Information technology and software, health care, business services, and various combinations of the three are good sectors for venture capital with financing rounds of less than $5 million over the next five to 10 years, according to Laura Pearl, ’88, managing director of CERES Venture Fund.
“We see a number of opportunities in what I generally call financial processing areas,” Pearl said during a panel discussion October 9 at Gleacher Center sponsored by the Private Equity, Entrepreneurial Ventures, and Venture Capital (PEVC) Club, a group run by students in the Evening MBA Program and Weekend MBA Program.
Financial processing and marketing services tend to attract very fragmented businesses without large, dominant competitors, she said. “Health care IT is ripe because health care tends to lag way behind areas of comparable size in our economy in terms of migrating to good information technology platforms,” Pearl said. “Cost efficiency and life-saving technologies are also good areas to focus on in health care.”
One of the major constraints to innovation in the field is that the average cost of bringing a Class III drug to market is about $800 million, with a real cost of about $200 million, said Raphael Lee, Paul and Allene Russell Professor of Surgery (Plastic), Professor of Medicine (Dermatology), and Professor of Organismal Biology and Anatomy at University of Chicago Hospitals.
“The biggest part of that cost is meeting safety for a diverse population,” Lee said. “That is much more than it costs to bring a drug to market in Europe or any other part of the world. The average cost is four times the real cost because only one in four applications to the FDA is approved.”
The FDA’s standards are very high and costly, so companies wait for tax dollars to fund high-risk research, he said. This model does not work because just one in 10 start-ups launched with university research succeeds, Lee said. “Companies should be layered around universities and license four to six ideas at a time,” he said. “This model has been used, and I believe you will see a change from how things are done now.”
Academic research and business form a “mismatch” of motivations, said Ian Foster, director of the University of Chicago Computation Institute, professor of computer science, and distinguished fellow at Argonne National Laboratory. “Researchers are motivated mostly by new ideas to impress their friends,” Foster said. “Business must figure out how to produce a working company, perhaps take many ideas, and put them together into something that people actually want to pay money for.”
A growing number of academic researchers are moving from the traditional “reductionist” approach of focusing on one aspect of science to an “integrative” approach building systems spanning across all scientific literature, he said. “They’re trying to find common themes or perhaps areas that have been missed,” Foster said. “Those sorts of areas, because they relate to managing complexity, are perhaps ripe for commercialization.”
For Mahesh Rajan, co-chair for entrepreneurship of the PEVC Club, the key takeaway from the panel was the distinction Pearl drew between the West Coast and East Coast approaches to venture capital. “On the West Coast, people expect some experience and more expediency,” Rajan said. “That resonated with me because I happen to come from the engineering side of things.”
— Phil Rockrohr