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Biotech Startups: Nothing Ventured, Nothing Gained

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Cash crunch as investors grow more risk-averse.

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It's a rotten time to be raising money. And for small biotechnology companies, most of which have little or no revenue and are dependent on investor capital to stay afloat, times are tough indeed.

According to the Wall Street Journal, 120 of the 360 publicly traded biotech firms have less than 6 months of cash on hand. And while this isn't an entirely foreign position for industry upstarts to be in, the challenging fundraising environment means many of these companies could go under.

The business of developing experimental drugs, procedures and devices has always been one of high risk and high reward. Investors, often venture capitalists, are willing to lose their entire outlay many times over for the chance of hitting it big.

During their initial years, biotech startups undertake research, complete lengthy drug trials, and navigate the labyrinthine bureaucracy that is the Federal and Drug Administration, with investors pouring in more cash all the while.

The lucky few either get swallowed up by one of the industry heavy hitters or go public.

As noted in the Journal, the biotech business as a whole had its first profitable year in 2008. As fledgling companies blow through cash, giants like Genentech (DNA), Amgen (AMGN) and Gilead Sciences (GILD) rake in mountains of profits.

The fundraising troubles these startups face are emblematic of the broader difficulties for small businesses. Despite promises of help from the Obama Administration, investors are reticent to back nascent ventures. With investor cash drying up, getting by on a shoe string is becoming increasingly challenging.

This also reflects a sift in time and risk preferences, something discussed at length by Minyanville's Kevin Depew. With a decidedly cloudy economic outlook, investors are drawn to more certain, lower risk bets. Biotech startups represent the pinnacle of investor speculation, as evidenced by their challenge to find fresh backers.

One positive, and something many in the scientific community are pointing to hopefully, is President Obama's support for stem cell research and increased funding for the National Institutes of Health. Greater government assistance, they expect, could give fledgling companies the time and resources they need to make the next big breakthrough.
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