VCs Trim Series A Deals in 2002

Most people don’t need to be reminded that 2002 was not a great year in the venture markets. For proof, look no further for a barometer than to the year’s largest Series A rounds. The top three Series A deals of 2002 brought in $158 million combined. As investors turned cautious, raising significant money often required more than an idea and a promise to go all out to make it work. It required a track record. It required experienced entrepreneurs. It required a compelling product idea that investors could sink their teeth into. And apparently it didn’t hurt to be in California. Alexza Molecular Delivery, Kalypsys Inc. and Exigen Group were three companies that had all of these qualities, enabling them to bring in the most Series A money in 2002.

Before starting Alexza Molecular Delivery in 2000, Dr. Alex Zaffaroni had provided sizeable returns for his investors with Alza Corp., a drug delivery company that he sold to Johnson & Johnson, Affymax, a drug discovery company acquired by GlaxoSmithKline, and Affymetrix, a biomed researcher that is now publicly traded. So when he looked to the private equity markets for Alexza, Zaffaroni and his partners had plenty of willing participants. In September, Alexza, a drug delivery startup that specializes in fast acting, non-injection prescription medication, secured a $45 million Series A venture round in a deal that was co-led by Frazier Healthcare Ventures and Versant Ventures.

“We could have raised a whole lot more,” says Allen Frazier, managing partner of Frazier Healthcare Ventures and a past investing partner of Zaffaroni’s. For Frazier, the appeal of Alexza lies not only in the confidence he has in Zaffaroni, but also in how the investment fits into the strategic plan of his firm. Frazier Healthcare has historically been attracted to products in the clinical development stage, shunning the higher speculation of the research stage and the expensive bidding wars for finished products from large pharmaceutical companies. “We look in the middle. Our strategy is to find a technology platform that, if successful, will lead to multiple products,” he says.

Alexa, based in Palo Alto, Calif., is well funded for 2003 and perhaps beyond, according to CFO Carol Christopher. “We are looking at this offering lasting us two years,” she says. “If and when we need more capital, we expect to continue with Frazier and Versant.”

Zaffaroni did not stop with Alexza. He is also an investor in Kalypsys Inc., a La Jolla, Calif.-based biopharmaceutical company that was formed in 2001. While he has a more of a passive role at Kalypsys than in Alexza, the presence of Zaffaroni and his partners was compelling enough to help the company land a $43.5 million Series A round in April.

“The people running Kalypsys were a major factor in our interest, to say the least,” says Vijay Lathi, a partner at the Sprout Group, which led the deal. Board members at Kalypsys include longtime Zaffaroni lieutenants Peter Schultz, a co-founder of Affymax, and John Diekman, former CEO of Affymetrix.

Another similarity between Kalypsys and Alexza is the focus on a full technology platform for drug delivery, allowing for the potential delivery of multiple products.

“The technology platform also gives us more options in the area of business development,” Lathi says, speaking of Kalypsys’ intent to pursue corporate partnerships this year. With no exit planned for 2003, Lathi sees partnerships as an interim source of revenue while awaiting the clinical results of its products. Bringing drugs to the marketplace and realizing product revenue is expected to take four to five years.

Familiarity and past success were also pivotal to the $62 million round secured by Exigen Group in July. In a deal led by Lightspeed Ventures, the San Francisco-based company was able to parlay the track record of co-founders Greg Shenkman and Alec Miloslavsky into the largest Series A deal of the year.

In 1998, Shenkman and Miloslavsky sold Genesys Telecommunications Laboratories, a company they founded in 1990, to Alcatel, a telecom systems supplier, for $1.5 billion. With $50 million of their proceeds, the two started Exigen Group, a maker of automation software for the service industry, in Dec. 1999. Almost immediately, the company embarked on a series of acquisitions, which provided it with customers and revenue prior to management’s gearing up for a push into the venture markets. The capital raised in the offering has enabled Exigen to fuel its continued acquisition spree, and to continue development of its products.

“We’ve solidified our market position as focusing on cost reduction solutions. As a result, we’ve seen increased demand for our solutions, particularly in the financial services sector,” says Shenkman, who added that Exigen has recently added Prudential Securities as a client.

Exigen’s competitive advantage, according to Shenkman, is its ability to streamline the operations of a business of any size, as well as across company lines to third parties. “We have built the infrastructure to support outsourcing initiatives either directly with a customer, or in tandem with their partners,” he says.

While Shenkman declined to share specific revenue numbers, he does predict that Exigen will be profitable by the end of the first quarter of this year. If the profits do materialize as he hopes, the company will, for the most part, forego any additional financing “We’re focused on year-to-year revenue growth from our business,” he says. “We will only explore additional financing for a special situation such as a large acquisition, if we decide it would make sense for us.”