Venture Capital increases in 2011, but…

The National Venture Capital Association (NVCA) has released their 4Q 2011 numbers for biotech venture financing in the US. The report echoes the global numbers already out from BioCentury and BioWorld – a boost in investment for 2011.

The take away, however, is not the total amount, but 1) the drop in the total number of biotech deals, and 2) the drop in start-up, early-stage deals from 2010. The total number of deals near 447 was down 8% from 2010, and the number of start-ups receiving funding dipped 19% from 2010. Biotech 1st round deals fell below 100 for the 3rd time in a decade (see table below). The NVCA defined “Life Sciences” group had the lowest deal number in FIFTEEN years. (They add device companies to biotech to get their “Life Sciences” number, which essentially means things are worse off in the device space.) As is often the case in our sector, the devil is in the details.  So, take the 20% jump in VC $ funding with a grain of salt.*

Here are the 1st round VC financings from NVCA since 1995:

Below is the US biotech venture investment from NVCA, 2005-2011. The second chart shows TOTAL US venture investment and total deals. Note that the second chart shows the total number of deals for all sectors going up, yet biotech (in the first chart) goes down for 2011:

What this implies is that although we did see more investment, the funding is becoming more concentrated. We see fewer deals, but more money invested. There are two possible reasons for why this could be happening. First, VCs are very conscious of capital constraints in a volatile macro environment and want portfolio companies to weather the next storm if need be. Second, later stage assets in biotech require more funding. With LPs demanding closer time horizons for an exit, these companies may have a better chance receiving additional rounds vs. discovery start-ups (without an asset) seeking a first round.

*A point that has been brought up since the NVCA release, see Bruce Booth and Rick Soltero, is the over reaction to the magnitude of the drop in the 1st round deals. Bruce argues that 100 is still a decent turn out, and Rick argues that they get more than they used to, with quality the focus on the VC front. Both are valid points and do not disrupt the thesis that more late-stage rounds deals are occurrring vs. early stage. When we plot the number of biotech deals that are 1st round vs. later round, the divergence is pretty clear (see below). However, when we plot the amount of money going into 1st rounds as a percent of total biotech investment, it is far more consistent (15-20% of all invested biotech VC money). Thus, taken together, this would mean the following:

1. There is no growth in the number of start-ups per year, potentially at a baseline near 100 (the 98 companies in 2011 is off peak levels of 140, by 30%, and below the 15 year average of 105)
2. The VC allocation discipline to early stage is about the same, but off peak allocation of 20% of invested money (typically 15-20% range since 1995)
3. Because there is more VC money invested in 2011, and start-up numbers stagnate, the investment per start-up is increasing (see last chart)

VCs pump more cash into late-stage efforts as startup rounds shrivel

The biotech industry finished 2011 on a high note with a surge in venture investing, but you can still clearly hear the alarm bells ringing in the background. The National Venture Capital Association and PricewaterhouseCoopers concluded that VCs pumped $4.73 billion into biotechs last year, a four-year high and one of the best numbers seen in the past decade. But only 153 of the 785 investment rounds for biotech and medical device companies went to startups, a 15-year low and a worrisome trend for analysts concerned about the future of the industry.

Venture groups in general, and the NVCA in particular, complained all year long about the tough investment environment. Their favorite whipping boy has been the FDA, and there have been signs that regulators are growing more sensitive to the charges that they are too slow and too cautious. It certainly hasn't helped, though, that the IPO window keeps slamming shut, usually crushing a few biotech execs' fingers each time. And the NVCA noted again that without a healthy IPO market, venture groups are being forced to support their portfolio companies longer, increasing the size of life sciences rounds as the overall number of deals shrinks.

The bottom line on 2011 suggests that VCs are still willing to bet on drug developers. But they are increasingly focusing their time and attention and dollars on later-stage companies, shunning the startups that need Series A money to make it through the Valley of Death.

"This reflects a serious breakdown in the model that has fueled the U.S. leadership in life sciences innovation," said Warburg Pincus' Jonathan Leff, according to Bloomberg. But break the latest fourth quarter numbers down, and you can also find some distinct bright spots. That's especially true for the Boston biotech hub, which saw a big surge in fourth quarter investments.

"New England had a very good year, and biotechnology really carried the day for us,'' Kevin Shaw, a partner in PricewaterhouseCoopers' emerging company services practice in Boston, tells the Boston Globe. "The combination of our teaching hospitals, universities and venture capitalists who know biotech - that adds up to a strong cluster."

And while VCs have been pulling back from the start-up sphere, shunning companies that are years away from any prospective exit in an IPO-poor environment, Big Pharma groups have been stepping up to the plate via their corporate venture capital (CVC) units, as Atlas' Bruce Booth notes in his column today. "Reality is every early stage investor now has their favorite CVCs on speed dial for their next startups' funding round."

- here's the press release
- here's the Bloomberg report
- here's the Boston Globe story
- here's Bruce Booth's column

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