Investors Divided on Stem Cells
It’s every start-up’s dream: So many venture capital investors are calling on CyThera Inc., which specializes in the suddenly hot area of embryonic stem cell research, that management is struggling to handle all the attention.
The tiny San Diego firm was thrust into the spotlight this week when the National Institutes of Health revealed the company had derived nine colonies of human embryonic stem cell lines, making it one of just 10 labs worldwide and one of only four in the United States with stem cells that are approved for research with federal funds.
The sudden interest in CyThera makes it perhaps the only U.S. stem cell company drawing investor attention. The nascent industry so far has struggled to raise capital.
The hope is that someday stem cells might be used to grow heart, liver or other tissues for people whose own organs are damaged. President Bush’s decision Aug. 9 to allow some federal funds to be used for research on human embryonic stem cells was seen as a signal to some that this area could eventually be a new financing frontier.
That’s made privately held CyThera’s attempt to raise the $8 million needed in venture funds this year suddenly much easier than last year, when the company worked to get its initial $2 million in financing, said Michael J. Ross, the firm’s chief executive and a co-founder. CyThera has just 10 employees.
“We’re just a little company, we can’t even process all the calls we’re getting at the moment,” Ross said.
In general, however, venture capitalists--still stinging from recent investment losses in tech firms--are hesitating before pouring money into embryonic stem-cell research, despite recent publicity, promises of riches and moves to allow limited federal funding.
Although there is some new interest, it’s an investment area that only a handful of specialists will participate in, venture experts said this week.
Not only is such research risky and new, they say, but any payoff for new investors is typically 10 to 20 years away, a little too long for most venture capitalists. It’s also unclear when the research might be translated into new treatments or when the cells could be used to replace damaged organs. Add to that political uncertainty, such as a shift in political winds shutting down some firms or types of research, and it’s clear most VCs will decide to pass.
“There’s never going to be a flood of money here,” said Jesse Reyes, vice president with Venture Economics, a New Jersey data firm that tracks venture money. “There are so many problems. It’s a long-term investment, but capital intensive. You might see something after seven years, then you get a new government regulation saying, ‘Oh you can’t do this.’ ”
Venture capitalists raise money from wealthy individuals or large institutions and then typically invest funds in early-stage or mid-size firms before they issue their first shares in a public offering. Going public can provide a big payoff for venture capitalists, who can see returns of 100% or more. However, because so many start-ups fail, the area is a risky one for investors.
“It’s hard for a VC to be funding optical switching companies one day and embryonic stem cells the next,” said Arthur Klausner, a partner at Domain Associates, a Princeton, N.J., firm that has invested in more than 100 health-care-related companies. That includes Menlo Park, Calif.-based Geron Corp., which went public in 1996 and is one of the few companies actively developing embryonic stem cell technology. Domain is no longer involved in Geron, having sold its position after investing in the firm about eight years ago.
“To invest in this area you need to be very, very savvy,” he said.
Still, CyThera is reaping the benefits of the recent interest in this area.
“Cell therapy has had sort of a black eye,” said CyThera CEO Ross. “People tried to commercialize therapies 10 years ago that weren’t quite ready for prime time. In my opinion, it’s ready for prime time now. What we need is a few successful companies to start the gold rush.”
CyThera received its first $2 million in venture funds from a group led by Sanderling Ventures, a Menlo Park venture firm that specializes in early-stage investing in biotech and genetic engineering. Formed in 1978, the firm is about to close a new $300-million fund.
Ross said CyThera expects some new investors in the second round, which will be used to expand research and development efforts, especially in diabetes research.
Others also are optimistic that more funds will come into this area, including Alex Barkas, a managing partner at Palo Alto-based Prospect Venture Partners, which specializes in investing in early-stage medical companies, which just raised a $500-million fund. Barkas is also chairman of Geron and was founding CEO of the company.
Geron is considered a leader in this area because it controls many of the rights to human embryonic stem cells. That’s because the firm financed the first isolation of such cells, at the University of Wisconsin.
“What we’re seeing in the public debate is a marker of the importance of the area. Whenever something appears to be this important, we would be ill-advised not to pay attention to the opportunity,” Barkas said.
Still, angel investor Lowell Sears, the former chief financial officer of biotech giant Amgen Inc., called all the media and public attention “a wave of enthusiasm that is not warranted,” like the Internet craze.
“There are certain obstacles to be overcome and it’s not in my time horizon as a venture investor,” said Sears, with Sears Capital Management, a Los Altos, Calif., firm that puts together early-stage biotech and pharmaceutical deals with established venture firms.
*
RELATED STORY
Cell study: Donor stops payment on part of pledge to Stanford, citing anger over Bush’s restrictions. B1
