Biotechs, VCs need to get real, says UK venture capitalist

Both biotechnology companies and venture capitalists need to be more realistic about the opportunities and outcomes available to them, a British venture capitalist told a Melbourne forum yesterday.

And the lack of merger and acquisition (M&A) activity, particularly among smaller companies, was "completely crackers," said Dr Sue Foden, from UK venture fund Merlin Biosciences.

Foden provided a glimpse last night of the difficulties that have beset venture capital funds during the downturn in the market over the last couple of years, and highlighted the need for companies to consider M&A, noting that the number of new companies was far higher than the number of companies able to obtain later rounds of funding.

"I can only assume a lot of companies will go to the wall or have to consolidate," Foden said.

According to Foden, the collapse of the biotechnology capital markets since she joined Merlin three years ago has substantially changed VC attitudes. In addition to financial considerations, she noted that decreased VC morale was a neglected consequence of the downturn in the markets.

"The question is how to make money with few or no exits and falling valuations," she said. "There is pressure on VCs to make good returns to their funds."

As a result, Foden said, already conservative VCs were becoming even more risk-averse. And there was a growing gap between seed funding, which was relatively easy to obtain and later rounds of funding.

"People look at numbers rather than at the vision, which is a shame," she said. "Investments are made to protect the downsides, rather than maximise the upsides."

Foden said there were many reasons why M&A did not take place, including differences of mindset and clashes of egos, priorities of the shareholder base, dysfunctional boards, lack of management incentives to consider M&A, and insufficient critical evaluation of programs.

Companies should also strive to have a functional board, preferably with a strong and independent chairman, that could evaluate opportunities appropriately, Foden said. Management incentives rewarding M&A activity in addition to financial milestones like listing the company would also be appropriate, and would have the added benefit of releasing experienced management personnel to circulate around the industry.

She also criticised the trend for universities to spin out companies rather than consider licensing their technologies to existing companies. Last year for example, she said 248 companies were spun out of UK universities.

"There does come a point when you ask how many biotechnology companies the market can support," Foden said. "It's not to say that you shouldn't set up companies, you just have to have realism."