VC providers keep funds flowing in NJ
It’s been a tough year for life sciences startups. According to a report issued by Evaluate Ltd., which provides commercial intelligence and predictive analytics for the pharmaceutical industry and their advisors, “While Big Pharma valuations ‘regained their mojo’ toward the end of last year, the outlook remains bleak for smaller scale drug developers.” And an Ernst & Young report released in May warned about a possible pullback in overall venture capital funding, noting that, “While VC investment in Q1 2023 improved by 37% over Q4 2022 – rising to $44.1 billion compared to $32.3 billion for Q4 2022 – recent bank failures and a weaker economic environment have dampened the overall outlook for the remainder of 2023.”
Still, some New Jersey-based venture capital funds are optimistic about opportunities in the early-stage segment.
With some $130 million of assets under management, the fund invests in seed and Series A financings across biotech and other industries throughout the Mid-Atlantic region. Holdings include a minority stake in Epibone, a Jersey City-based company that aims to use bone marrow stem cells to help individuals regenerate their cartilage and other skeletal cells, and a seed-stage position in Regenosine, a Princeton-based enterprise that’s developing and commercializing injectable musculoskeletal regenerative therapies for osteoarthritis.
Tech Council Ventures founder and Managing Partner Jim Gunton
“Before we take a stake in a company, we evaluate whether its value proposition appears to be clinically successful — how will their product make a difference, and does the science work?” Gunton said. “We also consider the management team and their clinical and capital experience: Will the team be able to raise the capital necessary to sustain the company during the years before it starts to generate revenue? It’s always somewhat of a gamble, because there are no guarantees, but we also consider proxies, including the company’s clinical trial successes and failures.”
During his three decades in the VC space, “The fundamentals remain – like a good management team that can assemble a lending syndicate – but some investing aspects are changing,” observed Gunton. “From 2000 to 2010, VC providers typically had eight- to 12-year exit strategies. But from 2013 to 2020 that dropped to a three- to five-year period. Now, though, gestations are taking longer, thanks primarily to reduced valuations and more cash constraints, and shifting drug reimbursement.”
Artificial intelligence is also impacting the VC space. “As an investor, it can be difficult to disentangle drug discovery and clinical trial documentations,” Gunton explained. “So, we can use AI to help dig down into the records, and even read images to uncover patterns. Currently, Tech Council Ventures is using AI to find and assess investment opportunities; and we anticipate increasing our use of AI in the future. We’re also investing in companies that leverage AI, like Xevant. This can open up a new chapter for investors.”
Strong fundamentals
Despite some challenges, the momentum has also not slowed appreciably at New Jersey-based investment firms like Syridex Bio, according to Managing Partner Squire Servance.
“It is a difficult environment to raise money, given the volatility and the tendency of sources to temporarily hold their capital,” observed Servance. He launched the impact-driven, life sciences-focused venture creation and private equity firm – which invests in therapies that address the needs of underserved communities – in November 2022. “But we’re continuing to talk to institutions and raise capital. Plus, we’re getting deal flow from our strong standing industry relationships.”
In May, the New Jersey Economic Development Authority approved the Princeton-based firm for a $5 million investment capital infusion from the state’s Life Science/Health Care Fund. The allocation will become part of Syridex Bio’s new investment fund, will be managed in alignment with the firm’s mission, and with state and federal government rules, the company announced at the time.
“One of the investments we’re evaluating is a therapy, that’s going into Phase 2 trials, for a rare disease that primarily affects people of color,” added Servance. “Currently there is no known treatment for the condition.”
Syridex Bio considers a variety of issues before investing in a company or product, Servance said. “First, in the broad sense, we look at opportunities to acquire an asset where we can create value quickly and accelerate a program to commercialization, especially therapies for diseases that have an outsized impact on underserved communities,” he explained. “Targets include therapies for Sickle Cell disease (a group of inherited red blood cell disorders) and Lupus (a chronic autoimmune disorder).”
Syridex also seeks to “identify products that have the potential to serve a significant market but are currently underutilized; and then we either acquire the existing company or acquire specific products and build a company around them,” Servance added. “So, we identify how we can create value and accelerate their clinical trials to be more efficient, in order to increase the chance that the drug will win FDA [U.S. Food and Drug Administration] approval in a timely manner. We also consider whether there are opportunities for clinical or other partnerships with large pharmaceutical or other organizations.”
Servance sees opportunity in the fact that “Big Pharma is facing a ‘patent cliff’ as blockbuster drug patents expire, placing nearly $200 billion in annual revenue at risk through 2030. This means they’ll need replacements.”
Exit strategies for VCs like Syridex are currently holding steady at a three- to five-year period, “but that could change, depending on issues like capital availability and Big Pharma’s need to fill their pipelines,” he noted. “In the future, exits could lengthen, and perhaps become more of a partnership with strategic buyers, instead of an outright strategic acquisition.”
Although some publicly held biotechs “have taken a hit, the fundamentals are still strong,” Servance said. “The speculative and momentum investors have pretty much exited the market and I think we’re likely to see a recovery later this year.”
Risk & reward
With a wave of their hand, VC players like Jim Gunton can funnel millions of dollars into a startup. NJBIZ had a one-on-one with the Tech Council Ventures founder and managing partner to find out what drives these modern-day swashbucklers.
NJBIZ: You’re committing a lot of your own money, and other people’s money, to early-stage companies. Doesn’t that make you nervous?
Jim Gunton: There is a lot of anxiety, because to a degree, it’s a roll of dice each time. On the other hand, it’s inspiring to work with talented people who want to change the world.
Q: The risk is there, though. How do you deal with it?
A: Risk is inherent in life. We know that it can take years, or even a decade with a commitment.
One of our more notable investments was Cytosorbents, a Princeton-based company that developed a blood purification product that launched in 1997 and went public in a series of offerings that took place five to 10 years later. But that’s the magic of the capitalist system. You mitigate the risk by working hard and, hopefully, collect your reward at some point.
