Venture Round: Looking for the Bright Side

What if this is the best thing that could have happened for venture capitalists and their companies?

By “this” we mean the complete and utter destruction of Wall Street, and by “best thing” we’re obviously thinking long, long-term impact here. Clearly, things will be rough for a long time coming.
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But venture capitalists have been squealing about how Sarbanes-Oxley has regulated them right out of the IPO business, saying the costs and oversight were too much for their little start-up companies to bear.

Then, the bulge bracket banks—the big guys with the bankers, analysts and cash—began turning their eyes to bigger, exciting and, yes, revenue-generating deals, leaving their little biopharma and device companies that could under-covered and forgotten in the eyes of many VCs.

Well, those days are clearly done. The question now remains, what will rise from the ashes? Will the banking and analyst staff that once populated the highest offices in Manhattan find their way to some of the boutique banks that have made themselves a nice little business putting together smaller deals, bringing the experience and resources to grow those institutions?

Furthermore, as one institutional investor tells us, venture capitalists could help themselves and this nascent boutique banking industry by steering some of the choice work toward smaller investment banks, eschewing the cache and hoopla associated with one of Wall Street’s blue chip names.

Uh, former blue chip names.

PE Hub had a similar conversation about small tech companies with Paul Deninger, vice chairman of the investment bank Jefferies & Co. We're not buying all that he's selling, but read it here, including the blistering comments. (BTW, we'd hardly consider IPC The Hospitalist Company, a tech company. It's a health care company thanks very much.)

So, is this the end of the world as we know it? Or has the past few weeks been a necessary—and admittedly painful—cutting of the larger trees that will allow some sunshine and rain wash over the growth underneath?

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As we said the short-term is pretty bleak. Witness this week's announcement that the spin-out of Angiotech Pharmaceutical is in danger, which likely means no investment by Ares Capital or New Leaf investment.

Also, VentureWire Lifescience and others reported on the recent fund-raising by Kalobios, which didn't include previous investor Lehman Brothers.

"We were all set to close on Friday of last week, until Lehman filed for bankruptcy," said KaloBios Chief Executive David Pritchard. "They had several million committed to the round, and while we only lost one business day...we had to rush to make that up."

Lehman had led KaloBios' $20 million Series C round in July 2007 through its health-care venture capital group. That group invests directly off the firm's balance sheet, unlike Lehman's IT-oriented venture partners group, which closed a $365 million fifth fund in September 2007. Randy Whitestone, a Lehman spokesman, said the venture partners group is part of the firm currently being auctioned off, and he said the firm is not certain of the health-care group's fate.

Pritchard described embattled Lehman as "a great investor and very supportive of the company." Jeffrey Farrell, a senior vice president at the investment firm, was an observer on KaloBios' board.

Pritchard said many of the round's other investors stepped in over the weekend to fill the hole left by Lehman, contributing above-pro rata shares. New investors Genzyme Ventures and Mitsubishi UFJ Capital led the round, joined by existing investors Alloy Ventures, 5AM Ventures, GBS Ventures, Lotus Bioscience Ventures, MPM Capital, Singapore Bioinnovations and Sofinnova Ventures.

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Fred Wilson, general partner at Union Square Ventures, has an interesting little post on his A VC blog about how the New York Times came to profile his firm. The serendipitous origin of the article must broil PR pros who would kill to get their clients such a profile, but more often than not this is how such profiles come together.

Anyway, the article relays how Union Square Ventures is willing to take small stakes in tiny start-ups, exclusively in tech. That's easier to do with a $165 million fund, but it got us thinking. We wrote extensively about how larger venture capital firms are maintaining their early-stage medical device flow by committing small bits of capital in ventures started by proven entrepreneurs who are affiliated with the fund. But are there any life sciences VCs who exclusively make similarly sized bets in untested start ups?

Venture Round: The BEAT Goes On

When we wrote about CardioNet's IPO back in March, we had no idea it would hold such historical importance.

CardioNet, trading under the symbol BEAT, remains the last venture capital-backed company to go public this year, including both life sciences and technology plays. And we have to admit its doing the VC-crowd proud.

But the company is doing so well one could argue it may have sold more shares than it had to.

