Venture Money for Biotech Lags Far Behind Dot-Coms.

STEPHEN O'Connor's story is very familiar, and also very unusual. He's a local entrepreneur whose company is not much more than a year old, but has already secured $1 million in seed financing from angels and venture capitalists. He's now putting together a second round of venture financing, around $10 million worth. Nothing too unusual there.

His startup has quickly gone from four employees to 13 and will use the incoming funds to produce and ship a product, building upon already-signed corporate alliances - just like dozens of other local startups have done.

What makes O'Connor's story unusual is that his company has nothing to do with the Internet.

Pasadena-based Nanostream Inc. is a biotechnology firm that has developed a microscopically small polymer wafer that can be used in biological and biochemical testing, and its success in attracting financing makes it something of an anomaly among L.A. biotech companies.

The million bucks it raised in the second quarter of the year was the only venture money that went to an L.A. biotech firm, according to a quarterly survey put out by PriceWaterhouseCoopers LLP.

When informed of that fact, O'Connor was surprised. Others were not.

"Venture capitalists in general don't think of L.A. as a (biotech) hotbed," said Ahmed Enany, executive director of the Southern California Biomedical Council. "That's changing, but slowly."

In fact, as the amount of venture capital poured into Los Angeles has increased dramatically over the past few years, relatively little has gone to what increasingly is being called the life sciences sector - medical devices, pharmaceutics, genetics and biochemical and biological inventions (as distinguished from health care-related businesses).

While more than $1.8 billion in venture money was invested in L.A. companies last year, only 1 percent went to biotechnology.

Emerging investor interest

The reasons are varied. Until a couple of years ago, there was relatively little venture activity in Southern California at all, compared to Silicon Valley, and to a lesser extent, Boston and elsewhere in New England. The venture capitalists who set up shop here for the most part poured their energy and resources into commerce, business-to-business and infrastructure enterprises related to the Internet. This, of course, was spurred by the huge valuations accorded to these companies by Wall Street once they went public, a two-year binge that only ended in April, when technology stocks plunged.

The corollary to that is that investing in biotech requires more due diligence and patience than is required with Internet companies. For the most part, the venture community sought to get as quick a return on their investments as possible, and for a time the Internet proved to be faster than anything anyone had imagined.

"Prior to a couple of years ago, there wasn't that much (venture) activity," said Alfred E. Mann, chairman and chief executive at insulin pump firm MiniMed Inc.

As one of L.A.'s richest residents, Mann has funded several biotech firms on his own, and does some angel investing as well. "What then happened was the Internet/dot-com craze began to develop and the VC money all went into that sector," he said. "People were looking for quick riches, and the biotech field takes years to mature."

But even as the dust from the tech wreck settles and biotech gets a second look from the venture community, Los Angeles still attracts less interest than other parts of the country. Silicon Valley, Boston and San Diego have far more money going into the life science sector than does Los Angeles. And one argument is that there simply isn't the same momentum behind biotech startups in this area.

"Los Angeles has never been a major leader in the biotech field," said Gordon Binder, outgoing chairman of Thousand Oaks-based Amgen Inc., who plans on starting a VC firm of his own next year. "One reason was because you didn't have the venture capital here."

It is a circular argument, of course, and coming from its source, one not without some irony. After all, Amgen is perhaps the most successful biotech company ever (1999 profits were in excess of $1 billion), and yet some say it could do more to encourage local like-minded startups.

"Why have you not seen successful spin-offs from Amgen?" asked Richard Hamilton, chief financial officer at Malibu-based Ceres Inc., which is developing genetically engineered plants using genomics, the high-speed method of isolating genes. "Maybe it's because it's so successful that people there don't want to take risks."

Searching far startups

Regardless, it's true that the number of high-profile VC funds with a strong biotech presence here pales compared with points north and south.

A year ago, members of L.A's Brentwood Venture Capital, Silicon Valley's Institutional Venture Partners and Orange County's Cross-point Ventures formed Versant Ventures, raising $250 million to devote solely to biotech and health care. (Other partners in Brentwood and IVP merged to found Redpoint Ventures, which concentrates solely on new-media companies.)

So far, Versant, with offices in Newport Beach and Menlo Park, has invested in 12 companies, most of which are biotech outfits. None is in Los Angeles.

"There aren't too many (L.A. biotech startups) we can point to that are highly successful," said Versant Managing Director Bill Link. "Our sense is that there should be some really nice opportunities in the area."

Indeed, L.A. has some natural advantages in creating and supporting such companies, especially with its strong academic community. UCLA, USC and especially Caltech all have given birth to new companies from students and professors with proprietary technologies that are seeking venture money to grow their businesses.

Caltech alone has spawned more than 30 companies since 1995, when it set up its Office of Technology Transfer, and is now putting out between 15 and 20 such companies a year, with over half being in the life sciences sector.

Richard Wolf, assistant director at the tech transfer office, disputes the notion that there aren't a lot of ground-level investment opportunities in local life science companies with hot proprietary technology.

"Times are better than we want to give them credit for," he said. "Just this year we started six life science companies."

But even he admits that there is a paucity of local venture capitalists heavily involved in the sector. Caltech invites qualified investors out to meet with its entrepreneurs every couple of months, and Wolf says the response has been terrific, with interest from groups as far away as Hong Kong. Even so, some of the on-campus entrepreneurs harbor doubts.

"The fear is that no money is coming in. Well, the money is coming in, but we have to go out and get it," he said.

The one thing virtually all parties agree on is that the venture community and the universities haven't bonded enough.

And no one disputes that there is a lot of venture money out there looking for solid investments.

"If you've got a great story, the VCs want in," O'Connor said. "If you have a lousy story, they don't."