Editor's Note: This is part two of a two-part series on venture capital funding for early stage biotech firms. Part one ran in Friday's issue.

Starting out is hard, especially in biotech. The research is unproven, business models untested and, sometimes, the management unseasoned.

Money's been particularly hard to come by in 2005. BioWorld's figures show private biotech funding has been slipping - $406.3 million in January, $636.6 million in February, $276.4 million in March and a miserable $182.4 million in April. Through May 12, private funding overall is down 23 percent from the same period last year, and total money raised by biotech through Thursday is one-third lower than it was in 2004.

So when early stage firms are able to raise decent rounds, it's worth noting. In Friday's issue, Tranzyme Pharma Inc.'s Vipin Garg detailed how his firm pulled in an oversubscribed $32 million third round, after a merger added layers to the company's story and brought it to the lip of the clinic.

Ambit Biosciences Inc. announced Thursday that it had added a $10 million tranche to its Series C round, bringing the total to $31 million. Those are good-sized rounds raised by two companies that had not yet reached proof-of-concept. Their examples add credence to the words of Ambit CEO and president, Scott Salka, who noted that money is available, but it "seems to be flowing to certain areas and certain companies."

Ambit is one of those companies.

Today's Valuations Bad News' For Previous Investors

Things weren't all roses in early 2004 when Ambit first started its Series C, but it managed to pull in $21 million in the first closing and stop there.

"We could have done a more sizable round," Salka told BioWorld Today, but the reason they didn't was pricing. There was "a lot of opportunistic capital" floating around then, he said, and the pre-money valuation his firm was getting "was really bad. And it was especially bad news for the Series A and B investors."

So Ambit did what it had to, which was "stomach raising less capital," he said, and keep the round open until it could go get more on better terms.

Investing, especially in biotech, is risky. How well those seeking money defray risk relates directly to their access to funds. How was Ambit able to raise $31 million, when it had no clinical compounds and no major collaborations to speak of when it started the round?

"The way we were able to overcome it was that our technology was working really well," Salka said. "It found purchase in 2003 and by 2004 we had done tremendous things with it."

Ambit's technology combines AFP (amplifiable fusion protein) and affinity-based methods in a small-molecule screening platform it calls ProteomeScan. That platform uses both reverse and forward screening and identifies and quantifies binding interactions between small molecules and human proteins.

The technology might have found purchase in 2003, but Ambit had not yet convinced a pharma partner to commit to a long-term agreement - that was the specific risk it offered to investors. Ambit was surviving on pilot programs it had "cobbled together," Salka said, but eventually that was enough to get those partners talking.

"They had good things to say about our technology," Salka said. "That's what gave us, even in those tough times, the opportunity to attract investors who were willing to take that risk with us."

The deal put the original $21 million in the books, closed in August. Coinciding with that tranche, Ambit also got its first broad agreement, and with a big-time name, too: F. Hoffmann-La Roche Ltd., of Basel, Switzerland.

"Roche committed to a multiyear collaboration, and they led the round with a major equity investment," Salka said. That set off a chain of partnering, and by the end of 2004, Ambit had locked up deals with Bristol-Myers Squibb Co., GlaxoSmithKline plc and Pfizer Inc. - in other words, a wish list of pharma partners for any young firm.

It was time to go back and add to that Series C, and Ambit raised the additional $10 million on terms that satisfied the Series A and B investors.

"Our revenues had grown," he said. "It gives [our investors] comfort to see that that technology is perceived as something useful" by a cadre of pharma players.

"We've got traction; we've got great traction," Salka acknowledged. "We've already made significant differences in the development decisions that [our pharma partners] are making."

Finding The Path Out

Besides Roche, here's the collection of investors in the total Series C round for Ambit: Perseus-Soros Biopharmaceutical Fund, Forward Ventures, GIMV, Avalon Ventures and various individuals. New investors were Canadian Medical Discoveries Fund Inc., of Toronto, which was advised by MDS Capital Corp., and Genechem, of Montreal.

Now that it has all those VCs in, how does Ambit provide them with return? Note this: There had been just 12 IPOs this year through April, and the average take was $52.4 million. To date, Ambit has raised $51 million.

"We say we need to be prepared for the markets to turn on a dime," Salka said. "The saying is that no one knows the window is open until it's halfway shut. But that's not what we are overtly planning for. We have to plan to build value" and, most likely, "sell the company to a pharma company or big biotech."

The best way to increase value is with clinical compounds, and that fact isn't lost on Salka or Ambit.

The end of 2005 should see Ambit with an investigational new drug application for its stroke program. The compound is "completely homegrown," Salka said, and the company has the intellectual property around the target it's aimed at. Next year Ambit should start dosing patients and move into Phase II, if all goes well. Its second product, a small-molecule kinase inhibitor for acute myeloid leukemia, is timelined about three months behind the lead. There are a "number of possibilities" for compounds behind those two, and the company is "winnowing down the list," Salka said.

Sounds promising, but it's clear the current market is unkind to early stage firms. If the right deals are signed, though, Salka said, "it doesn't cut off that IPO path, but you do build a better company. There are things that you can do to prepare for an IPO that are not necessarily good for building long-term value."

During the extremely liquid times of 2000, there was "lots of dressing up the place, building a façade" by biotech firms. It was nearly a pattern - debut a technology, sign a few deals with pharma, file and watch the IPO dollars roll in.

All those deals might make the company look good, but if they're not set up correctly - what's required is either a lot of money up front or "nice residual rights to the compounds" - the company is simply "on the treadmill, and everyone watches you run real fast," Salka said.

That's not what he wants to do - run real fast with everyone watching.

"Every relationship I cut has to help add value," he said.