You may recall the cardiac monitoring company entered into a unique structure with investors back in spring 2007 when it raised $110 million in a Series E. Investors were given stock that converted into common shares during the IPO. The company's management took a bit of a gamble as there were repercussions if the company didn't get out in a timely manner.

Well, it did go out at the lowest price allowed by the deal--$18 per share. As we noted back in March, the conversion of those shares depended upon the IPO price. Had CardioNet gone out at $23 per share, which it initially had hoped to do, those Series E investors would have held 5.9 million shares.

But if CardioNet went out anywhere between $18-$20, the Series E shares converted to 7.2 million shares.

Today, CardioNet shares are trading at $27.50, making it a darling among IPO stock pickers, with a nearly 53% gain in three months.

It's interesting that if CardioNet priced its IPO at $23, more than four dollars below where it's trading today, the company would have had to hand over one million fewer shares to its Series E investors.

We're being a bit facetious, of course. CardioNet's stock didn't really take off until the company posted better than expected numbers in mid-April. So this is the case of a company doing what it needed to do to go public, and then going out and proving its value to shareholders.

At the time, the company clearly wasn't getting traction at $23 per share. In fact, $18 per share seemed rather generous. It apparently wasn't.

While we're engaging in some 20-20 hindsight, Boston Scientific--which acquired a sizable stake in CardioNet through its purchase of Guidant--sold off 1.5 million shares at the time of the IPO, recouping $27 million.

Had it held on, its stake would be worth more than $41 million today.

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Edmund de Rothschild Investment Partners more than doubled its assets under management for life sciences by closing on €150 million last week for its third life sciences fund. The Paris-based firm previously raised €80 million and €26 million for its second and first funds, respectively, according to VentureWire Lifescience.

The firm expects to invest the new fund in 15 to 20 life science companies across all stages of development, including biopharmaceutical, medical device and diagnostic companies, mostly in Europe.

According to the firm, its investors include most of Edmond de Rothschild Investment Partners' life science existing investor base, including La Compagnie Financière Edmond de Rothschild, La Caisse des Dépôts and Amgen. Other investors include health insurance companies, public pension funds, social institutions and institutional investors.

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Attention any other venture firms in the market with new funds, save the postage. Washington State Investment Board isn't interested, according to a recent post on Private Equity Hub.

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Three Arch Partners, still investing its 2004 vintage fund, probably won't be in the market for a new one until next year.

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Fresh from the "I made a seven minute presentation to a bunch of lawyers and investors, and all I got was a lousy...." file.

As always, if you have any private suggestions, tips, or if you really, really, really hate the idea that we'll be running this column on Wednesdays instead of Fridays email me here.

(Image courtesy of Flickr user RWK through a Creative Commons license.)

Venture Round: Venture Capital To Go

That's the thing about Asian venture capital news. A week later and you find yourself still hungry for more.

Well, last week we profiled MPM Capital's first foray into India, a $20 million investment in Sai Advantium Pharma, a contract research organization. At the time, we declared it the first investment that a U.S.-based VC made in an Indian life sciences company, a designation we later had to undeclare as we failed to identify TPG Biotech (previously known as TPG Ventures, also recognizable as the venture firm affiliated with Texas Pacific Group) had invested in its own CRO, Matrix Laboratories Inc., two or three years ago.

Well, you're better off just reading what colleague Ellen Licking wrote about TPG's investment here or about other opportunities here.

But if you'd enjoy another little nibble. Dow Jones VentureSource's yesterday issued its first quarter report on venture investments in India. The report says India $99 million in venture investment with 16 deals completed, "a 27% drop from the fourth quarter that saw a record $135 million put into 17 deals."

Life sciences deals didn't account for much. The report mentions only two biopharmaceutical deals were done, totaling $11 million. Last year, life sciences and health care companies brought in $99.5 million, so in the words of Peter's Evil Boss Bill Lumberg "we need to sorta play catch up."

William Greene, general partner at MPM, says he expects other life sciences deals to follow the investment in Sai. "Given the quality of the deal flow and the interest these entrepreneurial companies have in accessing international venture capital I do think this is an area that is really going to grow," Greene says. But he's not ready to predict when the next deal might be done. "I can't say whether it's one month, two months or two years."

Well, after last week's experience, if he's not going out on a limb on this one, neither will we.

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Meanwhile, a few remote areas within the US are getting a little more attention, according to assorted reports.

