Two years ago, or even last year, talking to the venture capital community about biotech was an exercise in depression. The litany of disillusionment was long: therapeutics took too long to develop; they cost too much to develop; there was no viable business model; there was no way to get an adequate return on investment; other technology areas promised greater returns in less time.

While the mood may not have become more ebullient, it is different. So while a number of VCs are still shying away from biotech, other name firms are refining their investment models, putting more money into portfolio companies, and rethinking their roles as the provider of first choice for early-stage companies.

The VC retreat also has created a role for the "angel" investor in creating a flow of start-ups that may yet be attractive to the established venture community.

While good numbers are hard to come by, Alan Walton of Oxford Bioscience Partners estimates that total venture investing in biotech this year will be about $400 million, part of a long downward trend. He attributes part of the falloff this year to the venture community's focus on the Internet. In addition, many VCs have been out raising funds, which means they may be paying less attention to investing.

Year-to-date, BioCentury has tracked $647 million in funding for non-public companies (versus a total of $380 million in 1995). The $247 million difference between BioCentury and Walton's numbers presumably has been filled by individual angels and non-VC institutional investors.

Whatever the reasons, the bottom line is a better funding environment for young companies than has existed for some time.

Portfolio companies benefit

Arthur Klausner of Domain Associates noted that his firm has had to support its companies for longer with less help from the rest of the venture community, leaving less money left over for new investments.

That may end up being a good thing, he said, as this time around Domain has put a lot of money into the companies it favors. "If you think a company is going to be a winner, you want to put a lot of money to work," he said. "It's good to be a large shareholder in a company you like. If you're going to put in the time and effort, you want the leverage."

David Leathers of Abingworth Management Ltd. sees the same advantage. "The reduced venture deal flow suits us," he said. "We can put more money into deals we like because the big players aren't there."

The smaller pool of venture investors also means that Domain has had to look at startups with a more critical eye to judge whether they will be able to attract support from other VCs and from corporate partners.

Nevertheless, all VC money has to be put to work, which translates into more money per company. For example, Domain's first fund in 1986 raised $41 million and invested in 23 companies. The firm's 1995 fund raised $125 million and also will invest in 20-25 companies. More money doesn't necessarily translate into more companies, Klausner noted, in part because the general partners can pay close attention to a finite number of companies.