining AVCAL members cite life science or healthcare as a preferred sector, but in many cases that is more an advertisement than an indication they are committing a serious percentage of their funds to the industry.

That doesn't apply to some of the large diversified players, like JB Were Private Equity, which has put about $10 million into drug discovery company Cerylid Biosciences.

Adding up

At a guesstimate, adding up the contributions from similar players on the venture capital industry's A-list tacks a further $50 million on the total.

Then there are the smaller biotech-oriented fund management companies tapped into private equity rather than institutional investors. They are not members of AVCAL and collectively could contribute another $30 million. Melbourne's Momentum Investment Group, which has pointed some of its $30 million Innovation Investment Fund at biotechs, is one example.

Another is pooled development fund manager Brandon Capital, which has $5.5 million under management and is tying off a further fund of $10-15 million, says executive director David Fisher.

Brandon Capital is purely in biotech and healthcare and draws its capital from private investors rather than institutions. Typically, they are high net worth individuals looking to invest somewhere between $50,000 and $500,000.

A final component comes from companies like TSL Group Ltd, a specialist commercial advisory service provider that helps life science companies raise capital directly. It has raised $40 million in the last three years and "is on the cusp of another $40 million," says managing director Ross Dobinson.

'Unbelievably hard'

But even for a venture capital industry accustomed to the hard work of winning over skittish investors, Dobinson says it is proving "unbelievably hard" to raise funds in the current environment.

Investors are looking for "tremendous returns, no risk and an exit in a short time frame."

Says TSL principal Dr Shirley Lanning, "there is a real difficulty in getting them to understand what biotech is about and how it works."

One hurdle is the long time frame needed to realise returns from biotech investments and the fact they are often packaged as capital appreciation rather than dividends.

On the other side of the equation, however, there is an increasing awareness among biotech researchers of the role that venture capital can play as they seek to turn IP into a commercial business.

There is more appreciation of the dangers precipitated by a rush towards an initial public offering by one-product start-ups and of the business management value that a good venture capital partner can provide.

They are better off to have a round or two of venture finance to get the management right before approaching the investment market via a share market float, says Brandon Capital's Fisher.

Michael Panaccio, an investment principal in the biotech sector for Starfish Ventures, believes that if Australian biotech industry is to be sustainable it still needs more VC players.

"In my view, there is room for another one or two players of our size," he says. "Biotechs need more addresses to go to."

Start-Up Australia investment manager Shane Storey says the biotech research community has become much more savvy about the risks, rewards and demands of spin-off opportunities.

Corporate aware

"They are now quite acutely corporate-aware," he says. They are also becoming better at articulating the competitive advantage of their research when approaching venture capital sources.

An increasingly large proportion of Start-Up's business is being geared toward the seed stage because that is where it is seeing demand, according to Storey.

Overall, better quality deals are emerging from the pre-filtering process that the commercial arms of research institutes conduct. But negotiations are correspondingly tougher and the biotech venture capital industry is becoming more competitive, he says.

Mike Hirshorn, chief executive of Nanyang's St George Innovation Fund, says the growth of the commercial arms is making life easier for fund managers.

"They help the researchers get their work into a condition where we can invest by making sure issues such as business plans and IP protection have already been addressed."

However one of the biggest weaknesses among entrepreneurs in general also holds true for biotech researchers, Hirshorn says. "They don't really understand the market they are aiming for and who their customers are."