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— Venture Well —
The Deal: You say 50% of the new fund but 75% of your firm's mindshare will go into energy investments. Why? Karl Handelsman: Different deep sciences are being applied to produce what are fundamentally commodities. On the biotech side, we're used to having a superior product and claiming superior pricing because we can save people's lives. But if you're filling up your car with gasoline, and it's a half penny cheaper at a station down the road, you'll go there. Michael Melnick: The difference in margins is definitely something you have to wrap your mind around. It was hard for me coming from the exorbitant margins that we could justify in life science to this. If you can make a fuel profitable, then imagine if you could apply that platform to something a little higher value, such as specialty chemicals, and you can really make some money. Is this shift toward energy an acknowledgment that biotech faces limitations? Jim Watson: A diversified fund is still our basic religion, but our job is to turn the allocation dial. It's not a gold rush. We've done only two or three energy deals the first half of the year. Handelsman: The biggest limitation in biopharma is capital efficiency. It's difficult to generate a 5 times return, but it's easy to spend too much money and fail, just like Big Pharma does. Do you look for infrastructure or technology that's already established and can be moved into greentech? Melnick: Part of our accumulated experience is this toolbox of platform technologies that our companies pioneered. It's always in the back of our minds what might be applied to new problems such as those in cleantech. Handelsman: The first biotech product was recombinant insulin. Now we can assemble almost whole genomes, we can optimize, evolve and shuffle things in a more powerful way. People had these ideas a long time ago about biofuels and cellulosic ethanol, but what's changed is the deep underlying science. Using biotech development processes to produce commodity goods seems difficult. Handelsman: One difference is you can measure at the prototype experimental stage what you're trying to produce. With drugs, in some therapeutic areas you don't know if something works or if it will have a bad side effect until you get it into 1,000 patients and you're in Phase 3 [clinical trials]. Melnick: The key challenge in drug development is clinical and regulatory hurdles. In fuels and chemicals, it's scaling. Instead of the phases of clinical trials, you have this process of pilot plant, demonstration plant, [which] a lot of startups don't appreciate. Bringing a chemical engineering perspective to that is a key advantage. Watson: If you take a typical VC biotech investor, they've never encountered how to make millions of gallons of this at this price. Is this infrastructure that big energy companies would traditionally build themselves to bridge from research they traditionally did themselves? Watson: Exactly. If you're running Exxon Mobil right now, you're asking yourself, "Do I bet on my own research department? Do all the smart people in the world work for Exxon Mobil? And in the next 20 years, what products will be in my pipeline?" Handelsman: The tools now are so powerful, people [in startups] are able to do things that ordinarily would've taken 15 people working for two years. So inevitably your exit is selling to big energy companies? Watson: Actually, right now it's mostly IPO. It's the only bright area in venture IPO right now. Handelsman: I focus on biotech, so when I go to these other meetings and they're talking about all the filings, and I say |
In the venture world, greentech is hot, and biotech, which hasn't seen an initial public offering since March and only three this year, is not. One firm that plays both sides is CMEA Ventures of San Francisco. Four years ago it raised $300 million and split it evenly among high tech, biotech and energy/materials. In March it closed its seventh fund, and half the $400 million is earmarked for energy/materials. CMEA managing directors Jim Watson and Karl Handelsman and principal Michael Melnick (pictured, L-R) recently spoke with The Deal about the shift in allocations and how biotech expertise helps to understand the science and financing of greentech. 
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