Utah
VentureWire Lifescience reported that vSpring Capital well on its way to raising $200 million for its third venture fund. The firm is based in Salt Lake City, Utah and has offices in Albuquerque, New Mexico. vSpring invests in "Intermountain West region" companies operating in life sciences and other industries, according to the firm's web site.

Canopy Ventures secured $100 million for its second fund. The fund previously invested only in information technology companies, but General Partners Ron Heinz and Brandon Tidwell will target life sciences companies as well. Obviously, there's no shortage of opportunities there as we've written about opportunities and investments in medical device and personalized medicine.

San Diego
San Diego--which as we noted back in November suffers from an disproportionately low number of local VCs for a region so rich in pharma and research--has a new seed fund, again according to VentureWire. Mesa Verde Venture Partners, a successor firm to IngleWood Ventures, wrapped up $15 million for a seed fund in March, with some of the capital coming from two venture firms, vSpring and Sanderling Ventures. General Partner Daniel Wood--the Wood of IngleWood--and a team of venture partners scattered across the SouthWest will invest the capital in new health care start-ups in their respective regions. The strategy is an interesting one for Sanderling, which also has offices in San Diego. General Partner Fred Middleton told VentureWire the relationship provides Sanderling access to early-stage deals without committing too much partner time. It's made similar investments in the past in seed-stage firms in Pittsburgh and Silicon Valley.

Midwest

Finally, we leave you hopes and dreams from the Mid-West that coastal VCs will invest more capital in flyover states.

As evidence, the article--actually a report from a local venture conference--points to the recent $22.75 million spin off of Esperion Therapeutics from Pfizer Inc. as perhaps the beginning of a trend.

But clearly Esperion is too unusual a deal to build a thesis around. VCs will travel far and wide to invest in a ready made biopharmaceutical company led by its original CEO Dr. Roger Newton. You'll find an interview with Newton in our upcoming IN VIVO the Magazine. We'll link to it here when it's available.

But states like Minnesota and Michigan are drawing more attention from VC, particularly device VCs who see an fresh resource of talent coming from the recent spate of layoffs the spate of recent layoffs from Medtronic and Boston Scientific.

This rush of thousands of experienced medical device workers who don't have the require the same compensation as their Silicon Valley counterparts already is interest from coastal venture capitalists. New incubator--or accelerator--ConceptTx Medical Inc. is just one effort that will be able to tap this new pool of talent.

As always, if you have any private suggestions, tips, or if you really jonesing to talk venture this holiday weekend email me here. I'll get back to you Tuesday.

(Image courtesy of Flickr user Hfabulous through a Creative Commons license.)

Venture Round: Finding the Exit

This week brought on a flurry of news reports about venture capital firms setting out to raise new funds. VentureWire Lifescience reported that Atlas Venture, Scale Venture Partners, Pappas Ventures are at varying stages of raising new funds.

Toss in the news about Orion Healthcare Equity Partners hiring some new personnel, and the list of firms setting out to raise new funds just gets longer. (We first reported on Orion here and talked about other fund raisers Interwest Partners and Versant Venture's fund raising here)

It’s always nice to read about the flow of fresh new capital coming into the sector. Eventually, these articles will be followed up with new ones on fund closing. (Hello, this week's news about Split Rock Partners and last weeks' post on Kleiner Perkins Caufield & Byers.)

But who’s watching the dollars after they’ve been invested? Well, we did this month.

Our April issues of START-UP and IN VIVO offer some unique, data-driven insights on the opportunity for exits in the biopharmaceutical and medical device industry. The pieces are written by our fearless leaders Roger Longman and David Cassak, who are aided with data from our own Strategic Transactions Database and other sources.

Roger’s Valuation Watch takes a look the status of biopharmaceutical companies that have gone public since 2003. We’re sorry to say, the picture is not pretty for the companies or their investors. Hence the headline, “Marooned! VCs Stuck in the Public Markets.”

Among the group of 76 still-independent biopharma-focused biotechs (only a small number of recently public companies have been acquired and only a handful of those have been acquired at even a moderate profit for their investors), 61 companies are trading below their IPO price. The average trades 24.3% below its IPO price, the median 46% below.

The report names names, offering a list of the most troubled companies and the VCs who look like they’re might be in store for a good soaking.

