Biotechs seek venture debt but lenders are tight

By Toni Clarke

BOSTON (Reuters) - As cries of anguish from biotech companies seeking funding grow louder, and the capital markets remain firmly closed, many are turning to a non-traditional form of debt.

General Electric's (GE.N) GE Capital, SVB Financial Group's (SIVB.O) Silicon Valley Bank, Hercules Technology Growth Capital Inc (HTGC.O) and other specialty financing companies offer a type of borrowing known as venture debt that is becoming increasingly popular with cash-strapped biotech companies.

Venture lenders provide secured loans with warrants to venture capital-backed companies. The loans are not necessarily based on hard assets such as factories and equipment, as bank loans are, but on intangibles such as intellectual property.

"The way we look at it is we provide investors with a lower-volatility way to get exposure to great venture-backed companies," said David Fischer, a partner at Gold Hill Capital, which specializes in technology and biotech venture lending.

Venture debt funds are often structured like venture capital funds, with the money put up by institutional investors and wealthy individuals. Returns are generated in part by the return of capital, interest and fees, and in part through appreciation of the equity portion of the loan.

Should a company fail, the debt-holders are reimbursed before the venture capitalists, who rely for their returns on the sale of their protege companies.

"A debt fund is less risky than an equity fund," said Parag Shah, senior managing director, life sciences, at Hercules Technology. "We are not wholly reliant on exits to make our returns. We make an interest rate regardless of whether the company makes a stellar exit."

While debt funds may be less attractive than equity funds when stock prices are rising, they can cushion the blow during down times. And for small biotech companies which are typically shown the door by traditional banks, the loans can be life-saving and protect them from dilution.