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Investing in Hard Times

This article was originally published in Start Up

Executive Summary

VCs worried about depressed financial markets and demanding Big Pharma customers are being tough on almost all start-ups seeking funding-but no tougher than on their existing portfolio companies. For some, hard times are creating opportunities. The circumstances of companies that raised money in the past few years are impacting newer firms now. Even organizations that met their milestones have seen valuations plummet, and are struggling to get financing. The down market is making it more desirable and easier for VCs to invest in late-stage start-ups. In-licensing has been popular, but investors are increasingly seeking value-priced components to fill out existing firms or launch new ones. Investors haven't stopped doing early-stage deals, but they're looking for firms with advantages that can reduce risk or cost, or speed a company to market. Drugmakers that used to sign big-money deals are now demanding that start-ups prove their technologies' merits through short-term, inexpensive pilot programs. Some firms aren't so pressed by hard times. VCs are promising stellar founders lots of support and time to take big risks they bet will pay off handsomely.

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A panel at Windhover's recent START-UP Forum made plain that venture capital is not an area--for all its interest in investing in innovation--which takes easily to innovation in its own business model. Panelists discussed some unusual approaches to financing and dealmaking--such as PIPEs (private investments in public equity) and the unique difficulties they bring. Investors are forming syndicates and becoming increasingly cautious; attaching strings to money in ways not deemed necessary before. In difficult and uncertain times like these, it's clear that investors need patience and fortitude, perhaps more than creativity.

MPM's Challenge: Investing the Largest Health Venture Fund

MPM has raised a $900 million fund. What's it going to spend it on in these troubled times, when valuations across all sectors of the life sciences industry are slipping? MPM plans to direct two-thirds of the fund to product and technology companies, and a third to applied platform firms. The fund will aim for an 80/20 between pharmaceuticals and devices. MPM is particularly keen to find quality-of-life investments for its portfolio. In the pharma sector, MPM may at times take a stripped-down approach to building companies, but it will also do some buy-outs and generally be prepared to invest more and support start-ups longer than VCs did historically.

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