David, meanwhile, examines both big and small cap mergers and acquisitions in the medical device industry. After pouring through piles of transaction data from our database, David opens the story with this:

To anyone with a vested interest in medical devices, investors and company executives alike, anecdotally, the past several years have felt like good times. And, in fact, by one standard alone, the total dollar values of M&A in devices, things have never been better. Total M&A dollar volume in the period 2005-2007 was up almost three and a half times that of the three-year period just prior, 2002-2004. And while a couple of very large deals, most notably Boston Scientific Corp.'s play for Guidant and the private equity takeout of Biomet Inc., have helped to push deal values up, dollar volumes over the past three years would still be much higher, even if those outliers are factored out.

But it's one thing to say that payors are paying more for device companies than they ever have. It's another to ask, What exactly are they paying for?

David’s report goes onto answer those questions and more. Deal Analyst Amanda Micklus, meanwhile, compiled some impressive tables showing what companies have been the most active buyers and, more intriguing, on what disease or conditions are those buyers spending their dollars?

There you go, you’re all caught up. Not only do you know who is raising funds, but now you’ve got the means to find out what is happening to venture bucks already invested.

As always, if you have any private suggestions, tips, or if you would like to meet up at Heart Rhythm 2008email me here.

(Image courtesy of Flickr user Paulbence Photography through a Creative Commons license.)

Venture Round: Kleiner: You want solar power with that?

Is Kleiner Perkins Caufield & Byers (KPCB) evolving into a franchise? Over the past few years, the venture firm has attached its venerable name to a series of funds or investment initiatives targeting very specific niches: Java technology, vaccines, green technologies, even the iPhone.

Just this week KPCB announced the raising of a $500 million Green Growth fund. (The good news is KPCB still plays in the generalist space as well as it also announced the closing of $700 million for its 13th fund this week. More on that below.)

It’s a strategy that’s uniquely KPCB and leads one—okay us—to wonder whether all the specialization is really necessary. After all, we’re talking about Kleiner Perkins. Clearly, the firm could invest in green technologies just fine without the pomp and publicity that goes with industry-specific initiatives. (Personally, we do applaud KPCB for emphasizing green technologies and hope it bears fruit.)

Partner Dana Mead, who joined the firm in 2005 from Guidant, says the specialization strategy just plain works, insisting it has opened more doors and established networks more quickly than investing from a traditional venture fund would. The dedicated capital draws luminaries like Al Gore to Kleiner’s table while serving as bright green neon Open-for-Business sign for entrepreneurs and companies looking for capital. “The way you make money is to predict the next big thing and invest heavily in that area,” Mead says. “We did it with biotech with Genentech, semiconductors, Netscape, Google. We think we’re doing it with personalized medicine and we see green tech as that next big opportunity”

Again, KPCB was a first mover in all those areas without the benefit of specialty funds. But who are we to argue. The firm’s limited partners appear to be satisfied with the strategy (although what institutional investor would pass up the opportunity to invest in a KPCB-anything fund?) Plus, Tom Perkins must know what he's doing to afford a boat this big.

Time will tell whether it will produce solid returns as Kleiner’s green tech investments haven’t produced any exits yet. Mead, however, says green technology companies are very much like biotechnology companies: they require significant capital and time to mature.

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KPCB will be pulling back on the specialization strategy in at least one case. Mead says Kleiner isn’t likely to raise a follow up to the $200 million KPCB Pandemic Preparedness and BioDefense Fund, which is fully invested in 10 companies. Mead says Kleiner raised that fund for two reasons. “Number one to make a difference and number two to create a fund that makes good investments for our LPs,” he says. The jury remains out on number two, but Mead is comfortable saying that the pandemic fund helped to drum up support from the federal government, the pharmaceutical industry and not-for-profit entities like the Gates Foundation. He acknowledges that no other venture capital firm followed suit, “but in every one of our investments we have other venture firms as investors.” You can view the portfolio here. One intriguing company not mentioned is Breathe Technologies Inc.

