Report: Prospect Venture dumps latest fund, won't make new biotech bets

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The shrinking herd of venture firms backing newborn biotechs has gotten smaller. Prospect Venture Partners, which has supported many top-notch drug developers and other life sciences outfits for more than a decade, has decided not to move forward with its fourth fund after coming up short on raising money for it, Dow Jones VentureWire reported yesterday.

In an uncommon turn of events, the Palo Alto-based venture firm has essentially returned $150 million it had raised for the fund, telling its investors or limited partners that they didn't have to meet their commitments to funnel money into the fund, the VC wire reported. Prospect Managing Director Alexander Barkas told the publication that the funds, which fell short of a $250 million target, weren't enough to pull off the firm's investment plan. And, at least for now, the company is holding its existing capital from previous funds in reserve for its existing portfolio companies and won't be making any new bets on biotech or other healthcare start-ups.

This is more bad news for an already wounded biotech VC game and comes on the heels of a report from the National Venture Capital Association that 39% of venture groups has tapped the brakes on investments in life sciences over the past three years. What is particularly troubling about the Prospect Venture story is that the firm has had better success in backing biotechs and medical devices firms than many of its peers, exiting from 23 investments made in companies backed through its last two funds that either completed IPOs or were gobbled up in M&A deals, VentureWire reported.

Just to name a couple victories in biotech, the VC firm scored a win with its investment in Amira Pharmaceuticals, which Bristol-Myers Squibb ($BMY) scooped up in a deal worth $475 million earlier this year. And the firm also backed Gloucester Pharmaceuticals, a cancer drug developer that Celgene ($CELG) bought for $640 million in cash and milestones in a deal announced in December 2009.

With VC sources drying up and a dismal IPO market for drug developers, biotechs are challenged to be creative in their fundraising strategies and are trying to run on leaner budgets with outsourcing support to advance new therapies. But it's an open question whether the starvation diet for such developers will end up hurting the industry down the road, and Big Pharma firms have been dispatching their own venture groups to fund the kinds of companies that can feed their ailing pipelines.

- get the VentureWire report

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