Friday, September 28, 2012

Big ego VC says Pharma needs more big ego VCs

Read it here:

I'm not convinced that venture returns are meaningfully impacted by the venture partner involved. In the article above, a big ego VC wistfully urges that his sector return to the glory days. One of his funds from 15+ years ago is offered as evidence that he's brilliant and Big Pharma is stoopid.

Not that Big Pharma is blameless, but there are better explanations for declining returns even as drug discovery has gotten more capital efficient. Here's a few that occurred to me:

1) VC's own movement away from investing in early technologies to later stage deals. VCs basically don't do old-fashioned $500,000 seed stage deals anymore. They're now all about financing companies graduating to Phase II. Gee, Mr. Kinsella, I wonder why there aren't as many early-stage companies.

2) the hangover from VC over investment in the early genomics era. Remember the year 2000 hype behind genomics companies like HGSI, Millennium, and others? Yeah, I can't imagine why Pharma stopped trusting VC.

3) the rotation in investing strategy from FIDDCo (fully integrated drug discovery companies) and platform technologies to target driven companies each based on a small amount of closely-related leads. 

4) a lack of public market liquidity for small cap biotech, partly influenced by structural changes (like increased financial regulation reducing the attractiveness of IPOs), but more driven by increasing VC fund sizes. VCs are paid based on assets under management (size of fund = size of paycheck), and with larger fund, it is less economical to make smaller, earlier investments, which also require longer holding times, so VCs moved their money towards PIPES - investments in already-public companies.

There's four reasons generated in about 10 minutes. I'm sure I could come up with 10 more if I spent another hour on the idea, but I'd hate to accidentally give any credence to VC vanity.

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