Searching for a Pulse
By Carlo Longino, Tue Jan 21 12:00:00 GMT 2003
Wireless and biotech are coming together to create another buzz industry - "biodefense". But it may not yet be the best place to throw VC dollars.
The wireless and biotech industries whose rise was heavily fueled by venture capitalists, and two of the hardest hit when the bubble burst. But investments with a view to combining the two - often now under the umbrella of "biodefense" - and throwing in another well-hyped area, nanotechnology, seem to be picking up steam. Are VCs hovering with good reason, or do they just have bad memory?
Biotech and nanotech start-ups still hold a draw for investors, even though as VC investment overall continues to pull back. Although in 2002, VC firms returned more principal to their investors than they managed to raise for new funds, nanotech ventures raised USD427 million in 2002, up from USD190 million the year before, according to Venture Economics and Venture Capital Journal. One VC firm, MPM Capital, also managed to raise USD 900 million for a biotech fund.
And many of these ventures are keen to throw wireless into the mix, whether it is to report data from environmental sensors or keep doctors aware of what's going on inside a patient's body. These companies have also received a boost from post-September 11 anti-terrorism hoopla, be it from government money or investors expecting heightened interest in, and need for, their products.
In the reaction and response to the terrorist attacks on the World Trade Center, it became painfully obvious that the United States - and many other countries - is woefully unprepared for a chemical or biological attack. Detection systems, if available, are cumbersome and expensive, and are generally only deployed reactively, that is, once an attack or outbreak is suspected, which may be too late in most cases to save many lives.
This has focused a lot of attention on companies working to develop new sensors to detect toxins or deadly viruses for both military and civil use, with wireless reporting capability being a key function. But it's not as simple as creating an automatic test strip and patching it in to a cellular network, it often requires new scientific processes to be developed, honed, and perfected. Adapting what can take an entire lab full of equipment into a reasonably sized - not to mention reasonably-priced - unit can be a mighty task.
But the US government has made biodefense a priority, already having awarded USD50 million in contracts to companies in the field while Congress and the requisite bureaucrats bicker over how to spend the whopping USD37 billion tabbed for "homeland security and defense" for fiscal 2003. Recent estimates suggest at least USD6 billion of that will go towards biodefense ventures. But that amount is still only half what the biotech industry spent on research and development in 2001.
Apart from a well-established need and market space, biodefense ventures receive some other boosts as well, the least of which in intellectual property, which can be a sticky subject in any science-based endeavor. US patent applications that are counter-terrorism-related are guaranteed expedited reviews, offering another quick path to revenues. And although crafting a proposal for government funds can take 18 months, once approved, the funding comes with few restrictions and without the added pressure of meeting VC-established milestones. The government also makes no claim to any intellectual property stemming from such funded projects, and of course, the government often becomes a venture's first customer upon the successful completion of a funded product.
So it would seem that combining bio- and nanotechnologies and wireless would make a good stomping ground for venture funds. But many industry watchers wonder if VCs are too quickly forgetting the lessons of the past 2 or 3 years, especially in the case of nanotechnology. It's an area laden with risks for the investor.
The first drawback is that anything in this market space fundamentally relies on some pretty hefty science that's miles and miles away from making some neat Flash animations to front a B2B exchange. Biotech and nanotech require a fusion of biology, chemistry, pharmacology, physics, materials science, and engineering - and that's even before throwing in a wireless element, which is another hill to climb on its own.
And many ventures have barely begun the process of figuring out all that science, offering little more than a proof of concept, and similarly, little intellectual property from the outset. And what IP entrepreneurs bring to the table may be tied up in universities or other research hotbeds, laying out a potential legal minefield.
The upshot of these factors is that anything developed in this field may take a lot longer to bring to market than VCs have the patience or pockets for. Indeed, MPM Capital, the company that raised the USD900 million biotech fund, has its principal investors make a 10-year commitment, and has told them not to expect any payout for at least 4 years. In fact, the firm is only now returning the initial USD230 million to its principals from its 1997 fund.
So this market may not be the best place for an inflow of VC money - not yet, anyway. It may be safer for now to let the scientific research carry on in university- and government-funded labs and projects, without tying up investor money in such a risky endeavor. And getting in on some products developed solely to satisfy a government need may not fit VCs' plans well either. Standard government products, and these limitations are sure to tighten as long as economies shrink and budgets carry wide deficits, only allow for 15-20 percent profit margins, making them pretty unattractive to VCs.
A Waiting Game
In this market, venture capitalists may do best to have some patience - something they've not been long on in the past. While there may be a media and government frenzy over biodefense products, marrying already-hyped industries like bio- and nanotech with the king of hype itself, wireless may not get them the best return for their dollars.
What VCs do best is to fund companies developing products and applications, not technology or science. And this market is far too embryonic - pardon the pun - to take that step.
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Carlo Longino is a freelance writer based in Austin, Texas. His previous experience includes work for The Wall Street Journal, Dow Jones Newswires, and Hoover's Online.