Mr. Fleming: Forward Ventures is a venture capital firm located in San Diego. We have about 450 million under management and we specialize in biopharmaceuticals. We do some device investing in the healthcare space. We do not do healthcare services IT or anything in healthcare IT or anything in the IT space. There are three senior professionals here. Myself, Stan Fleming, I'm a Managing Member along with Dr. Ivor Royston. We founded the company in 1993, Ivor and I. The third professional is Dr. Stuart Collinson. We have invested in about 70 companies over the life of the firm, and we are currently investing in our fifth fund, Forward Ventures V. Forward IV was a 256 million fund of vintage year 2000. The Forward V Fund is 145 million in vintage year of 2003. We are actively investing out of the 2003 fund. A typical portfolio for us is 15 to 20 companies. We invest in early clinical-stage assets or very near the clinic and we have founded a number of companies. We generally invest in early venture rounds, but in fairly mature technologies that are in clinical testing and in the case of medical devices oftentimes in marketed products. That's a general background on Forward Ventures.
TWST: It has been a difficult year for venture capital investing, how has it been for your firm and looking for potential candidates?
Mr. Fleming: The financial meltdown or the dislocations in the financial markets have had the greatest impact on those sectors of our business that are most dependent upon having functional markets. I should say that most of our investment activity takes place in biopharmaceutical companies in private markets as opposed to the public markets, though we have taken a number of companies public in the past. These companies are engaged in product development products with life cycles of five to ten years. During that time, they are constantly in need of capital. So they are particularly dependent on orderly financial markets.
What's happened in the market is that a dearth of buyers has led to a lack of transactions. As a result, the markets have ceased to function. There has been a major dislocation between the buyers and sellers in this market, and it will be slow to get restarted.
The dislocation has fallen disproportionately towards the later stage end of the market. The good companies in this sector have built up significant capital value through a series of private financings in the venture community. These are companies with valuations in excess of 100 million. Suddenly they found themselves competing against publicly traded companies at similar stages of development that essentially had no markets at all for their equity and so had capital values that were dramatically depressed. As a result, the venture capitalists who had been focusing on the private markets shifted their attention to public markets. With no buyers, the private markets collapsed.
The late-stage companies have been unable to raise equity capital at any kind of reasonable prices without facing a total washout of existing investors, many of whom have been in these companies for more than five years. Most of those companies ended up reverting to inside rounds of financing, regardless of how well the company was doing or stage of development. Since a number of the syndicates that are supporting these companies have been at the table for a long time, they are often not as strong as we would like. So it can be difficult for the companies to raise the money they need to continue product development.
Still, we have seen rounds of financing in most of these companies. Since they are "inside" rounds, they're not at substantially depressed prices. The money comes from existing investors trying to protect the capital value that they have built up over years. However, for those shareholders who can't invest, the "play-or-pay" penalties are severe. Their preferred shares are usually converted to common and in some cases even washed out, resulting in a substantial or total loss of value. So this market has been very difficult for later-stage companies. Our earlier companies have not built up significant capital value yet. They are in their first, perhaps second round of venture financing. That end of the market has held up considerably better. Some of those companies are looking at getting rounds done, but even in those areas, it's still slow and very challenging. Only the best companies are getting funded with outside money, and they are doing so at prices that by last year standards are modest.
Interestingly enough, the very early stage market has held up reasonably well, because start-ups are not funded through market-based transactions. These are generally negotiated deals with licensors, whether it's universities, pharmaceutical companies or biotech companies. So they don't depend upon having orderly markets as much as they depend on the availability of capital and technology.
If you step back and look at the statistics for the market as a whole, you see activity at the early stage and at the late stage. The early stage, as I've mentioned, is activity that is not market-based. If you look at the late stage market, that activity is largely ininside rounds, driven by the need for these companies to continually finance regardless of the conditions in order to support late-stage clinical trials. The syndicates can only sustain those kinds of transactions for a limited period of time before they run out of money. If they find themselves in a situation without a functional market for an extended period of time, there are going to be substantial losses in the sector. I don't think that has really started to happen yet, but should the drought continue for another year or so, the companies will continue to consume capital in clinical trials, and the syndicates will eventually get tired and then we will see those valuations collapse. That could have serious repercussions for the industry, because these are some of the most valuable assets in the entire venture portfolio.
So it's a tough, challenging, difficult time for the bio-venture world and the biopharma in particular.
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