Sunday, March 04, 2007

Can't Get VC? Try Charities

Warren Buffet and Bill Gates have given their business fortunes to charity; now charities, increasingly, are pouring their philanthropic funds into business--including the biotech sector. In fact, some VCs are joining or even founding charities as the most promising means of accelerating the development of new treatments.

Like Wolf Busse, for instance, general partner at NGN Capital, who has just become executive director of the newly-founded Melanoma Development Foundation. In collaboration with the UCSF and with support from Bain & Co, the charity will progress promising IP from UCSF into the clinic, virtual-style, but also seek out shelved compounds from pharma--it's already in negotiations for two.

Plans for a for-profit biotech are in the pipeline, too: with seed funding from MDF. Accelerate Cancer Therapeutics (ACT Biotech) will be launched in June--with Busse as CEO. And since MDF will fund some of the work, it'll get equity in ACT.

Isn't all this stretching the charitable cause a bit far? No, says Busse: "It's allowable according to the IRC rules," and MDF got approval as a public charity with these plans in mind.

Indeed, plenty of other non-profits have turned into so-called venture philanthropists--not just giving grants to industry, but taking equity stakes, providing milestone-linked grants "so that companies are incentivized to perform" and securing modest royalties.

Why? Coz they've gotten impatient simply handing money to research scientists--since rarely, or unbearably slowly, does that research ever turn into drugs (especially when it's research into rare diseases with poor commercial prospects). The problem isn't helped by VCs' mass exodus from early-stage opportunities.
"If we don't address the innovation gap, who will? It's a role for foundations," declares Richard Insel, EVP research at the Juvenile Diabetes Research Foundation.

Not that charities are trying to displace VCs; they're in fact trying to draw them in. But as non-profits become more business-savvy--the Cystic Fibrosis Foundation has been doing this for years--they're also tougher negotiators. Sure, they don't need a profit, but they do need to share in success. So while VCs in theory support foundations--it's usually non-dilutive funding, after all--there are times when sparks fly. "They're unrealistic in their demands," fumes one VC. "They're trying to be tough, but they don't have the knowledge to carry it off."
Not for much longer, probably.

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