Money’s There, but Hurdles Abound

Aspiring biotechnology entrepreneurs in Greater Los Angeles complain that it’s a struggle to raise the capital needed to launch start-ups.

Indeed, venture capital is tough to come by at a time when investors are looking for quick payouts and have little patience for biotechnology, which seems to be plodding compared to Internet, software and telecommunications companies.

Although venture investment in biotech has remained fairly constant in recent years, most of that money has been flowing into San Diego, the San Francisco Bay Area and Boston--the country’s major biotech clusters.

And the market for initial public stock offerings in biotech has all but disappeared.

The difficulty in finding cash for start-up and early-stage companies is among the biggest barriers to plans for establishing a world-class biotech center in the Los Angeles-Orange County region.

But there are other obstacles. It is hard to assemble large pieces of land for the kind of biotech parks that dot the landscape around San Diego, and laboratory space is in short supply.

The major biotech centers around the country have attracted a trained labor force that can move easily from one firm to another--especially important in a high-risk field where workers want to know that if one business fails they can quickly find a job at another.

And local biotech entrepreneurs long for a sense of community that they see among high-tech employees in Silicon Valley, where budding businesspeople meet casually at local taverns and coffeehouses to hatch ideas and build financial relationships.

Ready access to capital can overcome many other problems, however, and venture capitalists and other industry watchers say there is money available for Southland companies with strong science, commercial ideas and carefully drawn business plans.

“We would be quite interested in doing deals in Los Angeles. We just haven’t found the right opportunities,” said Arthur J. Klausner, a general partner at Domain Associates’ Laguna Niguel office. Domain’s investment portfolios include a number of biotech and medical device companies in San Diego and Orange counties.

“There’s overall a dearth of capital [in biotech], but it hasn’t dried up,” he said. “Good deals tend to get funded and bad deals tend not to get funded.”

When Bassil I. Dahiyat, with a new PhD from Caltech, went to venture capitalists two years ago, he got a warm reception, helped by the prestige of the university and its faculty’s connections.

He and his Caltech mentor, biology professor Stephen Mayo, had come up with software for designing new proteins never seen in nature.

“It’s like evolution, but we do our evolution on a silicon chip in a computer,” he said. Not only does the firm design potential drugs and industrial chemicals, but it builds them in its laboratory for potential customers--pharmaceutical, chemical and agricultural companies.

Dahiyat wanted to keep his new company, Xencor, close to his old academic haunts in Pasadena. But some would-be backers urged him to move to Silicon Valley or San Diego, which between them have 330 of the state’s 390 biotechnology companies.

Instead, Dahiyat received $3.5 million from a private investment group in Chicago. These investors “wanted assurance we could run a viable operation in the L.A. area,” he said. This June, Xencor, now with a staff of 19, raised another $12 million.

Clearly, there is money available for the right start-ups, but there is no biotech bonanza.

Venture capital investment in biotech is essentially flat, said Jean Yaremchuk, vice president of VentureOne. “It’s not being ignored or abandoned.” The company’s data show an average of $600 million a year invested in biopharmaceutical firms since 1995, with remarkably little variation.

The market for initial public stock offerings, however, has all but vanished. VentureOne tracked only a single IPO in the first half of this year in the industry.

“People were burnt by these companies in the early 1990s,” Yaremuchuk said.

There was hope that the increasing level of investment in technology generally would benefit emerging biotechnology companies, but it hasn’t, said Kirk Walden of PricewaterhouseCoopers.

In the first half of the year, $363 million went into biotech, according to the company’s venture capital survey. That’s about one-tenth of the $3.5 billion invested in software and Internet companies.

Investors are looking for payouts on their investment in 18 to 24 months--typical of successful software and Internet firms--not the three to five years expected with biotech companies, Walden said. “Can you blame them?”

Veteran venture capitalists have not given up on the industry. A team drawn from Brentwood Venture Capital, Institutional Venture Partners and Crosspoint Venture Partners is assembling a $250-million health-care fund, one of the largest of its kind. Called Palladium Venture Capital, it will be managed from offices in Irvine and Menlo Park. Investments will be in four areas: medical devices, biotechnology and pharmaceuticals, health-care services, and Internet health-care applications.

