PEHub is reporting that limited partners are putting more resources into life sciences all of a sudden. The article is low on details but says several funds in the $200 million to $400 million size are being raised right now. I know most of our audience doesn’t care much about life sciences — although you could argue anyone susceptible to death, disease, or aging (read: All of us, even you, Larry Ellison) should.
But the mini-trend is interesting in what it says about IT investing: absolutely nothing.
Typically there’s a resurgence in life sciences whenever IT investments slump. But I don’t think that’s the case this time. For one thing, there’s no evidence we’re in a slump — there are a bevy of conflicting data points on the health of the startup ecosystem. If anything, the most negative naysayers are concerned that we aren’t yet seeing the psychological ripple effects of disappointing IPOs make their way to the private company world.
That’s not to say that a correction won’t be coming for all those angel deals that can’t get a series A, the series A companies that haven’t gotten enough traction for a follow on round. And an overall crush of valuations when members of the 2011 $1 billion valuation club set out to raise another round. But said carnage isn’t here yet.
If you want evidence of disappointment in the consumer Web, look to the resurgence in enterprise deals instead. In the intervening years between the March 2000 NASDAQ crash and whatever this thing is that we’re in now, it has become clear that investing in life sciences and tech are utterly different animals — more so today than ever. Decades from now when we look back on the venture capital business, I think we’ll be surprised that life sciences and tech investments were ever done out of the same funds, through the same partnerships, and under the same roofs.
Two things have changed the businesses forever: The Internet and the playbook of big pharma.
Back in the days when Silicon Valley actually made, you know, Silicon, companies couldn’t go from idea to IPO at light speed. Tech IPOs, when they occurred, were small and companies grew the longer they were in the market. It was a totally different game. It’s similar to those opening weekend box office records that get gaudier and gaudier as the film business has changed, moving away from long runs based on reviews and word-of-mouth to huge opening weekend mega-plex pushes on as many screens as possible before the reviews come out. Far more screens and higher ticket prices are why there are such bigger opening box office weekends today — not because the movies are any better. The film industry essentially hacked its way around reviews.
Similarly, the Internet hacked its way around the normal laws of building a tech company. It’s dramatically faster and cheaper to get a product into market, and the delivery is mostly direct to consumers, not shelves of stores or networks of distributors. But there’s a downside: It’s feast or famine. The days of the small IPO are gone, as most Internet companies go very, very big or sell quickly. When it comes to tech, venture capital has become even more of a home run business.
But it’s not just that the speed and size of the consumer Web has become more distinct from the long-time horizons and uncertainty of drug discovery. Life sciences, too, has changed in the last decade, pulling hard in the other direction. Amgen and Genentech were supposed to be the future for this field, the first two — of many — massive publicly traded drug discovery companies. But instead, the industry en masse opted to do the research equivalent of the acqui-hire: Rather than take on the risk of expensive clinical trials and uncertainty when it comes to the FDA and insurance coverage, biotech companies do licensing deals with big pharma early and often.
You can understand why. Consider Tysabri, a multiple sclerosis wonder drug that was expected to become a blockbuster until sales were suddenly suspended in 2005 with warning of new potential side effects. It took more than a year to come back on the market and has only recently won clearance to modify its label, which investors hope could double sales over the next year. This was a seven-year battle that could have murdered a small company like Elan, had it not partnered up with the giant Biogen to develop and market the drug together.
But with a decision to share the risk comes a decision to share the spoils. Elan may only now be able to reap the benefits for Tysabri — and it only gets half of them.
There are few signs of this trend waning: VCs love it, because taking a small unprofitable biotech company public to fund ongoing research is all but impossible, and they aren’t going to carry it the whole way. Entrepreneurs love it, because they can get rewarded for initial discovery and don’t have to build out the testing, approval, and sales infrastructure from scratch. And big pharma really loves it, because they effectively outsource early drug research.
The picture for returns, when it comes to life sciences, couldn’t be more different than the consumer Web: No highs, but a steady track record with few lows either.
Investing in the two areas has always taken a different passion and knowledge base. But increasingly it’s just a completely different business with different risk profiles, investment expectations and fund cycles — about as similar as private equity and venture capital. And as Web-focused venture firms fall under pressure to do seed programs and help with recruiting and other high touch services, the two will become even more distinct. (And some would argue cleantech is a third animal with its reliance on subsidies and long-lead market lead times.)
People will cite programs like the incubator RockHealth, funded by many IT investors, as evidence that there’s still some synergy there. But no one at RockHealth is doing medical devices or drug discovery. They’re building things like iPhone apps that sell into the healthcare world. That’s a tech investment that happens to be in the healthcare vertical, not a life sciences deal.
Firms still doing it under one roof will argue there’s instant diversification for LPs. But that’s the LPs’ job. The synergies are getting harder and harder to see.