July 2, 2012

Xconomy

Who is Still Active Among the Early-Stage Biotech VCs?

Imagine for a moment you’re a hotshot biomedical scientist at a university. You have invented a technology in your lab that you think has potential to make a big difference for the world of medicine. Despite all the accolades you might be getting in Nature, you are savvy enough to know you still have a pretty raw concept. Your idea needs someone who can build a business around it, and invest a lot of time, money, and talent to prove it’s the real thing.

Who would you call?

There aren’t that many people who you can call anymore, and the number is shrinking. This question has been gnawing at me for a while, as I’ve sought to understand the historic contraction that’s occurring in the biotech venture capital business, and what effect it will have on the biotech industry’s ability to turn bright ideas into valuable new healthcare products.

Much has been written about the venture financing stats, which aren’t pretty. About $780 million of venture capital went to life sciences companies in the first quarter of 2012, a breathtaking 43 percent drop from the prior quarter, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters. What’s even more disturbing is that the vast majority of that money went to existing companies with products in late-stage development, not to startups. Despite some fascinating advances in the basic science of genomics, microRNA, drug delivery, diagnostics, vaccines and more, the amount of money for first-time company financings fell by 60 percent in the first quarter to $120 million. Only 21 companies in the U.S. got their critical first financing in the initial three months of this year—in a country where Ernst & Young counts 1,870 public and private biotech companies.

Less money is going into the industry, and this isn’t a one-time quarterly blip, it’s a long-term trend. The VC industry has already contracted dramatically, as there were 1,022 active firms during the tech bubble year of 2000, and just 462 active firms were left in 2010, according to the National Venture Capital Association. The NVCA definition of “active” includes firms who invested at least $5 million into companies in the past year. But the number of active firms is still declining, because many firms raised their last funds before the financial crisis of 2008. Most of that pre-2008 money has been invested already in companies, and the VCs can’t go back to hit up their friends at pensions, endowments, and foundations for more money, at least until they can generate better returns. With slim odds of taking their portfolio companies public or striking a big acquisition by a Big Pharma company, the biotech VC industry has been withering on the vine the past four years.

To view the full article, visit:  http://www.xconomy.com/national/2012/07/02/whos-still-active-among-the-early-stage-biotech-vcs/
By Luke Zimmerman