Posted by Richard Gabriel on Thursday, July 29, 2010 @ 12:00PM 

By Richard Gabriel

I live in Massachusetts and let’s face it; we live in what is perceived to be a high tax state. Whether this belief is true or not we share that belief of high taxes with California, New York, New Jersey and Michigan. On the other hand Florida, Texas and North Carolina, among others share a different belief and it is reflected in each states approach to funding of Life Science companies. And each of those states would kill for the concentration of Life Science, technology and educational institution that we enjoy with California and the other so called high tax states.

Sure, taxes in Massachusetts and the overall business environment for start up companies are less than ideal. There is frankly, no comparison between the incentives being offered in Florida and Texas for start up companies to move to those states and start their businesses. Some entrepreneurs have moved to these states and have taken advantage of the help, financing and favorable state environments. Each time a technology leaves Massachusetts heading for more fertile pastures, we lose jobs, tax revenues and population, which in turn decreases our real estate values, creates more stress on our commonwealth to raise taxes even more, it’s a vicious cycle and yet we sit on one of the greatest natural intellectual resources in the world and have yet to figure out how to fully mine its fountain of bubbling opportunities.

However, in my last blog, we talked about a new funding model for biotech and the life sciences industry and we received hefty responses from VC’s that were interested in exploring a new way of funding. Some ideas that we kicked around included a new ‘fund’ that would have a longer time horizon, attract a more patient and less capricious group of investment partners that weren’t demanding a 5 year exit with double digit returns per annum, but rather a combination of long term debt, mixed with long term equity investment.

How would such a fund work? Well a possible appropriate debt to equity ratio should be 1 to 4. Every dollar in long term debt at a reasonable interest rate is backed by 4 dollars in equity. This ratio, provides the limited debt partner with the interest only coverage for the life of the debt, which in Life Sciences, should be no less than 10 years. Additionally, expecting a short term double digit return on a Life Science equity investment is, frankly, ridiculous. Not only does it place an unfair burden on the entity that is being formed and its management, it is an unfair hurdle and it’s artificial to the practical operations of starting and running this type of business.

Well then, what about the risk? How is a venture fund ever to make any money? All these choices have their pluses and minuses and are self evident. For the entrepreneur, think, Steven Jobs, Michael Dell, Bill Gates and not a veteran of multiple start up companies, all of whom have, by now, failed, been swallowed or otherwise disappeared and, if alive, are headquartered in another part of the country. Perhaps the alternative though of invest big, hold, pay dividends and interest or buy back the shares at an appreciated rate that reflects the true value of the business that was built has some merit today? Take a look at the valuation gaps between a pre-clinical candidate and the sums of money paid by Pharma for Phase 2 & 3 compounds, the gap is astronomical and it is that gap that tells us or should tell us that the current model is wrong

We should be looking more carefully at the broken institution of funding our start ups in our state and instead of letting Texas, Florida, North Carolina and California pirate our technologies and people away, find a way to fund them and keep them here. Build businesses and jobs and people will start coming back to Massachusetts or perhaps they won’t even leave after they graduate! Got any ideas? Write us. We’d love to hear from you.

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Richard Gabriel is head of the Life Science practice at Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as Corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

By Mark S. DiSalvo

It seems my industry colleagues have been wrongly optimistic and also hyper cynical. At least that is the bottom line of the read I get in comparing the analysis of the 2^nd annual Semaphore Confidence Survey with last year's results.  And some people have very threatening ways.

Let's start with pay.  At the start of last year 51% of the nearly 500 respondents to the 2009 Confidence Survey believed they would earn more money than the prior year.  The truth was that only 11% of this year's respondents reported they did in fact earn more than the prior year and nearly 67% earned less than the prior year.  But hope springs eternal, just like every investor is certain that they will score a tens strike on the next investment, 78% of this year's respondents believe they will earn more money than last year.  Let's check back a year from now and see whether BMW dealers will be smiling.

My peers demonstrated their optimism with their pocketbooks too (well, their LP's dollars anyway). In the beginning of 2009 8% expected not to do any deals and fully 74% thought they would make up to six investments.  The year proofed strong with no respondents reporting the intent to do no deals and nearly 98% doing up to six deals with 73% closing 1-3 deals. Further, those deals were larger than expected with 62% self reporting their deals were in excess of $25 Million in each discrete investment when they anticipated less than 17% believed their deals would be above $25 Million in size at the time of last year's survey.  As one respondent commented "I smell irrational exuberance". 

And in what are we investing?  We may be either fickle or very nimble as a business class. This year's expected top three industries were not in the top three last year. Health Care, Enterprise Technology and Financial Services were win, place and show as compared to Digital Media, Sustainable Energy/Cleantech and Infrastructure at 1, 2 and 3 last year.   Health Care moved up from 4^th last year.  People are apparently smelling money and opportunity in Obama-care. As one person noted, "...when you mess with 16% of the economy something's got to break our way."

The just under 400 who did reply this year were similar to last year's mix of VC and Buy-out pros, with a decidedly higher representation of operating executives responding.  This year's mix of survey takers were very high on themselves believing that 63% were confident in their business and 77% confident in the person they see in the mirror.  Both marked increases to last year's numbers.  They even had more confidence in their bosses with 50% expressing that view - nearly double last year.

This confidence however does not extend itself to America's political leaders.  Respondents were downright, well...down on President Obama and his economic team. Only 11% expressed any confidence in the president with 55% damning his economic team (compared to 37% disapproval for Obama).   The cynicism is markedly clear when literally no one - not a single person - expressed any confidence in Congress with 65% stating no confidence in the folks under the Capital dome. Even state governments and state legislatures earned 12% confidence. This is what happens when you threaten to screw with capital gains taxes, I guess. Interestingly, the survey closed on election eve of the Massachusetts vote to replace Ted Kennedy in the US Senate.  I think we know how the Bay State respondents voted!

Click the link to see the highlights of the results of the this year's Semaphore Confidence Survey results.  If you want to do your own comparison, click the link to see last year's Semaphore Confidence Survey results.

While some might think the survey results rather depressing in either fact or faultily hopeful there was more than a bit of entertainment. Several wondered after the wag who famously noted in the survey comment section last year that, "PE is dead and I wish my boss were too."   Commenter's this year frequently asked after that quote master, speculating if he or she were "on the lam", noting that "if he did murder his boss it would be justifiable homicide".  Our infamous predictor never surfaced - neither admitting to the crime or the prediction. However, a new would-be industry murderer surfaced stating with equal certainty, "‘PE Killer' was wrong. It is VC that is dead. And my boss is comatose..."  I doubt that either PE or VC conclusion reflects the true state of our industry.  That said, apparently at least two of our colleagues have either a morose sense of humor or deserve to be patted down before they go to an industry conference. Maybe we should post a reward to uncover their identity.  Wanna contribute? I'll put up the first half a buck.

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Mark S. DiSalvo is the President and CEO of Sema4 Inc., dba Semaphore (http://www.sema4usa.com/), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York and London.