Tuesday, February 17, 1998
A bumper crop of venture capital fundraising, coupled with burgeoning numbers of opportunities in science and technology, is promising to result in a perhaps unprecedented spate of biotech start-ups in the next few years.
Europe's budding biotech entrepreneurs in particular have never had it so good. While biotech stocks on the London Stock Exchange have taken a drubbing from investors, the availability and willingness of European private equity to finance new ideas and turn them into biotech businesses has never been greater. Hardly a month went by in the past year without the unveiling of another biotech fund to tap into the rich seam of European potential.
But the phenomenon spans both sides of the Atlantic. The most recent illustration is a U.S. fund being raised by Sofinnova Inc., which expects to raise $60-$80 million in the next few weeks. At the same time, the firm's French arm, Sofinnova Partners, is hoping to raise a $100 million French fund sometime in March or April, with life science investment expected to get about half of the take.
But while some of the new money is in the hands of veteran biotech investors, the sector has attracted less seasoned players who may find it more difficult to evaluate the proposals before them. This raises the specter of increased pressure on deal valuations, as well as on the quality, if too much money in inexperienced hands ends up chasing too few companies and too little management talent.
There also is potential for a glut of IPOs three to five years down the road, a problem that could be exacerbated if last year's tepid IPO market continues into this year.
The potential imbalance between venture companies and IPOs is illustrated by the financing numbers for 1997. Last year, companies raised about $1.1 billion from venture funds, while IPOs contributed some $913 million.
All of these issues are particularly pertinent to Europe, where the number of companies and the pool of seasoned management is far shallower than in the U.S.
Valuations and quality
In a free market, no individual VC can control the quality and pricing of deals. Thus if the increased availability of funds puts pressure on valuations, the alternatives are to succumb or pass on deals that are too rich.
Some evidence of this pressure already can be seen in Europe. "The first wave of successes in biotech IPOs in London and on the NASDAQ has created an even stronger pull for entrepreneurs, brokers, banks to the sector," said Rob Zegelaar, partner at Atlas Venture in Amsterdam.
"High yields have attracted late stage players to earlier phases in what is for them unknown territory," he said. "They use discounted cash flow models on companies that are hardly in preclinicals and this often results in over-valued companies. At the same time, new early stage players are very often tempted to accept high valuations in order to build market share."