If you’re a CEO of a small biotech company, raising money isn’t necessarily getting easier, but there are a few signs that money could be starting to loosen up a bit.

The Boston Globe noted in late May that several private Boston-area biotech companies had raised needed funding money directly from hedge funds. The newspaper noted that small privately held Microbia, which has trials running on two potential drugs, had a $75 million funding round in February. Also, Merrimack Pharma, a company that’s developing a potential treatment for autoimmune disease from a goat milk protein, did a deal in March for $65 million.

Other similar hedge fund-led rounds are being completed, including $100 million recently raised by California-based Fibro-Gen, which is working on a potential new anemia drug competing against Amgen.

The fact that deals of that size are being done by hedge funds isn’t good news for struggling venture capitalists, which typically have provided biotech funding of that size.

It’s also not necessarily a sign of improvement. It can be argued that venture capitalists likely know the biotech space better than the hedge funds do. Perhaps the hedge fund involvement is merely a sign of speculative money chasing risky investments that the venture capitalists would rather not touch.

But the counterargument is that it’s a positive that money is being raised, period. It likely means that at least some of the  record liquidity that was pumped into world markets over the past nine months is making its way to the equity capital markets and to the small biotechs that need the funding.

A somewhat related development is that the number of convertible deals in the U.S. is again showing month-over-month increases after more than 12 consecutive months of declines. Convertibles are often a capital-raising option of last resort, so it’s not the best gauge. But an increase in any deal category other than secondary offerings may be seen as an improvement. It’s one more very small sign of the equity capital markets getting a bit better.

Until we start seeing VC activity improve, we’re talking only talking about potential early signs of change for biotech funding. That said, those signs were nowhere to be found in early 2009.

Mike Tarsala

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