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Observers of the Los Angeles
life-science industry scene have long noticed an imbalance: lots of
innovative ideas, but not enough smart money to shepherd those ideas to
commercial success.
This situation seems counterintuitive,
given the high regard for the
L.A.
region’s scientific infrastructure and its abundant supply of
innovative ideas. After all, the first biotech drug,
genetically-engineered insulin, was the result of work done by Dr.
Arthur
Riggs and his colleagues at the City of Hope. Also, one of the most important scientific instruments used in genetic
research, the DNA sequencer, was conceived at Caltech.
Yet lax technology transfer efforts,
among other factors, have long-frustrated investors who have found
little incentive to dig deep roots locally. As a result, finding local
venture funding for early-stage deals, particularly by deep-pocketed
investors capable of putting together syndicates, has been an ongoing
problem.
Fortunately, this situation is changing,
albeit more slowly than local entrepreneurs have hoped. More and more
experienced VCs are seeing the potential and beginning to realize that
Los Angeles
is an underserved market.
Prism VentureWorks -- a sponsor of the
SoCalBio Investor Conference -- is one such fund that not only
recognizes the opportunity, but is also acting on it. The
Massachusetts-based fund recently launched a
Santa Monica
office that will serve as its west-coast base of operations. Prism’s
arrival may signal just the beginning of a trend leading to the
formation of a local life-science venture capital cluster.
Anthony Natale, M.D., the Florida-native
venture partner at Prism’s
Santa Monica
office, recently spoke with SoCalBio Synergies about his
fund’s investment strategy, and what it’s like to be a life-science
VC in
Los Angeles
.
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Tell us about your transition from
doctor to venture capitalist?
It’s been an interesting, very organic
transition. I didn’t plan early on in my career to leave the
day-to-day practice of medicine. The
process was gradual, as I started consulting for VC firms. I found
looking at the business side of medicine very enjoyable, and decided to
pursue an MBA while I was still working at a hospital and treating
patients. As an ENT doctor, my perspective was very specialized. Now I
have an opportunity to see all sorts of breakthrough technology.
How long have you been in the VC
business?
I recently marked my fifth year working
full-time as a VC. Before joining Prism at the end of 2006, I worked at
MDS Capital, where I directed investments in the medtech sector, with a
special focus on device and diagnostic companies.
Do you miss practicing medicine?
There are moments when I miss working as
a physician, especially when I’m observing a procedure or performing
due diligence on a company: but I truly love what I do now. While I’m
no longer on the clinical side, I am in many ways more involved than
ever in medicine.
Why did Prism decide to establish an
office in
Los Angeles
?
Setting up shop in
Southern California
is a way for Prism to distinguish itself and build recognition quickly.
We see Los Angeles and most of Southern California as underserved in
terms of VC firms in general, and the situation is perhaps most profound
in the life-science sector. The region is growing in terms of technology
that is potentially very lucrative. Many investors are surprised to
learn that there are only two or three other local VC firms focused on
life-science investing, compared to 80 or 100 in the Bay Area. In
addition,
Los Angeles
is a natural fit for our digital media practice.
What is your specific focus within the
life-science space?
We’re looking mainly at medical
devices. The fund’s device bias is a great fit for
Los Angeles
and
Orange
Counties
, which are home to many promising firms. Areas of particular interest
include minimally invasive surgery, aesthetics and other types of
lifestyle/self-pay medicine. The fund also invests in interventional
medicine. That said, we’re open across the various medical specialty
areas, and view opportunities company-by-company.
Does that openness extend to biotech
deals?
The simple answer is yes, but compared
to devices, biotechnology is more risky and more “binary” in that a
project is either successful or unsuccessful. Medtech, in contrast,
offers a greater range of results. Biotech also tends to require more
capital – but of course the payoff can be huge. We view medtech and
biotech as complementary, and we like the fund to have both.
Any preference regarding a firm’s
stage of development?
Although we tend to focus more on early
stage investment, we don’t really have a strong preference. We’re
open to funding at every stage of development, from seed to mezzanine
investment.
Give us an example of a recent deal
and why you liked it.
