Living the Biotech Funding Nightmare

Living the Biotech Funding Nightmare

File photo by Sam Hodgson

“San Diego is the algae Mecca,” said Martin Sabarsky, CEO of local biofuels company Cellana.

Friday, Nov. 20, 2009 | The life of a biotech entrepreneur is always filled with uncertainty. But these days it is downright terrifying.

At no time in recent history has it been harder for companies to find new money to fund new discoveries, and it’s becoming harder and harder for them to keep money that has already been pledged to them.

Martin Sabarsky is living this harsh life. The chief operating officer of the 5-year-old HR BioPetroleum — an algae biofuel start-up with operations in both Hawaii and San Diego — is the epitome of today’s early-stage biotech executive.

The 39-year-old lives out of a suitcase while presiding over a virtual company, and has become more accustomed than he ever thought he would to the word “no.”

And he considers himself one of the lucky ones. His company is in the clean tech industry, which, relatively speaking, is hot right now. He is based in San Diego, a hub for algae biofuel research. And HR BioPetroleum has a long-term partnership with oil behemoth Royal Dutch Shell, something that his competitors would kill for.

But that doesn’t mean it’s easy. Sabarsky took some time out recently to tell us just what it’s like out there.

I look at your operation and see that you, a guy from Poway, and another guy (CEO Edward T. Shonsey) who lives both in La Jolla and Seattle run an algae biofuel company with its main operations in Hawaii. You are the new reality in biotech start-up, no?

I think that’s exactly right. I see a number of virtual models, especially when you have a financial community that is more reticent to take early-stage risk, and wants to come in later and later, you are forced to adopt different mechanisms not to just survive, but thrive in the meantime. And being lean and mean is really the only way to do it.

So yours is a company that is based at least in two places …

I think the fairer question is anyone based anywhere these days? Look at any multinational, where they are headquartered is based on a filing, a document, as opposed to the reality. I think the reality is we are everywhere, and we are nowhere. There is so much that can be done using the technology. And if I am headquartered anywhere, it is out of my suitcase.

You recently testified in Congress last month regarding the current funding environment for early-stage companies. What did you tell them?

What I told them was that the valley of death phenomenon has been exacerbated by the continued financial crisis. And while it is not a new dynamic where venture investors have wanted to step in at a later stage, take less risk, it really has been exacerbated greatly by the onset of the financial crisis. We’ve seen venture pull back, or in some cases totally pull out of venture investing. Venture capital has really become somewhat of a misnomer these days until they get back to taking risk for the very significant returns that they expect in exchange for their investment. As a phenomenon it is real, and we haven’t seen a lot of mitigation of that.

You told me earlier that even with your deal with Royal Dutch Shell you are having trouble raising money.

That is right. And more trouble than I’ve ever had in my experience raising money. I have helped companies, both as a lawyer and a banker raise billions of dollars. This is the most challenging environment in my professional career, and according to people who are older than I am, probably in our lifetimes.

You have been particularly outspoken about the behavior of venture capitalists in this environment. In essence, you’ve called them spineless.

Actually, that’s not true. If you don’t mind me quibbling with you, they’ve got spines, they just used to have steely spines. They were the people who funded Google in the early 2000s when we had the last technology downturn in the face of fairly established incumbents like Yahoo and MSN. And it took real steel but those are your words — it doesn’t mean they are spineless.

I understand what you are saying. But you have said that they aren’t doing what they should be doing. What is it that they are not doing?

In many cases they are not deploying the capital that they do have. The world has gone on sale, basically — both public and private companies who are starved for capital. Something like half the companies in town have less than 18 months, maybe even 12 months, worth of cash left.

And those are companies that have been previously funded by fairly significant investors. There are others who are shutting their doors, even some who are venture backed. They are going into hunker down mode and not deploying capital, but I also understand the challenges these funds are facing. Their funding sources have dried up in many cases — the endowments of the world are affected by the disruption in the global financial markets. But to paraphrase something said in an earlier context: If not now, when? If not them, who?

And the bill you were testifying on behalf of in Congress would address this issue, correct?

Yes. It is a bill that would essentially get the government in the venture capital business. It would provide taxpayer dollars to fund existing or newly created venture capital funds. So they would actually put, over a period of five years I believe, up to $4 billion dollars. It would provide cash for new investments in targeted areas that are starved for capital, but are considered important from a national priorities standpoint.

So we’ve had this massive stimulus package, Obama has been talking since the very beginning about R&D in technology. Clean tech has been huge, at least in his rhetoric. Do you think the government is doing what it should be doing?

I think directionally, yes. It’s not just true on an Obama administration basis, but it is truly bipartisan. And a lot of the money in the pipeline right now actually began under the prior administration. Clean tech to me is something that tends to unify just about every disparate interest group that you can shake a stick at. Having said that, it might not be enough without some significant additional funding as well as structural changes.

So what do you see long term? What is the long-term effect on innovation of what we are going through in your mind?

It’s causing a shift. It’s a slowdown in early-stage research or basic research. And that is not something that will change unless (venture capital) steps up or government fills the breach. It may have the unintended consequence of forcing innovation to be done by the large institutions, large companies, in many cases multinational companies. And these are things that may be not be strategic to the businesses and could be discontinued at a moment’s notice. I think the issue is you would like to see a number of well-funded pure plays where the success of the company is dependent on getting the process commercial, rather than something that is just kind of nice to have.

— Interview conducted and edited by DAVID WASHBURN

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