Over the past half-decade, venture capitalists have been retreating from biotech and energy, burned by bad bets and turned off by excessive costs. Meanwhile, one firm with former executives from Pfizer and the Central Intelligence Agency is doubling down.
Lux Capital said today that it raised $245 million for its third fund, topping the $200 million it set out to raise and more than twice the size of the previous fund. Among the firm’s 13 investment partners are Jeffrey Kindler, Pfizer’s chief executive officer from 2006 to 2010, and James Woolsey, the CIA director during the Clinton administration. With a focus on energy, health care and the sciences, Lux expects to fund companies that other firms won’t touch.
“None of these are momentum investments,” said Peter Hebert, a managing partner at Lux. “We’re looking for non-consensus opportunities, and we’re doing things different from the rest of the pack.”
The pack has moved towards software startups, which attracted $8.27 billion in U.S. venture funding last year, up 35 percent from 2007, according to the National Venture Capital Association. Over that same stretch, investments in biotech dropped 28 percent to $4.15 billion, and energy and industrials fell 11 percent to $2.75 billion.
The reasons are well documented. Internet technologies and open-source software have enabled developers to create and test new products using little capital, and allowing investors to spread their bets. Energy and biotech startups, by contrast, are riskier because initial investments tend to be larger; industries are regulated; and changing course when the initial plan fails is more expensive. Additionally, the high-profile collapses of solar-panel developer Solyndra and battery provider A123 Systems have laid waste to hundreds of millions of investment dollars — sending many investors into hiding.
Lux has avoided such spectacular failures. In energy, the firm has backed promising startups such as Gridco Systems, which provides services for electric grids, and Transphorm, a developer of power modules designed to make devices and equipment more energy-efficient. Lux also incubated Kurion, which develops technology to minimize the impact of nuclear waste.
With offices in New York and Palo Alto, California, Lux manages about $350 million in assets. Lux lacks the name recognition of more established venture firms because it hasn’t had a blockbuster exit. Four of the firm’s startups have been bought, yet almost all of its gains are on paper, said Hebert, who co-founded the firm in 2000. “Our whole philosophy is when we win, we win big,” he said.
Now, Lux can use its $245 million to deliver on that goal.