Monday, March 5, 2001
While hot life science technologies come and go, VCs are reminding themselves that patience, combined with fundamental investment strategies like targeting big markets, sound management and a solid business plan never go out of style. That was the takeaway message from a venture capital panel at the Lehman Brothers' Healthcare 2001 conference in Orlando, Fla., last week. The panel also offered up opinions on where the hot spaces are, and how they are coaching their portfolio companies to deal with the turbulent public market.
The group - Farah Champsi of Alta Partners; Jonathan Leff of Warburg Pincus; Thomas Liston of Humana Ventures; Barbara Lubash of Versant Ventures; and Michael Meyers of Global Bio Medical Partners - all had a bent towards product companies.
Most of the panelists underscored the need to have a product company that addresses big markets. Lubash said most companies turned down by her fund "fail on the market size test." Versant looks for $1 billion market potential for drugs and $500 million for devices.
While the days of the quick buck may be gone for the moment, Lubash predicted exits will appear and returns will remain robust for life science VCs. "Invest early in companies with stable business plans and you will be able to exit if you're patient and manage cash carefully," she said.
"In this market we're telling our companies to focus on the most attractive net present value programs," added Meyers. "We want them to take a rational and commercial view of R&D programs."
Meyers predicted that valuations for private companies will continue to come down, as buysiders go back to "looking at revenues, EBITDA (earnings before interest, taxes, depreciation and amortization) and balance sheets to value companies. Valuations will regress to historical means," he said.
Leff also is cautious not to do too much benchmarking of private companies using public valuations because "whatever is hot today, won't be five, six and 10 years from now." On average, he said, Warburg holds onto a portfolio company for six years.
The group hasn't entirely walked away from toolkit stories. While maintaining that Alta is biased towards products, Champsi is keeping an eye out for post-genomic platform companies that have validated their approach through multiple partnerships. Companies determining the structure and function of proteins, high density microarray companies and bioinformatics plays should have modest success in raising private capital, she said.
Still, Champsi's current pick is a product play - Cytokinetics, which is developing drugs that interact with the cytoskeleton.
Leff likes small molecule compound builder Sunesis, and protein drug developer ZymoGenetics, which he said are well positioned to deliver products in the "aftermath of the genomics revolution."
On the IPO front, panelists agreed that companies need to understand whether they are mature enough to make the move into the public space. They also agreed that an IPO event should be looked at as part of a company's financing strategy, not as an exit. "Companies really should be asking themselves, how does this financing strategy overlay with the company's cash flow needs?" said Leff. "Can you raise enough money to sustain your business for several years and do so at a decent valuation?'"
Rachel Leheny and her biotech team at Lehman told the conference that the biotech markets remain slightly overvalued, but that the