Yesterday I sat down for a wide-ranging conversation with Jim Watson, managing general partner of Silicon Valley venture firm CMEA Capital. He was in Boston for SuperReturn U.S., but was heading down to D.C. as part of his continuing efforts with Harvard Biz School’s Josh Lerner to improve management/structure of investment operations at public pension funds. Some notes:
* CMEA Capital will not raise another “traditional” VC fund, after having closed its last one in 2007 with $400 million in capital commitments. Instead, it plans to create a series of holding companies that will feature no management fees, with LPs effectively coming in as co-investors (treat it like a loan with a hurdle rate – probably higher carry).
* The first such holdco is already up and running, to focus on pharmaceutical candidates. Interesting structure: Acquire 20 drug compounds from academia, distressed biotechs, etc. About 6-7 new drugs per year. Invest no more than $10 million in any project, outsource the development and achieve liquidity within 36 months (no exceptions). Avoid drugs with particularly long efficacy wait-times, like ones focused on Alzheimer’s Disease (pain management, for example, is preferable).
* A second holdco focused on tech is being developed, but the rules may be different. Jim didn’t talk cleantech (the firm’s third sector), but I’d be surprised if it tries launching a cleantech-focused holdco. Pretty sure that ship sailed for CMEA with Solyndra.
* Watson believes that management fees should become dinosaurs in both the VC and LBO worlds (save for budgets in new firms that shouldn’t exceed 1% of capital under management). CMEA has been ratcheting down the fees in its two active funds to zero.
* There were reports late last year that Eli Lilly (LLY) and CMEA were working on a $250 million pharma fund, whereby Lilly would commit $50 million and open up its orphaned catalog. In exchange, it would receive buyback rights. CMEA ultimately declined to do the deal. I’ve learned that Lilly made a similar offer to Healthcare Ventures LLC and TVM Capital. I’d wager that they didn’t, given the inherent conflicts of interest for portfolio companies and co-investors, but I’ve put in calls to find out for sure.