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The view from Mission Bay: the future of biotech looks pretty bright

I was fortunate to attend “Winning Strategies in Life Sciences: Pursuing Success in Today’s Changing Environment,” an all-day conference held October 5 at the University of California, San Francisco’s beautiful new Mission Bay campus. It was sponsored by Foley & Lardner LLP, Silicon Valley Bank, BayBio, QB3 and RoseRyan. The focus areas covered maximizing growth potential, designing models for the wireless health care industry, ensuring global intellectual property and big-pharma mergers and acquisitions. Part of my quest was to answer a burning question: why isn’t biotech doing better, since the baby boomers’ demographic trends indicate that people are living longer, with a higher quality of life?

The sessions were a little more upbeat than the biotech news has been over the past two years—the industry has taken a beating as venture capitalists have focused on hot new social media and technology start-ups at the expense of the sometimes-capital-intensive biotech industry. One area of intense pride is the new QB3 incubator on UCSF’s Mission Bay campus. It is now full of start-ups (more than 40) that are given access to tools, money and networking opportunities, and find it easier to get from start-up mode to their first and second round of funding. Housed on the Mission Bay campus with other aspiring entrepreneurs, they can share ideas and contacts that can help accelerate their progress. Also, the QB3 center provides a concentrated area of experts that venture capitalists and other companies find attractive. QB3 has partnerships with outside venture partners (as well as service providers) that have poured more than $10M into the start-ups and is in the middle of raising an additional $10M to put into new companies. This is a little known success story outside of the biotech industry!

Some insights from the sessions included:

  • The FDA has gotten better with providing clearer direction, but still has a ways to go.
  • Angel investors like health care IT, because there are fewer regulatory hurdles to jump over.
  • The health care IT sector has had rapid growth due to ARRA’s funding for electronic health records, which provides $45,000 for providers who are “meaningful users” of the technology. This is a clear edict that should provide rapid automation (and hoped-for cost savings) over the next five to 10 years.
  • Investors are frightened by the large numbers of patents that are expiring over the next three to five years, because generics radically drive down the cost of pharmaceuticals.
  • Capital efficiency is key for companies that must deal with a difficult regulatory environment.
  • Many companies continue to go outside of the U.S. to accelerate their testing requirements.
  • The JOBS Act will not have a great influence on whether companies file to go public or not.
  • Wireless is a booming area of biotech growth, as companies are rushing to build applications that focus on personalized medicine and the improving relationships between doctors and health care providers. One wireless private network provider has analyzed more than 25,000 applications.
  • Mergers and acquisitions continue to far outweigh IPO exits. It is imperative for companies to plan for potential exits one to two years in advance.
  • More M&A events are focused on changing the landscape of drug/device combinations, building infrastructure in noncore areas and growing holistic end-to-end solutions.

Although the economy is still muddling along, biotech is holding its own in the Bay Area. I didn’t get my answer to why biotech isn’t booming now, but with the baby boomers aging, Obamacare coming and the pace of innovation increasing, the future looks pretty bright.

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Did Sarbanes-Oxley kill the tech IPO?

In a March 2 CNBC interview, Marc Andressen was asked what one thing Washington could do to increase job creation and innovation in Silicon Valley. He replied by saying “attack regulation” and went on to specifically mention Sarbanes-Oxley. In his view, Sarbanes-Oxley was put in place to prevent the next Enron or WorldCom but, in reality, it has just about killed the tech IPO. Founders want to keep their companies private for as long as possible, or forever.

I can certainly understand and applaud that founders desire to keep their companies private—but I think that has more to do with keeping control over the operations and direction of the company, focusing on long-term strategic goals and not being distracted by short-term returns to investors. Focusing on the business rather than the return to investors seems like a healthy approach to running a company.

When asked what specifically is the problem with Sarbanes-Oxley, Andreessen stated that it introduces an entirely new category of regulations, controls and responsibilities for companies’ finance staff, legal staff, board and audit committees—which translates into an enormous amount of time, energy and attention on the part of management when they are trying to focus on building their business. He went on to say that he is not in favor of another Enron or WorldCom, but the companies he works with are not out to defraud anybody. The big frauds haven’t come out of Silicon Valley.

