Views from a Venture Capitalist

Nancy Harrison

Venture Capital Investment in Canadian Companies

Excludes Canadian VC investments in foreign companies

Source: Macdonald & Associates

170167

256

190

82

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

1998 1999 2000 2001 1H-2002

Year

To

tal

Val

ue

0

50

100

150

200

250

300

Vo

lum

e

Total value raised # of financings

Venture Capital Investments in Biotech

Canadian VCs Support Industry

0 2 4 6 8 10 12 14 16 18

Canada

US

Percentage Invested in Biotech

1998

1999

2000

1998

1999

2000

2001

2001

1H-2002

1H-2002

The Markets are Bad – How Bad are They?

Where is the Bottom?!

40%

50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

9/1

7/2

001

10/1

/2001

10/1

5/2

001

10/2

9/2

001

11/1

2/2

001

11/2

6/2

001

12/1

0/2

001

12/2

4/2

001

1/7

/2002

1/2

1/2

002

2/4

/2002

2/1

8/2

002

3/4

/2002

3/1

8/2

002

4/1

/2002

4/1

5/2

002

4/2

9/2

002

5/1

3/2

002

5/2

7/2

002

6/1

0/2

002

6/2

4/2

002

7/8

/2002

7/2

2/2

002

8/5

/2002

8/1

9/2

002

9/2

/2002

9/1

6/2

002

NASDAQ Biotechnology IndexS&P 500 IndexNASDAQ Composite IndexDow J ones CompositeS&P/TSX Pharmaceuticals & Biotechnology IndexS&P/TSX Composite Index

Source: Yorkton Securities

The Bad News

• Blair/Clinton comments• September 11th• Enron• Elan• Dov • Pharma downturn • Series of poor data, FDA rejections• ImClone

Are There Public Market Safe Havens?7 Stocks Lose $62B in 6 Months

12/31/01 6/12/02 Mkt Cap Change Mkt Cap %

Amgen $59.2B $42.2B -$16.8B -28%

Genentech $28.6B $17.4B -$11.2B -39%

Immunex $15.8B $12.4B -$3.3B -21%

Elan $15.4B $2.6B -$12.8B -83%

Serono $14.3B $10.2B -$4.0B -28%

Genzyme $12.7B $4.0B -$8.7B -68%

Idec $10.5B $5.0B -$5.5B -52%

Total $156.4B $94.1B -$62.4B -40%

Source: BioCentury June 24,2002

What Constitutes a Tier I Company?

March 2000: 41 of 81 companies have products

Today: 33 of 36 companies have products

Source: BioCentury June 17, 2002

US Money Raised by Biotech Companiesin 2002 YTD

$ YTD $ 2001

IPOs $250.6M $400M

Follow-ons $592.4M $4B

Venture capital $2708.6M $4.2B

Other $5537.0M $7.4B

Total $9088.6M $16B

Source: BioCentury September 9, 2002

Where are the institutional investors?!

Canadian Public Market Financings are Dead

$275

$1,366

$1,564$1,647

$332

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

1998 1999 2000 2001 1H-2002

(CD

N $

mln

)

Source: Yorkton Securities

Money Raised in Public Canadian Biotechnology Companies

Six Top Public BC Biotech’s – 2 year, 5 year

                                                                           

Private Deals Done in BC – not many -

• Last half 2001– Protiva - $14.5m

• First half 2002– Oncogenex - $3.6m

• Other deals – follow-ons – Grants - Genome Canada

BC Companies are Still Not on the Radar Screen of Foreign Investors

Foreign VC's in Canadian Biotech Deals in BC

$ 0

$ 10,000

$ 20,000

$ 30,000

$ 40,000

$ 50,000

1996 1997 1998 1999 2000 2001

0

1

2

3

4

5

$ Invested

# of Investments

What are VC’s Focused on?

The New Reality

• Internal rounds (Series B-2) closing a year after Series B

• Lack of lead investors• Debt financing• Lay-offs and downsizing/prioritizing• Mergers• VC’s supporting their own companies• VC’s having a hard time getting excited about the

“old” model - Disillusioned• Numbers don’t work anymore

A Generic Early 90’s Model

Round Type Date

Amount Raised (MM)

Pre-Money Valuation

(MM) IRR Multiple

1 Seed Jan-90 $ 0.50 $ 2 101% 32.53

2 1st Jan-91 $ 3.00 $ 10 70% 8.13

3 2nd Jan-92 $ 8.00 $ 32 50% 3.30

4 3rd Jan-94 $ 13.50 $ 100 32% 1.32

5 IPO Jan-95 $ 150

Total Private Capital $ 25 MillionFrom Vinod Khosla (KP)

A Generic Late 90’s Model

Round Type Date

Amount Raised (MM)

Pre-Money Valuation

(MM) IRR Multiple

1 Seed Jan-97 $ 5 $ 35 79% 18.37

2 1st Jan-98 $ 10 $ 100 65% 7.35

3 2nd Jan-99 $ 25 $ 200 59% 4.04

4 3rd Jan-00 $ 60 $ 600 52% 1.52

5 IPO Jan-01 $ 1000

Total Private Capital $ 100 Million

$200$200

??

Angiotech Model

• Go public on TSE (stepping stone/capital)• Then go to NASDAQ (liquidity)• Luck element - public markets closed

Big Corporate Partnership Model

• Sign a big deal and get credit (Inex)• Doesn’t always work that way anymore (StressGen)

Top Quartile VC IRR’s above 30 %

US Venture Capital Net Returns to LPs by Fund Vintage Year

(40.0)

(20.0)

-

20.0

40.0

60.0

80.0

100.0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

An

nu

al IR

R

Lower quartile Median Upper quartile

What are VC’s doing to Get Returns?

• Focusing on companies with on products, revenues and profits

• Avoiding concept deals• Doing fewer deals – more money per deal• Watchful waiting• Investing in NRDO’s e.g. Salmedix

What are VC’s doing to Get Returns?

• Investing in Superhero CEO’s– Affinity raised $70m Series B – June 24

• Investing at lower valuations (40%)– Especially for Class of 2000 companies

• Letting companies go under – not throwing good money after bad

• Investing in relatively cheap publics versus private companies

So What Can Companies Do?

Creative Financing Alternatives

• Cut Burn– e.g. Geron

• Let go 1/3 of work force to refocus on later stage programs – June 2002

• “In the current financing climate companies that are well managed make tough calls…early.” Alex Barkas, Chairman

• Slice and Dice Market– e.g. Angiotech - masters of this

• Lean and Mean– Angiotech never more than 50 people

Creative Financing Alternatives

• Strategic M&A– e.g. ImmGenics

– Don’t wait until out of money

• Deals to cut burn, increase chances of success– e.g. Active Pass/Neogenesis

• Buy versus Build– e.g. Active Pass

• Spinouts– e.g. Inex/Protiva

Summary

• The world has changed – forget the past• Lots of money out there

– For Right story - at Right Valuation

• Time is the enemy: Financing and M&A take a long time – don’t get pushed up against the wall

• Remember what drives investors – returns! – build into pitch

• Be flexible on model and exit• Founders make money when shares are sold, not on

company financings.

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