It was an overnight decision that took five years to reach. In the end, Managing Partner Chad Waite and his colleagues at OVP Venture Partners knew they did the right thing – abandoning all future life sciences investing, despite its current flavor of the month status.
Spend a few minutes listening to the strategy behind OVP Venture Partners’ move, and few could argue that it wasn’t a sound decision. In its hey-day, OVP was never a major life sciences player. Roughly one-third of OVP Venture Partners’ portfolio was invested in the sector – mostly pharmaceuticals – and the firm benchmarked those returns against other sectors. It found that the software and communications areas generated a much higher return, without requiring all the heavy lifting inherent in biotech.
While the internal rate of return for OVP’s life sciences companies has been in the middle single digits on average – the firm said the return in network security, communications and software has been better. Waite points to Seattle-based WatchGuard Technologies as an example. The maker of Internet security products, which went public in July 1999, returned more than $130 million on a $5.5 million investment. That was enough money to pay back OVP’s third and fourth venture funds.
By comparison, OVP’s investment in Rosetta Inpharmatics, a technology company that hopes to improve the drug discovery process, returned only about $20 million.
Of the eight Washington biotechnology companies that completed initial public offerings in the past five years, three secured early-stage financing from OVP. CellPro, an early OVP biotech investment that was hit with a patent-infringement lawsuit that caused its demise in 1998, brought the firm 12 times its original $4 million investment. For OVP, the 12 times return was the best in the sector.
But after looking at more than 10 years of results, Waite concluded that there was not as much money to be made there. What’s more, the capital that the likes of Rosetta required was inordinately high, too much for regional-based firms like OVP. “Weigh that versus the dilution and you need to be in Paul Allen’s league to handle it,” he says, referring to the Microsoft cofounder and head of Vulcan Ventures. “From a dollars-and-cents standpoint we felt internally that all things being equally our risk/reward is higher in communications and software.”
Even though Waite said he understands the need for diversification, those arguments were outweighed by the firm’s decision to focus on three distinct software areas: wireless applications, outsourced technical services and enterprise software.
“We looked at it and says, Where are we going to do better for our partners?'” Waite recalls.
The firm does reserve the right to invest in biotechnology, though Waite no longer is hanging out at the Fred Hutchinson Cancer Research Center or going to hematology conferences. “You have to go to the meetings, keep up with technology, know the right people,” Waite says. “It is a lot of work.”
That is why Fund VI, scheduled to close in July at around $160 million, will focus on those two areas. Not that OVP Venture Partners is burning up the league in the other sectors. It has made one investment since last year, but Waite seems unphased. “We haven’t seen the things we’re interested in,” he said. “We’re not afraid, we just haven’t found what we’re looking for.”
Waite said the firm’s LPs [including one in Saudi Arabia] supported its decision throughout, and it didn’t take a lot of convincing. “Maybe we have a good relationship, but the top LPs said we invest in you guys to make the right decision, we’re backing you guys because we’ve been backing you the whole time.'”
Waite went on to say, “It was not an easily made or quickly made decision. But we frankly feel pretty good that we got out at the right time.”
Contact Ken Ryan at: Kenneth.Ryan@tfn.com