I suspect Marc Andreessen knows more about the companies he invests in than the average investor knows about the companies in their portfolios. And that, I think, is the point of Sarbanes-Oxley: providing accurate and timely financial information to investors and to management. The Enrons and WorldComs may not have come out of Silicon Valley, but I believe we were the poster children for the stock option backdating scandals a few years back. While I agree that the vast majority of companies are not out to defraud anyone, it’s a slippery slope. In my experience, small private companies are not staffed appropriately to deal with the accounting implication of unusual transactions, and not adequately staffed to make sure mistakes are detected and corrected before publishing financial statements. Without proper objective oversight, the pressure to achieve certain operating results—or to be viewed as someone who believes in and supports the business—can cause a well-intentioned person to go astray. While founders are busy building their business, they won’t fund finance appropriately if they do not value it as a strategic part of the business. That’s fine if it’s just the founders’ money at risk, but when you are raising money in the public market you’ve taken on additional obligations and responsibilities. Those additional categories of regulations, controls and responsibilities that Sarbanes-Oxley brings to the table become essential.

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Cleantech survey findings consistent with word on the street

RoseRyan recently completed the second annual State of Cleantech Survey with our partners KPMG, Barney & Barney and Arbor Advisors. In general, the findings are very consistent with what we are hearing from clients. Cleantech ventures are still being funded but investors are keeping a cautious eye out due to macroeconomic issues. Although there have been some high-profile flops (Solyndra) there have also been many successes (Tesla). The Valley continues to produce high-profile cleantech success stories, and I anticipate there will be some big wins in the coming year.

Some of our key findings include:

  • The overall outlook for venture funding is optimistic, with 67 percent of survey respondents saying they are extremely, very, or somewhat optimistic.
  • The outlook for cleantech growth in Northern California is strong, with fully 50 percent saying they are extremely/very optimistic.
  • The two biggest trends are an increase in M&A and the expansion of large multinationals into cleantech.
  • The greatest challenge is gaining access to capital.
  • Regarding personnel, cleantech demand is highest for engineering support.

All of my clients are highly optimistic about the future of cleantech. Most believe that if they had greater access to capital at attractive terms they would be able to expand their business rapidly. Some sectors, including solar and lighting, are growing rapidly and are being impacted by the advent of strong Chinese competitors, while others, including energy efficiency and storage, are growing at a steadier pace. Big multinationals are biding their time trying to predict who the winners and losers are going to be.

I fully expect the pace of innovation to continue as the federal stimulus–funded clients approach their second and third years post-funding. The cleantech market is showing some signs of maturity and funding infrastructures are improving. Although the frothiness of the past may be mellowing, the overall market is growing at a nice, sustainable pace.

In the coming year expect some big news in biofuels and electric vehicles spaces…it should be interesting to watch!

You can download a PDF of the 2011 Cleantech Survey report or read the news release.

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Clean energy needs federal policy commitment, project funding

I attended the third annual Cooley Clean Energy and Technologies Conference November 2 in Redwood Shores, and there were several interesting speakers and discussions. The event focused on innovative models in business, financing, policy and regulation. Some of the highlights:

There is a huge potential for the reduction of emissions in global shipping using dozens of existing technologies—the estimate is a reduction of 500 million tons of carbon annually by 2020.

The solar industry globally is way down: global leaders Spain and Germany have reduced spending, a worldwide surplus of equipment has driven down prices, and smaller companies have merged or gone under. Now energy efficiency is the strongest cleantech growth engine.

One panel discussed the need for more creative ideas for funding to help start-ups gain cash flow to make it through the “valley of death” that follows the first round of angel funding, to get them to the next stage of additional VC or PE funding.

Another interesting comment, which most of the panel members agreed with, is that the government provides initial funding from grants and loan guarantees, but there isn’t a long-term policy commitment to see it through to fruition.

The panelists also believe that more government money should go to clean energy projects (such as infrastructure and the smart grid) and not just new technologies. This is where the jobs will come from in greater numbers. Personally, I think this is on target. The current national grid was designed many decades ago, and upgrading it is critical. This investment in our infrastructure would have an immediate effect on job creation and energy savings; it is also critical for our national defense.

Speaking of jobs, Clint Wilder from Clean Edge presented the annual jobs report for the industry. There are 3 million cleantech jobs globally, and 500,000 of those are in California. In fact, the Bay Area is ranked No. 1 in the country, followed by L.A. at No. 2, San Diego at No. 7 and Sacramento is No. 15. Four out of the top 15, that’s not bad!

The bottom line seems to be that to make an impact on the environment and creating more jobs, now and in the future, there should be more focus on using existing technologies, more project-based funding, and a long-term policy plan from the government and industry.

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