Views from a Venture Capitalist
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Transcript of Views from a Venture Capitalist
Views from a Venture Capitalist
Nancy Harrison
Venture Capital Investment in Canadian Companies
Excludes Canadian VC investments in foreign companies
Source: Macdonald & Associates
170167
256
190
82
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1998 1999 2000 2001 1H-2002
Year
To
tal
Val
ue
0
50
100
150
200
250
300
Vo
lum
e
Total value raised # of financings
Venture Capital Investments in Biotech
Canadian VCs Support Industry
0 2 4 6 8 10 12 14 16 18
Canada
US
Percentage Invested in Biotech
1998
1999
2000
1998
1999
2000
2001
2001
1H-2002
1H-2002
The Markets are Bad – How Bad are They?
Where is the Bottom?!
40%
50%
60%
70%
80%
90%
100%
110%
120%
130%
140%
9/1
7/2
001
10/1
/2001
10/1
5/2
001
10/2
9/2
001
11/1
2/2
001
11/2
6/2
001
12/1
0/2
001
12/2
4/2
001
1/7
/2002
1/2
1/2
002
2/4
/2002
2/1
8/2
002
3/4
/2002
3/1
8/2
002
4/1
/2002
4/1
5/2
002
4/2
9/2
002
5/1
3/2
002
5/2
7/2
002
6/1
0/2
002
6/2
4/2
002
7/8
/2002
7/2
2/2
002
8/5
/2002
8/1
9/2
002
9/2
/2002
9/1
6/2
002
NASDAQ Biotechnology IndexS&P 500 IndexNASDAQ Composite IndexDow J ones CompositeS&P/TSX Pharmaceuticals & Biotechnology IndexS&P/TSX Composite Index
Source: Yorkton Securities
The Bad News
• Blair/Clinton comments• September 11th• Enron• Elan• Dov • Pharma downturn • Series of poor data, FDA rejections• ImClone
Are There Public Market Safe Havens?7 Stocks Lose $62B in 6 Months
12/31/01 6/12/02 Mkt Cap Change Mkt Cap %
Amgen $59.2B $42.2B -$16.8B -28%
Genentech $28.6B $17.4B -$11.2B -39%
Immunex $15.8B $12.4B -$3.3B -21%
Elan $15.4B $2.6B -$12.8B -83%
Serono $14.3B $10.2B -$4.0B -28%
Genzyme $12.7B $4.0B -$8.7B -68%
Idec $10.5B $5.0B -$5.5B -52%
Total $156.4B $94.1B -$62.4B -40%
Source: BioCentury June 24,2002
What Constitutes a Tier I Company?
March 2000: 41 of 81 companies have products
Today: 33 of 36 companies have products
Source: BioCentury June 17, 2002
US Money Raised by Biotech Companiesin 2002 YTD
$ YTD $ 2001
IPOs $250.6M $400M
Follow-ons $592.4M $4B
Venture capital $2708.6M $4.2B
Other $5537.0M $7.4B
Total $9088.6M $16B
Source: BioCentury September 9, 2002
Where are the institutional investors?!
Canadian Public Market Financings are Dead
$275
$1,366
$1,564$1,647
$332
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
1998 1999 2000 2001 1H-2002
(CD
N $
mln
)
Source: Yorkton Securities
Money Raised in Public Canadian Biotechnology Companies
Six Top Public BC Biotech’s – 2 year, 5 year
Private Deals Done in BC – not many -
• Last half 2001– Protiva - $14.5m
• First half 2002– Oncogenex - $3.6m
• Other deals – follow-ons – Grants - Genome Canada
BC Companies are Still Not on the Radar Screen of Foreign Investors
Foreign VC's in Canadian Biotech Deals in BC
$ 0
$ 10,000
$ 20,000
$ 30,000
$ 40,000
$ 50,000
1996 1997 1998 1999 2000 2001
0
1
2
3
4
5
$ Invested
# of Investments
What are VC’s Focused on?
The New Reality
• Internal rounds (Series B-2) closing a year after Series B
• Lack of lead investors• Debt financing• Lay-offs and downsizing/prioritizing• Mergers• VC’s supporting their own companies• VC’s having a hard time getting excited about the
“old” model - Disillusioned• Numbers don’t work anymore
A Generic Early 90’s Model
Round Type Date
Amount Raised (MM)
Pre-Money Valuation
(MM) IRR Multiple
1 Seed Jan-90 $ 0.50 $ 2 101% 32.53
2 1st Jan-91 $ 3.00 $ 10 70% 8.13
3 2nd Jan-92 $ 8.00 $ 32 50% 3.30
4 3rd Jan-94 $ 13.50 $ 100 32% 1.32
5 IPO Jan-95 $ 150
Total Private Capital $ 25 MillionFrom Vinod Khosla (KP)
A Generic Late 90’s Model
Round Type Date
Amount Raised (MM)
Pre-Money Valuation
(MM) IRR Multiple
1 Seed Jan-97 $ 5 $ 35 79% 18.37
2 1st Jan-98 $ 10 $ 100 65% 7.35
3 2nd Jan-99 $ 25 $ 200 59% 4.04
4 3rd Jan-00 $ 60 $ 600 52% 1.52
5 IPO Jan-01 $ 1000
Total Private Capital $ 100 Million
$200$200
??
Angiotech Model
• Go public on TSE (stepping stone/capital)• Then go to NASDAQ (liquidity)• Luck element - public markets closed
Big Corporate Partnership Model
• Sign a big deal and get credit (Inex)• Doesn’t always work that way anymore (StressGen)
Top Quartile VC IRR’s above 30 %
US Venture Capital Net Returns to LPs by Fund Vintage Year
(40.0)
(20.0)
-
20.0
40.0
60.0
80.0
100.0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
An
nu
al IR
R
Lower quartile Median Upper quartile
What are VC’s doing to Get Returns?
• Focusing on companies with on products, revenues and profits
• Avoiding concept deals• Doing fewer deals – more money per deal• Watchful waiting• Investing in NRDO’s e.g. Salmedix
What are VC’s doing to Get Returns?
• Investing in Superhero CEO’s– Affinity raised $70m Series B – June 24
• Investing at lower valuations (40%)– Especially for Class of 2000 companies
• Letting companies go under – not throwing good money after bad
• Investing in relatively cheap publics versus private companies
So What Can Companies Do?
Creative Financing Alternatives
• Cut Burn– e.g. Geron
• Let go 1/3 of work force to refocus on later stage programs – June 2002
• “In the current financing climate companies that are well managed make tough calls…early.” Alex Barkas, Chairman
• Slice and Dice Market– e.g. Angiotech - masters of this
• Lean and Mean– Angiotech never more than 50 people
Creative Financing Alternatives
• Strategic M&A– e.g. ImmGenics
– Don’t wait until out of money
• Deals to cut burn, increase chances of success– e.g. Active Pass/Neogenesis
• Buy versus Build– e.g. Active Pass
• Spinouts– e.g. Inex/Protiva
Summary
• The world has changed – forget the past• Lots of money out there
– For Right story - at Right Valuation
• Time is the enemy: Financing and M&A take a long time – don’t get pushed up against the wall
• Remember what drives investors – returns! – build into pitch
• Be flexible on model and exit• Founders make money when shares are sold, not on
company financings.
www.ventureswest.com