SBIR Funding - Should it be open to VCs?

I don't have much time to give you an extensive blog about the issue but I did want to bring this to your attention. Here's the nutshell.

The NIH's SBIR (Small Business Innovation Research Program) funding mechanism has been an important one for small businesses who are not big/mature/saavy/desperate-enough to land venture capital funding, have very limited access to other NIH funding, and have tapped out the available angel/seed/friends_n_family resources at their disposal.

Since 2003, one of the hallmarks of the rather small SBIR funding pot ($2.2 billion a year) has been that it was not available to companies that are majority-backed by venture capital. Before 2003, venture-backed firms were allowed to participate in the SBIR program.

The program is scheduled to expire next month and so is up for renewal. The House committee responsible for the program has proposed that the VC-restriction be removed thus re-opening the program to a whole slew of companies previously ineligible. The House just passed this bill. A senate version of the bill tries to reach a compromise by limiting the amount available to venture-backed firms.

Whatever your opinion on the judiciousness of this move, there is no doubt that opening up eligibility to the program will dilute the available funding.

Here is a link to yesterday's article on the subject in the Washington Post.

Fellow blogger Steven S. Clark (BioScience Biz) has a just posted his most recent update and opinion on the matter that is well worth the read.

VCs ready for stem cells?

Traditional wisdom on the street (that's main st. not wall st.) says that VCs are not yet backing cell therapies or regenerative medicine type investments because (a) it's too early, (b) they got burned at the tip of the gartner curve in or around 2000, (c) they're waiting for the first home-run/blockbuster or even modest success story, (d) the regulatory pathway is too ambiguous, (e) the business models are not clear, and/or (f) all of the the above or any any other logical sounding reason.

While there certainly is some truth to the cited reasons, it's not true that VCs have stayed away from the cell therapy/regen med pool - ok maybe they've just rolled up their pants and stepped gingerly into the wading pool end! While VC participation to-date may be modest relative to the size, number, and/or enthusiasm of VC funding in other sectors, there certainly is evidence to counter a blanket statement about lack of VC participation.

• I maintain a database which today lists ~225 investors with one or more investments in a cell therapy or regen med play representing ~290 investments in ~110 cell therapy companies plus ~23 pharma, biotech, or device companies with an investment in an external stem cell and/or cell therapy-related venture.
• Toucan Capital - likely one of the undisputed pioneers in VC funding for stem cells - has been building a very early-stage portfolio for several years.
• So far this year there has been deals announced representing ~$500M largely in the purchase or license of product lines. Additionally there has been~$149M in direct investment deals announced.
• Certainly companies like Geron on the public side and Tengion on the private side have done just fine raising money to-date.
  

This week's positive sign was the announcement of Kleiner Perkins Caufield & Byers funding of iZumi Bio Inc - an induced pluripotent stem cells play. KPCB (namely Beth Seidenberg and perhaps others) has been following the sector for some time but to my knowledge has not made any investments.

While iZumi has not revealed their business strategy, the announced focus of their research will be "potential use of stem cells in cardiovascular medicine and drug discovery". Certainly the use of stem cells for drug discovery and testing is now the sexy low-hanging fruit for investors and companies looking to create revenue in the short-term while funding their longer-term therapeutic programs (similar in a way to the approach Gail Naughton's new company (Histogen Inc) is taking).

While Bioheart's IPO did not fare so well earlier this year, Aldagen has announced its intention to launch an $8o+M IPO sometime soon and given their success in raising private money appears to have reason to have some confidence.

This IPO and the progress of Proteus Venture Partners in closing their regenerative medicine fund should be two very interesting events to watch in the second half of 2008!

--Lee