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Now, as far as investing the $700 million KPCB XIII Fund, Mead says KPCB will invest equally among green tech, information technology and life sciences. In the life sciences space, “We do love personalized medicine and you’ll see us doing more diagnostics. We really like medical devices and continue to do significant investments there. We like orthopedics (except for overheated areas like dynamic stabilization) right now, imaging and the opportunities in consumer medicine,” Mead says. KPCB is also looking heavily at cancer companies including those employing epigenetics as well as companies trying to stem cancer metastasis. Mead says KPCB will continue to incubate companies inside its own walls, and that the firm incubated five of the 10 life sciences companies in the portfolio of its prior fund.

Abingworth's Growth

IN VIVO Blog was happy to see the news this week David Mayer joined Abingworth to help manage the firm's growth equity stage investments. Mayer brings a wealth of private equity investment experience from his time at Thoma Cressey Equity Partners including a role in some high profile investments like ESP Pharma Inc. and Jazz Pharmaceuticals Inc. Check out the press release for more information.

What you won't see in the press release is new that Abingworth is in the process of raising $100 million to $200 million for a small fund that will supplement the firm's growth equity investments. In the case of larger deals, Abingworth might draw capital from its new growth equity fund as well as its $587 million main fund.

Mayer says Abingworth Growth Equity fund would give the firm enough powder to in larger deals--up to $80 million--without syndication. It may still want to syndicate such deals, but co-investors wouldn't be necessary.

Mayer says Abingworth's flow of growth equity deals is already strong. He expects to invest in pharmaceutical and device companies. Abingworth might also invest in services companies if they work within the life sciences field.

Mayer says the fund target is intentionally small. Abingworth wants to sync any future fund-raising campaign with its main fund. Abingworth could raise a second growth-equity fund or just raise a larger single fund.

Have any suggestions, tips, or pictures of your own really big boat, email me here.

Venture Round: VCs (and others) Win With Sirtris

Tired of Sirtris-GSK talk yet? Too bad. As we now bring you, the venture angle.

As you no doubt know by now, GlaxoSmithKline will pay $725 million for Sirtris Pharmaceuticals Inc., paying $22.50 per share, an 84% premium over Sirtris' closing price.

We've already gone over the particulars of the deal, including some of our concerns. But one irrefutable fact is Sirtris' venture investors made more than a few bucks.

As should be the case, the earlier investors did the best. Polaris Venture Partners, TVM Partners, Cardinal Partners, Skyline Ventures and a few of the company's co-founders will do very well. But by our measure even investors in the company's last private round early last year will see nearly their capital nearly triple, including the cigar-smoking guy directly above.

Now let's go over a round-by-round account:

* Back in the fall of 2004, Series A investors Polaris, TVM, Cardinal and Skyline as well as a few individual—co-founder Richard Aldrich, Paul Schimmel and David Sinclair—paid 50 cents a piece for 10 million shares of convertible preferred stock. At last year's IPO, those shares converted into 1.9 million shares of common stock, so by our measure those investors ultimately paid roughly $2.63 per common share.

* Later that year, Sirtris raised another $12.6 million by selling 21 million shares of Series A-1 convertible preferred stock for 60 cents a piece. The four venture investors bought in along with Wellcome Trust Limited. At the IPO, the shares converted into 4.1 million shares of common stock, meaning investors ultimately paid roughly $3.07 for each common.

* Series B investors, who came along in the spring of 2005, bought 33.7 million shares for $27 million, paying 80 cents per share. All the earlier VCs were joined by Three Arch Partners and Novartis BioVentures. Those 33.7 million shares converted into 6.4 million of common at the IPO, making the per common share price $4.20.

* Sirtris went to the well again in spring of 2006 raising $22.1 million in a sale of Series C stock, priced at $1.12 per redeemable share. Investors this time included all of the Series B investors as well as a trust managed by Schimmel, Paul Schimmel Prototype PSP. After the IPO, the 19.7 million preferred shares converted into 3.7 million common shares so these investors paid $5.88 per share.

* Finally, Sirtris capped off its private fund raising with a $35.9 million round at the start of 2007. Earlier investors TVM, Skyline, TVM, Three Arch as well as Sinclair were joined by CEO Christoph Westphal, co-founder Sinclair and Peter Elliott, senior vice president and head of development. Investors paid $1.68 each for 21.3 million shares of Series C-1 redeemable convertible preferred stock. At the IPO, those converted into 4.07 million shares of common. Per share price: $8.81.

