When times are bad, fingerpointing can be a comforting exercise. In today's bear market, we get the sense that there are some hard feelings and frustration directed from institutional investors to the venture community. The latter continue to do well - and the fact that they continue to raise new venture funds indicates they see a rosy future for their returns. Meanwhile, institutional investors have watched their $12 IPOs and $20 or $30 secondaries plummet to $3 or $4 or $5.

While it's easy to accuse the venture community of bumping up valuations so that public market investors can't make a return, we've pointed out in other contexts that nobody holds a gun to investors' heads and forces them to put their money into a stock. If they didn't like the starting prices they shouldn't have gotten in, and if their stocks had a good run, they should have gotten out.

But bull and bear markets aside, there are some new perceptions this time around that are worth thinking about, namely that the public markets really have been asked to engage in venture investing.

That has two implications. Most obvious is that public offerings should be done at venture-type prices offering the potential for venture-type returns.

Less clear is the question of whether there should be more interaction between early- and late-stage investors, based on the notion that they're all in it together as venture investors and that more dialog would help ensure a smooth flow of funds by making it easier for people to make money every step of the way.

The irony

The problem, of course, is that developing these companies has taken longer than anyone ever thought, making biotech a unique endeavor compared to almost any other sector. Ironically, the biggest risks seem to come in the middle of the development process, when funding is in the hands of the public markets.

"My notion is that up to this point, the part of the development process of a drug that's been more difficult and more expensive is clinical development," said Jeff Wiggins of Rosenberg Capital Management. "By then, VCs tend to be out of it, so people like me have been given the short end of the stick. VCs have taken too much of the value and that's not going to happen any more."

Wiggins goes so far as to wonder whether the returns on investment in the industry as a whole even justify investing in biotech. He estimates that the money lost in biotech to this point by public investors is probably greater than has been made by VCs. "That brings into question whether these companies should be started at all," he said.

He emphasized that he wasn't accusing the venture community of pulling the wool over investors' eyes. Rather, everyone has simply been wrong about how much it costs and the probability of success.

The question is, how can biotech investing be made worthwhile? Is it simply a question of lowering valuations to the point where there's a greater likelihood of prices going up than down? Or, if both private and public investors are engaged in the same venture endeavor, does there need to be more of a partnership between early- and later-stage investors?