One recent successful case study
involves Serica Technologies, which is an orthopedic materials firm out
of the Greater Boston area. Serica develops a silk-based biomaterial
platform for connective tissue repair. Prism VentureWorks co-led the
company’s C round with existing investor Morningside Technology
Ventures. Ivy Capital Partners also joined as a new investor. Serica’s
biomaterials serve as “scaffolds” to provide support and relief to
damaged tissues, which in-turn promotes restored function. The product
is designed to aid natural healing by
slowly reabsorbing into the body
and avoiding further damage that can result from overuse of the injured
area. The product has the capacity to be commercialized as an
off-the-shelf replacement for connective tissue repair. This would truly
revolutionize current standards.
What’s your advice for aspiring
entrepreneurs to become fundable?
First, do your homework and know
what’s involved in starting a company before you launch. It sounds
simple, but you have only one chance to make a good first impression and
gain early momentum. Start-ups don’t need to spend a lot of money to
do their homework and get good advice. They can turn to universities and
tech transfer offices,
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Dr.
Natale believes the new Los Angeles office will help
Prism distinguish itself quickly.
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Prism
VentureWorks
@ a Glance
Founded:
1996
Location:
Westwood, MA & Santa Monica, CA
Size
of Current Fund:
$250 million
Industry
Focus:
- Life-Science
- Digital
Living
- Information
Technology
Stages:
Seed to mezzanine
Investment
Professionals:
14
Life-Science
Portfolio Examples:
- Aptus
Endosystems
- BioRexis
- Entrigue
Surgical
- Insulet
Corporation
Web:
www.prismventures.com |
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as well as organizations like the Southern
California Biomedical Council. Anyone who says they don’t have the
resources to get information is really saying that they’re not
motivated, especially in a place like Los Angeles, where we have so many
great universities, conferences and networking events. Even the Internet
has a wealth of information regarding what VCs are looking for. So as I
mentioned, if I have one piece of advice, it’s to do your homework and
educate yourself. Life-science entrepreneurs should recognize that a
scientist would never think of performing an experiment without first
doing the necessary research, and starting a business should be viewed
the same way.
Any other dos and don’ts?
It’s important to not focus solely on
the science. Aspiring entrepreneurs need to think about commercial
applications and business opportunities. Also, they have to carefully
study the successes and failures of other start-up firms. VCs like Prism
don’t fund science projects. We’re not the NIH. We’re here to
generate returns for our investors, so we need products, not just
“cool” science. Last but not least, don’t assume anyone with an
MBA can run your company. This sort of mentality can turn off a VC
faster than anything.
Do you think the early-stage funding
environment is getting better with the entry of new money from sources
such as hedge funds into private equity investing?
To some degree, the answer is yes, but
non-venture sources such as hedge funds can’t really fund early-stage
life science deals, which are still dominated by a few leading venture
funds. Early-stage investing is a fairly stable space.
Where do you see the impact of such
money?
There’s now a universe of life-science
companies that are relatively mature but not ready in the current
environment to go public. This has created a new, expanded market for
private equity led by several types of investors including hedge and
crossover funds. These new investors are focusing on late-stage deals in
private companies that are essentially at the same stage as the public
companies they were investing in just a few years ago. It is at
late-stage development where we see a lot of money chasing a few good
companies.
What’s the trend with respect to
exit strategies?
Exit strategies have changed because the
IPO market isn’t what it used to be. But it’s important for
entrepreneurs to keep in mind that changes in the relative importance of
exit strategies should not affect how they build their business. If they
build the business well, they will find a good exit. These days, the
balance is in favor of M&As versus IPOs. We no longer count on the
public markets.
Can you provide an example of a recent
portfolio exit via acquisition?
One of our recent portfolio exists was
BioRexis Pharmaceuticals of King of Prussia (PA), which was bought by
Pfizer this past February. BioRexis is developing long-acting GLP-1
receptor agonists for treating type 2 diabetics. The company has
proprietary protein engineering technologies based on human transferrin.
How does the change in the relative
importance of exit strategies affect Prism’s investing?
If we invest, our goal is to build the
company for sustainability regardless of what the exit picture will look
like a few years down the road. In general, we no longer look for
premature exits, notwithstanding the willingness of big pharma and
device companies to buy earlier stage deals, as in the case of BioRexis.
Companies generally need to get further down the pathway by building a
sustainable business. Looking ahead, I don’t think things will change
dramatically over the next few years. Companies will still need to be
more disciplined; and investors will need to see more data and potential
sales traction than in the past. v
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