Value for money
As opposed to credit crunch, the latest round of venture capital has been more successful in Ireland - and prices are lower. It's a good time to be doing business, writes Louise Hodgson.
Of the nine new funds in the latest round of venture capital (VC) in Ireland, three of them are dedicated to the life sciences, and the other, less industry specific funds are showing signs of leaning towards the sector also. In a world where credit crunches and budget squeezes are ruling the way in which business is being conducted, it appears that biotech and pharma start-ups, at least, may not be feeling the full blow of the recession.
Of course the industry itself has not side-stepped this global epidemic altogether. Announcements in the first four months of 2009 from the likes of medical devices behemoth Boston Scientific and Élan, the Irish blockbuster maker, of restructurings, reshufflings and relocations here in Ireland, illustrate that the big players are certainly pulling the purse strings. Venture capital, however, is primarily concerned with early stage, high growth potential companies and projects, and its availability in Ireland has, so far, been mostly unaffected by a crunch of any kind.
Regina Brehany, general director of the Irish Venture Capital Association (IVAC), however, does not want to give the impression that money for VC was easily available. Timing, she says, played a large part in this latest round. "It's been very difficult. The Irish VCs have raised money, but the luckier ones had raised the moneys before the recession really hit. It was still very difficult all round. There is great credit due to them, really, because VC funding in America, Europe and the UK is significantly down, whereas in this investment cycle it's up in Ireland and the funds here are bigger this time around than they were last time," she says. "To use a cliché, Ireland is very much punching way above its weight in terms of VC at this stage."
The difficulty mostly lay in attracting international moneys. However, Ireland is unique in that we usually try to attract foreign moneys into VC on a company by company basis, so that may be the way in which this particular problem is overcome.
The VC cycle that is currently underway began its funding rounds in 2007, however, it was Seroba Kernel that closed first, in February of this year. Seroba Kernel is the combination of Seroba BioVentures, which managed a dedicated life sciences VC fund, and Kernel, a more general VC company. Seroba Kernel, however, describes itself as "Ireland's largest and most experienced life science venture capital firm" and on February 9th, the Tanaiste Mary Coughlan announced the first close of its Life Sciences Fund II Limited Partnership with €75 million. It was the seventh fund supported by Government through Enterprise Ireland's €175m Seed and Venture Capital Programme 2007-2012, and was the second fund dedicated to the life sciences sector.
"The latest fund will be invested in Ireland and the UK principally, but really it's a European life sciences fund," explains Seamus O'Hara, partner of Seroba Kernel. "We haven't published a specific proportion that will be put back into Ireland, but I think a substantial portion will be invested here. The bulk of the team is based in Dublin so this is the market we're very familiar with.
"You have to remember that the investment by limited partners into the venture capital fund has an object of getting a return on that investment, so it's not being limited just to the Irish market. As a specialist fund, we're quite focussed, unlike generalist funds that are looking in all areas. So to limit ourselves purely to Irish deal flow would, for this scale of fund, be a little bit limited."
The firm intends to invest in 10 to 15 companies, focussing primarily on therapeutics, medical devices and diagnostics but "the team" will also consider other opportunities. The fund will lead or co-lead its investments with an average investment size of about €5m-€7m per company over its duration. The investors are mainly institutional and include the National Pensions Reserve Fund.
As for the implications of the recession, O'Hara explains that, while the industry as a whole has certainly been affected - although not quite as much as other industries - the nature of VC is such that current wobbles in the stock markets and currency fluctuations are irrelevant to its operation. "The markets have been down across the board, and no sector has been spared, but venture investing is a long term game. The funds are 10 year funds, so we're not looking at what's happening today or tomorrow, we're looking at what's happening a number of years from now.
"In general terms," he continues, "there may be a little bit more caution in terms of venture investors making sure they're backing their existing portfolios, so, for new companies, there is a sense that it is a bit tougher. But the reality is that quality projects and quality companies are getting backed. I think that's probably a reasonable assessment of how it is right now."
Regina Brehany even goes so far as to look on the bright side. It has often been said of late that the recession has created new value for money - something that Ireland has perhaps been lacking in general for many years now. More value for money implies greater performance, which should secure more investment for the next round of VC, which is crucial for the continued growth of the sector.
"This time around," she explains, "there's a lot better value out there than in the last cycle. The last cycle was very, very difficult, because the whole IT bubble burst at the beginning of the cycle, and prices were really high. This time around they are significantly lower, and we've a far better chance of getting pretty good performance out of this cycle than the last one.
"Performance has been very difficult all around the world, and it's all about performance at the end of the day. If performance in the first couple of years in this cycle is looking good, it can encourage long term investors to come in and play next time around. So I wouldn't be overly concerned about the next round yet. In any case, it'll be three to four years down the road and economies could look a lot different. And certainly, if the funds are able to invest now at much lower valuations, there's a better chance of producing good performance."
Needless to say, O'Hara is also encouraged by the way valuations are now going in favour of the investor. "Valuations are also realistic now. We're typically investing in companies at a relatively early stage where there's a lot of risk and a lot of work to be done, so valuations have to make sense. I think, in current markets, valuations are realistic."
The announcement of the €75m close generated a lot of publicity for Seroba Kernel, and a number of projects were brought to the team's attention. "We intend to make a number of investments this year," encourages O'Hara. The first investment, however, was in Opsona Therapeutics.
On February 18th, just nine days after the Seroba Kernel close, it was announced that Fountain Healthcare Partners (another Irish life sciences specific fund), Novartis Venture Fund, Inventages Venture Capital and Seroba Kernal had invested in Opsona Theraputics, an Irish biotechnology company focussed on autoimmune and inflammatory diseases. It was an €18m series B financing round, the proceeds of which will go to the advancement of Opsona's clinical trials.
"Opsona is an Irish company run out of Trinity that's raised a substantial amount of money with strong backing from big, corporate, well known household names in the pharmaceutical-biotech sector," says O'Hara, assessing the valuation of that investment. "There're a number of key things to achieve in terms of validating companies at that stage and their products, and you can see big uplifts in valuation as they progress. With companies at this stage of development, where the focus is not so much on revenues and so on, it's about hitting validating milestones like moving a product from the bench into animal models and then on into clinical trials and getting through those phases."
Opsona will hopefully be the first of many investments, and O'Hara admits that he and the others at Seroba Kernel are currently looking at a number of projects, "but our doors are open now for people interested in raising funds.
"Our view is that the life sciences sector is generally very interesting. It tends to be a defensive sector in terms of pharmaceutical business and the healthcare business, but the reality is that the medical need will always be there and populations in the developing world are aging. So there are lots of opportunities for companies that are developing new medicines and medical devices. We see Ireland as a very good place to find those companies and then build those companies. Of course the economic environment creates difficulties in a general sense, but in terms of the sector we're focussed on, it's a good time to be doing business," O'Hara concludes.