Early-stage fundraising is still mired in the fall-out from the collapse of the technology boom and funds are having to travel much further for much longer to raise anything approaching their original target fund totals. A number of funds have recently hobbled to first or final closings, trumpeting sometimes meagre commitments that two years ago would barely have merited a mention.
Pentech, the Scottish sister to buy-out specialists Penta Capital, has finally closed its early stage technology fund £2m over its original £20m target with a final contribution from the European Investment Fund. And Avlar Bioventures rolled out the red carpet for a £2m commitment from Yamanouchi, a Japanese pharmaceutical company. It was the first significant commitment to the £40m fund in 15 months. Avlar claimed it was still on target for a £75m final close.
Part of the problem is the poverty of returns from technology funds in the aftermath of the dotcom bubble. But poor returning technology funds have not only made fund raising difficult for themselves, but also for the life sciences players. The appetite for technology funds has diminished; their supply has shrivelled in the face of falling demand and it has left life science funds as the flavour of the month in the early-stage market. Investors are wary of flavours of the month though.
Kate Bingham, a partner at Schroder Ventures Life Sciences, is currently fundraising, she said: “We are finding it slower going. Investors are taking longer to make decisions. But we are well on track to hit $400m by March next year.”
Bingham also pointed out that life sciences was an especially cyclical industry and that it was a long-term cycle. It made it hard for funds without a long track record of returning money to investors and it was harder still without a team that had worked together for a long time.
“We returned money in under two years from the first investment, but we’d not repaid the fund until five years in, and that is good going,' added Bingham, '40 per cent of the fund is still held at cost. It is at least a 10-year fund. Most life sciences funds take longer. You’ll need an extension to deal with the tail.”
To compound this, investors that are comfortable with the long-term nature of the funds often find the risk profile of early stage investments difficult in the current climate. The money therefore ends up going to a buy-out fund or a fund-of-funds.