BUSINESS FUNDED Michigan State University research associate Ed Timm works in a mobile air-testing lab financed through Michigan's Life Sciences Corridor.
LEAPS OF FAITH Venture capital and government support for biotech start-ups are harder to come by
F
IRST THE GOOD NEWS: BIOTECH-
nology companies received a larger share of all venture-capital investments last year—13.2% — than they did during any of the previous six years. And now the bad news: Investments in biotech companies slipped for the second year in a row, to $2.8 billion—well off the peak of $4.4 billion invested in 2000. The mixed news came out of the recent MoneyTree Survey from PricewaterhouseCoopers, Thomson Venture Economics, and the National Venture Capital Association. The survey measures cash for equity investments by venture capitalists in private emerging companies in the U.S. The 15% drop in venture-capital investment in entrepreneurial biotechnology firms from 2001 to 2 0 0 2 looks good when compared with the 4 9 % drop in venture investing overall. But capturing a larger slice of a much smaller pie is cold comfort for those firms forced to merge or close for lack of funding capital. The drop goes hand-in-hand with the collapse in biotech stocks that followed the bursting of the dot-com stock bubble in 2001. According to G. Steven Burrill, chief executive officer of the merchant bank Burrill & Co., the equity value of publicly traded biotech firms dropped 4 9 % in 2002, following a 24% decline in 2001. Because investors have little taste for small biotechnology firms that are already publicly owned, venture capitalists see less 18
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of a chance for their usual payoff: the initial public stock offering of a company that they have invested in. So only the most patient venture capitalists are putting money into biotech companies. AT THE SAME TIME, the littlest enter prises—those too small to attract venture capitalists' attention—are also having to scramble to get scarce government seed capital. They are finding slimmer pickings as states cut back economic development funds to balance their budgets because of the recession. For example, the state of Michigan established a Life Sciences Corridor in 1999 with settlement funds from a multistate lawsuit against tobacco companies. The
BIO-AVAILABLE CAPITAL Less money, but a greater share, goes to biotech
1996 97
98
99 2000 01
02
NOTE: Biotech encompasses human, animal, and industrial biotechnology products and services, including biosensors, biotechnology equipment, and pharmaceuticals. SOURCE: PricewaterhouseCoopers/Thomson Venture Economics/National Venture Capital Association MoneyTree Survey
plan was to commit $50 million a year for 20 years to the effort, for a total of $1 billion (C&EN, Oct. 1,2001, page 31). However, the state's fiscal distress has forced use of tobacco funds to replace tax revenue shortfalls. The 2003 corridor program was pared back to $45 million last year and was then cut again to $32.5 million a few weeks ago. A projected $1.7 billion state revenue shortfall for fiscal 2004 means that Michigan not only may cut the program back to $25 million, but that life sciences will have to share funding with homeland security and auto technology research, according to a Michigan Economic Development Corp. spokesman. About three-quarters of the funds awarded so far support basic research at Michigan State University, Wayne State University the University ofMichigan, and the Van Andel Institute, some of it in collaboration with entrepreneurs. Most of the remainder has gone to private-enterprisebased collaborations with academic institutions; about $5 million has funded venture-capital initiatives. "Our commitment to the program remains the same," says Raili Kerppola, corridor managing director. "When the state budget recovers, we'll get back to targeted funding levels. And we also hope to make up for the difference between the promise and the reality" Other state programs in support of new technology are also at risk. "More states are emphasizing reductions than increases in science and technology spending," says Dan Berglund, president of Ohio's State Science &Technology Institute. The seven-year-old group promotes the use of technology in economic development. Even Pennsylvania's vaunted Ben Franklin Technology Partnership haS taken its lumps. A spokesman for the group— which fields business incubators and venture-capital investments and makes loans to new technology-based firms—says its $7.1 million 2003 budget for four regional centers has been flat compared with 2002. The state may pare funding back to $6.3 million in 2004. The only good news for start-up technology and life sciences businesses is that, despite the economic slowdown, they can still get some money But these start-ups will have to scramble as the resources available to them continue to shrink.—MARC REISCH
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