Even in better times for biotech funding, such as the middle of this decade, money for regenerative medicine, including stem cell-related projects, has been scarce. The science is too new, the political climate too uncertain. Now add an economy in a tailspin, and startups working in this area find themselves choked for cash in the next year.

Yet there could be a lifeline, in the form of public money that could keep the new field afloat and prime the pump for private investors. The California agency that controls the state's $3 billion purse for stem cell and related research is banking on this possibility as it prepares a $500 million loan program for private companies developing tools and therapies.

Officials at the San Francisco-based California Institute for Regenerative Medicine, or Cirm, say the money could be available as soon as next summer. The program is meant as a bridge to help companies turn difficult-to-fund projects into enticing targets for investors, licensors and buyers, but it could end up as a lifesaver for struggling startups.

"If the banks would loan in this area, we wouldn't," says Robert Klein, chairman of Cirm's oversight committee and the driving force of Proposition 71, the 2004 ballot measure that created the agency as a rebuke to the Bush administration ban on federal funding for most embryonic stem cell research. (Cirm has already granted $650 million to nonprofit research and construction projects.)

Many details haven't been finalized. But venture capitalists view Cirm as an important step in the development of the field.

"Many companies are undercapitalized," says Gregory Bonfiglio, who runs Palo Alto, Calif.-based Proteus Venture Partners, a firm focused on regenerative medicine that aims to raise $100 million by year's end as part of its first fund. "The single most important factor to ongoing success is the ability to get financing."

Across the board biopharma investing has slowed but the change has not been dramatic.

The 2008 three-quarter mark of $3.3 billion, extrapolated to a full year, would be the lowest total for the sector since 2005, according to Dow Jones VentureSource. It's possible early-stage investors aiming at long-term horizons will "stick to their knitting for a while," says Amir Nashat at Polaris Venture Partners in Waltham, Mass. But if fourth-quarter numbers tumble, cash-hungry biotechs looking for later rounds might have nowhere to turn. Public markets won't help. And M&A, which for nearly a year has been the only real exit, has slowed as well.

The time might seem ripe for bigger firms to buy their regenerative medicine bona fides. But with Big Pharma undergoing convulsive change, expect extreme caution.

"It's a big risk to fund [our own] 50 to 60 full-time employees, and you have to show some return," says John McNeish, one of the top two executives in Pfizer Inc.'s new regenerative medicine business unit. "It's a very challenging time to find dollars for external research."

McNeish points to GlaxoSmithKline plc's $25 million grant to Harvard University's Stem Cell Institute and other Big Pharma investments scattered about as examples of investments being made, "but it's not the sorts of dollars that rescue companies," he says.

That makes Cirm's $500 million loan pool all the more enticing. The agency's latest draft shows the loans will be subordinate to other funders, a key point for VCs who might follow Cirm's money with their own. They will be available as six- and 10-year loans, with payment acceleration when the borrowing company hits liquidity events or, in some cases, secures 20-fold financing. Depending on the borrower's repayment pledge, the state will take warrant coverage at either 10% or 100% of the loan.

The agency aims to start accepting applications early next year as part of a larger effort to fund "disease team" projects that move promising research into the clinic. It's possible Cirm will back a company and its project through Phase 2 trials, which could cost tens of millions of dollars.

"Those sums of money are substantially higher than we've been talking about for any individual grants, but I think would fit very well in a loan program," said Cirm vice chairman Ed Penhoet last month at a public meeting.