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Venture Capital Pivots to Biotech

Venture capitalists are starting to look beyond the overcrowded field of software startups into the transformative field of biotechnology.

(TNS) -- Always looking for big ideas that can revolutionize industries, venture capitalists are starting to look beyond the overcrowded field of software startups. Some say their latest target could be more meaningful — and lucrative — than any app: biotechnology.

Silicon Valley’s biggest venture capitalists continue to pump massive late-round investments into established apps like Uber and Airbnb, but smaller biotech startups are increasingly piquing their interest and opening their wallets.

Biotechnology was funded at the highest level in a single quarter since the industry began tracking that data in 1995, according to a MoneyTree report released last month. The industry saw a 32 percent increase in dollars invested from the previous quarter — amounting to a total of $2.3 billion.

“Apps are amazing, and there’s a huge number of apps that have changed people’s lives, but it’s getting harder and harder as a VC because you still need to get eyeballs on it,” said Arvind Gupta, venture capitalist and co-founder of biotech accelerator IndieBio. Biotech “is an industry that can truly change lives.”

And, Gupta said, it’s one that will reward early investors.

“Communication and social networking is a billion dollar market,” he said. “But food? Global wellness? Things that will help people live much longer and much better? That’s a trillion dollar market.”

Money heads to biotech

Venture capital interest is a big change for biotech startups, which just a few years ago struggled to find funding. Some, like uBiome, even relied on online crowdfunding campaigns on sites such as Kickstarter and Indiegogo.

After graduating from UCSF’s Institute for Quantitative Biosciences incubator, CEO Jessica Richman said she wasn’t sure how to fund her company, which studies microbiomes, the ecosystem of human gut bacteria. So, she turned to a crowdfunding campaign.

“At the time, the biotech and tech worlds were really separate from each other, and we needed a way to demonstrate that there could be a demand for what we were doing,” Richman said. “We needed a way to gain traction.”

In 2012, uBiome raised $350,000 on Indiegogo. Other biotech startups, like Exogen Biotechnology in Berkeley or the HIV-vaccine oriented Immunity Project in Oakland, brought in early funding the same way.

Three years later, uBiome serves as an example of how far Silicon Valley has come in its embrace of biotech. It went on to become one of the first biotech companies to break into Y Combinator, the prestigious tech accelerator that churned out big companies like Airbnb, Reddit and Dropbox.

There were six biotech startups in its class in the summer of 2014. Today, Richman said, there are about 30.

After graduating Y Combinator last year, uBiome landed $3 million from Menlo Park VC firm Andreessen Horowitz. It’s one of several venture capital firms traditionally oriented around software companies that have started looking to startups focusing on food products, genetic sequencing or cures for diseases.

Big trend foreseen

They mark the beginning of what Gupta expects will become a big trend — once VC firms realize how lucrative biotech can be.

According to the MoneyTree report, which summarized VC spending for the second quarter of 2015, the software industry continued to eclipse all other industries with $7.3 billion in funding to 491 deals. Later-stage deals accounted for 19 percent of the total, the report said, and there were 26 megadeals of $100 million or more , including a $1.5 billion investment in vacation rental service Airbnb.

Four out of the last five quarters were marked by a billion-dollar deal, resulting in growing numbers of so-called unicorns — startups valued at more than $1 billion.

Though it saw no massive billion-dollar rounds, biotech captured the third largest total for dollars invested and second for number of deals, with $2.3 billion going into 126 deals, data showed.

Data Collective, a venture capital firm that traditionally funds startups focusing on data, has taken on several biotech startups dealing with genetics.

“I think of DNA and genomics as one of the grandparents of the big data movement,” said Zachary Bogue, a managing partner at Data Collective. “The thing that’s exciting about biotech is they’re not just optimizing online ads, they’re fundamentally making the world better in some way. Whether it’s through better drug discovery or the prevention of epidemics and pandemics and making our global industries less reliant on petroleum.”

It’s hard to say when the tide began to turn.

Some credit the Google-backed genetic testing company 23andMe with making biotech cool. Others point to the lower-than-ever costs of lab time and DNA sequencing as the tipping point.

“It’s massively different now than it was 10 years ago,” Gupta said. “We’re getting to the point where, in bioetech, like in software, we’ll see people to attempt to write organisms from scratch, because it’ll be cheap enough to fail.”

Too technical, too expensive

For decades, biotechnology has been considered too technical and too expensive to exist beyond the confines of traditional laboratories and science-centric markets. The expense made biotech startups risky — especially compared with apps or software, Gupta said.

But over the past five years, the time and money needed for DNA manipulation has plummeted. Laboratory costs have gone down. Technology has enabled biotech startups to streamline their business.

It has made taking a chance on a biotech startup less of a gamble, Gupta said, and enabled entrepreneurs and investors to approach biotechnology startups the way they treat software innovation: experiment, and if they fail, try again.

“It’s making groundbreaking science fund-able by tech VCs,” he said.

On its website, Y Combinator lists biotech as one of its top five areas of interest for startups: “We are certain that this is going to be a surprising powerful and controversial field over the next several decades. It feels a little bit like microcomputers in the 1970s.”

This sense of possibility is one of biotech’s most valuable assets, Gupta said.

“Right now, we’re just starting to see the very bubblings of the biology revolution,” he said. “A lot of the titans of the future industry haven’t even been created yet. That’s how early we are.”

©2015 the San Francisco Chronicle Distributed by Tribune Content Agency, LLC.