MDV, others combine tired portfolio companies

Venture capital firms with languishing portfolio companies in a downturn economy have found yet another way to revive them. They are combining them to create strengthened companies with enhanced technology that can tackle bigger or more focused markets.

Mohr Davidow Ventures recently combined two of its portfolio companies—CELLective Diagnostics, formerly known as CellPoint Diagnostics, and The DNA Repair Co., to form a new company called On-Q-ity Inc.

Mohr Davidow led a $21 million Series A funding round in On-Q-ity last week with Bessemer Venture Partners, Physic Ventures and Northgate Capital.

Mohr Davidow had already put $5 million into DNA Repair, while CELLective had raised more than $20 million from Mohr Davidow and Northgate, according to Thomson Reuters (publisher of PE Week).

But both companies—which have complementary technologies for fighting cancer—had the misfortune of looking for a Series B round in the summer of 2008—a slow season to begin with—and then getting hit with the global financial collapse that followed, says Sue Siegel, Mohr Davidow partner and board member of On-Q-ity.

Had new funding not been found, the companies probably would have died, she says.

“They found themselves not able to raise a financing, not because of the merits of the technology, but because of the environment and the circumstances that existed,” Siegel says.

“Many companies have not raised financing, and you’ll find a graveyard of companies where either the technology was shelved or it got delayed or they’re subsisting on minimal dollars until they see another day,” she says.

Combining portfolio companies is not simple, and venture capitalists shouldn’t look at it as an easy way out, Siegel says. She points out that the usual due diligence was conducted and other Mohr Davidow partners had to be convinced of the option.

The idea for creating On-Q-ity came from the scientists at DNA Repair—who saw a technical fit with CELLective– from Siegel and a couple of other Mohr Davidow partners, and from Mara Aspinall. Aspinall, now president and CEO of On-Q-ity, was brought into CELLective by Mohr Davidow from Genzyme Genetics in early 2009 to figure out what to do with the company and saw the opportunity for a merger.

With the two technologies, On-Q-ity has a shot at developing new, cheaper and more effective treatments for cancer by tracking suspicious cells in a patient’s blood stream that indicate resistance to treatment, Aspinall says. On-Q-ity will focus on breast and thoracic cancers first, then prostate and other solid tumor cancers.

On-Q-ity is in large-scale clinical trials and expects to have tests in the market by 2011.

Another venture firm that combined portfolio companies recently is Draper Fisher Jurvetson, which sold one of its companies, Increo Solutions, to another company in its portfolio, Box.net.

Box.net sells an online storage and content sharing service to businesses and kept Increo’s technology and its two co-founders, both engineers, according to Jen Grant, Box.net’s vice president of marketing.

DFJ and U.S. Venture Partners also invested another $7.1 million in Box.net and called it an extension of the $6 million Series B round Box.net raised nearly two years ago. Box.net decided not to go for a Series C round right now to avoid a lowered valuation, Grant says. She adds that the company is about a year away from being profitable and cash-flow positive. Increo previously raised a small amount of seed funding from DFJ.

“Our investors are big supporters and big believers and they want us to make it to profitability,” Grant says. “They put in a little more money to make sure we didn’t dilute further.”

DFJ didn’t return calls seeking comment.

Siegel, at Mohr Davidow, says that other venture firms are also looking at combining companies across portfolios, but that’s even more complicated than keeping them in-house because ownership can be harder to straighten out.