“This is a strong signal to the entrepreneurial marketplace that there is capital to focus on health care, mostly in California,” said William J. Link, a general partner in the new firm. “There are a few more opportunities emerging out of San Diego than Los Angeles. Los Angeles has great institutions on the medical side. What it needs is a support structure.”

But it’s the medical device industry, not biotechnology--the genetic engineering companies--that have flourished in the Southland, particularly in Orange County, where one company after another spun out from the early successes, Link said.

In fact, there are more than 600 medical device companies in and around Los Angeles, including 234 in Orange County, according to the California Healthcare Institute.

For that to happen in the area’s biotech industry, it will take “a critical mass” of companies, according to Link and others.

That has happened in San Diego, thanks largely to the early success of Hybritech, a biotech pioneer, which was set up to mass-produce antibodies for use in diagnosis and treatment of cancer and other diseases. In 1986 ,Eli Lilly & Co. bought the company for $1 billion.

The executives and scientists who left Hybritech after the acquisition went on to found other companies that today form the core of a flourishing biotech cluster in La Jolla and surrounding communities in San Diego County.

Efforts to form a similar cluster in Greater Los Angeles and Orange County have floundered.

For example, the University Research Park in Irvine--a partnership between UC Irvine and the Irvine Co.--hoped to attract biotech to an 185-acre site within walking distance of the university.

The research park has been a success, attracting 20 companies in just three years. But almost all of the firms are in information technology; none are in biotech.

To jump-start biotech interest in the site, the company recently completed two laboratory buildings, based on the theory that if you build it, they will come.

There is wide recognition of big opportunities in the region, building on the strength of the world-class science at its universities, hospitals and research centers--places such as University of California campuses, USC, Caltech, Cedars-Sinai and City of Hope.

To commercialize the scientific discoveries requires funding, difficult to find in an area outside the big biotech clusters.

But the apparent disadvantage for biotech entrepreneurs in the Southland is seen by some as an opportunity. “The way we see things, there’s great new technology and a lot of skill to make it happen,” said Dr. Steven J. Sisskind, who with three partners started Angeles Ventures about a year ago to help early-stage companies find private investors. Sisskind, who trained as a surgeon and also has an engineering degree, says that he concentrates on firms that typically started with money borrowed from friends and family and are seeking a second round of funding in the $500,000 to $1.5-million range.

Trying to fill a similar niche is Convergent Ventures, whose chief executive, William L. Robbins, has a background in the neurosciences and worked in marketing for a major pharmaceutical company. The 4-year-old firm is connecting biomedical and biocomputer companies to mainstream investors.

Too often, locally spawned companies that do get funding “wind up getting funded out of state and moving out of state,” Robbins said.

Both Robbins and Sisskind believe that for biotech in the region to take off, these young companies will have to stay put and form their own networks. To encourage this sense of community, Sisskind and Robbins have joined forces to sponsor an informal bimonthly gathering of scientists, investors and entrepreneurs at a Westwood brew pub. “We started out as four of us sitting around one table a year ago,” Robbins said. “At our most recent session, 75 people turned out.”

The Southern California Biomedical Council holds regular networking dinners for those in the industry. They feature formal presentations from venture capitalists, patent attorneys and successful local companies such as Amgen and MiniMed.

The council is also seeking industry-savvy investors to contribute to a $10-million angels’ fund to provide seed money for start-ups. “When you look at Los Angeles, it is not a shortage of money per se,” council Executive Director Ahmed A. Enany said. “Its the willingness of investors to pay attention to the industry.”

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Times staff writer Paul Jacobs can be reached at paul.jacobs@latimes.com.

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The Rich Get Richer

California is a hotbed of biotechnology activity. But most of the investment in early- stage companies is flowing into the San Francisco Bay Area and San Diego--well-established biotech centers--and not the Greater Los Angeles and Orange County region.