Who were two other big winners? A trust managed by John Henry, the principal owner of the Boston Red Sox (pictured), was the single largest investor in Sitris' C-1 Round. Not sure how he came to be involved in Sirtris, perhaps he met up with fellow Brookline, Mass. resident Westphal at their neighborhood Dunkin’ Donuts. Meanwhile,Venture lender Hercules Technology Growth Capital will crow about its big returns in an upcoming conference call. (Tip of the cap to PE Week Wire for pointing this out.) Hercules provided Sirtris $15 million in venture debt in 2006.

Insider Sales

Sirtris wasn't public long enough to file a proxy. You can find out who owned what just after the IPO right here. But some investors and executives already unloaded some stock, so the final numbers will be different.

Early investor Polaris, for example, distributed close to one million shares to its limited partners on Nov. 30, just after the lock up expired. Shares closed at $16.09 on that day.

Co-founders Westphal and Sinclair, meanwhile, sold off 55,000 and 30,000 shares, respectively, over the past few months, with the shares selling anywhere between $11.23 and $14.95. The sales were part of a Rule 10b5-1 trading plan, a prearranged and gradual sell-off of shares by insiders. Separately, Schimmel also sold off just over 11,000 shares at $17 a piece.

Westphal's Future

In our earlier post, we wondered whether Westphal would remain with GSK to run the unit or return to his venture capital roots as he was a proficient company starter while at Polaris. Westphal has kept his fingers in the venture game serving as senior advisor to Flybridge Capital, formerly IDG Ventures.

No doubt, venture capital will continue to call to Westphal, but he will have strong incentive to stay at GSK. According to the 424B4 form filed after the IPO, the stock vesting scheduls for Westphal contain a "double trigger" requirement that "prevents an unintended windfall to management in the event of a friendly (non-hostile) change of control."

Under this structure, unvested equity awards under our 2004 Stock Plan would continue to incentivize our executives to remain with the company after a friendly change of control. If, by contrast, our 2004 Stock Plan had only a "single trigger," and if a friendly change of control occurred, management's equity awards would all vest immediately, creating a windfall and the new owner would then likely find it necessary to replace the compensation with new unvested equity awards in order to retain management. This rationale is why we believe a "double-trigger" equity vesting acceleration mechanism is more stockholder-friendly, and thus more appropriate for us, than a "single trigger" acceleration mechanism.

Westphal found Sirtris' story compelling enough to leave a general partner position at Polaris. That attraction--coupled with the "double trigger"--means he may stick around for a while.

As always, if you have any private suggestions, tips, and comments on my math email me here.

Venture Round: Ascension Raises Second Fund

One of the most active venture capital investors in health care companies—both in number of investments and opportunities for exits—isn’t a venture capital firm at all. It’s Ascension Health Ventures, and the group is about to get more active.

Founded in 2001, Ascension Health Ventures operated as an experiment of sorts, a venture capital group backed with $125 million from the largest not-for-profit health care system in the U.S.

Unlike other hospital-affiliated investment groups, Ascension Health Ventures didn’t look inside its own hospitals’ walls to find investments. Rather, it swam with other VCs, identifying both early and late-stage health care companies with products that might someday be used by its own hospitals and doctors.

After managing a successful debut fund, the St. Louis-based group announced today that it secured a second fund that counts two other hospital systems as limited partners. Catholic Health Initiatives and Catholic Health East agreed to participate in CHV II, L.P., a $200 million fund that will be invested along the same parameters as Ascension’s first $125 million fund.

Ascension Health remains the largest investor in the fund, which will be managed by Ascension Health Ventures II, LLC, the general partner of the fund. Each of the systems will have a representative on the six-person management committee that’s required to approve all new investments. The group also invests directly in venture funds. With its last fund it took part in funds raised by CB Health Ventures, Essex Woodlands Health Ventures and Sanderling Ventures. Now, with its new fund, it already made a commitment to the recent fund raised by SV Life Sciences.

Ascension’s portfolio company count from its first fund is at 19, including 10 medical device companies. Three of those companies staged strong IPOs—Emageon Inc., Stereotaxis Inc. and TomoTherapy Inc.—while a fourth, Confluent Surgical Inc., produced an exit through an acquisition by Covidien Ltd.

For more on the fund raising check out our October Start-Up.