Last week I talked to the CEO of a small, innovative startup pharma development company; he had some interesting facts to relate. Specifically, he told me about the latest one-to-one meeting series he had.
It is always the same time-honored thing with such events: you pay a lump sum, in return for a guarantee that the organizer will broker X time slots for private talks with potential customers or investors; with each one you probably have ten minutes to make your pitch. Normally this is a pretty one-sided business: you strive to make yourself unforgettable; your counterpart will decide, by coming back to you (or not), whether you really stand out.
Not so with the meeting series. The CEO was looking for additional venture capital, and several VCs who agreed to see him had actually expressed considerable interest in this small startup. After the third meeting this afternoon, it was clear to him that he didn’t need to make a pitch. What he needed to do was ask, “Do you have any liquid funds you could invest?” and in most cases the answer would be a no, we can’t, not at this time. Which ended these meetings, after a few polite exchanges, even before the allocated time slot was over.
What an interesting reversion! Apparently there are sufficient VCs with life science portfolios remaining (many have folded) who would probably love to invest in startups that pass their scrutiny. But they cannot, not now. Their portfolios have suffered severely during the past three years, when IPOs and other exits that looked like good bets in early 2008 ceased to be an option. Even if the incubator companies survived, the VCs are now facing a locked-in investment. And in the present environment they simply can’t raise more capital for life science investments. So they turn to Web 2.0 companies where products are more immediately understandable and exit horizons are much shorter. The Atlantic magazine ran a story on this a month ago.
But for companies that were started on a good idea, a patent application, and a bit of kickoff funding, and are now unable to raise the follow-up funding that they would desperately need, this does not change a thing. Several of our customers are facing this situation. One of them, a German developer with a cancer drug candidate and good Phase II data, will close its books by year’s end because three years’ effort to find funding for a Phase III program, or a strategic investor, were in vain. A promising Spanish customer who seemed poised for takeoff a year ago has to lie low until the investment winds change again. A U.S. distributor of an intelligent medical device who wants to develop the European market with us has asked for more time because…. well, you get it.
And this tell us what? That the situation is dire for most existing life science startups? Obviously so. And does it also tell us that starting a new one now would be nothing less than crazy? Here is where it gets interesting: an increasing number of observers, us at H.M. Pharma Consultancy included, do not necessarily think so. During the life science industry’s passing through this long Valley of Tears, a huge desire for renewed vigor has been building: pharma has been looking for promising new business models for years. The year 2012 will bring a hair-trigger environment: just a few macroeconomic things need to turn out right, and money will flow back to the VCs. Matthew Geller, president of healthcare investment bank Geller Biopharm, put it succinctly in a recent BioWorld Perspectives blog post (see here): “If things do turn, they would turn on a dime. The market is bipolar.”
It has often been said that great fortunes are made based on decisions made in deep crisis. It will be the same this time. Those who gear up now might be much better off than those who started a few years ago.