Report: VC Funding in Life Sciences Falls Behind

By Mia Burns (mia.burns@ubm.com)

Although U.S. venture capital funding for the life science sector dropped by 15 percent in the third quarter of 2013, PricewaterhouseCoopers executives say that they are expecting investment within the industry to return. A new report, Falling Behind, includes data from MoneyTree Report from PwC and the National Venture Capital Association based on data provided by Thomson Reuters.

Venture capitalists only invested $1.4 billion in 188 life sciences deals last quarter, however, the pace of life science investment for the first three quarters of 2013 is outpacing the previous year.  During the second quarter of 2013, there was a sharp increase of 26 percent in dollars invested compared to the second quarter of 2012.

Greg Vlahos, life sciences partner, PwC told Med Ad News Daily, “There are several factors that contributed to the drop in dollars. First, half of the drop can be attributed to the fact that 3 of the 10 largest deals in Q2 were investments into life sciences companies while we saw no Life Sciences deals in the top 10 in Q3. Those three large deals in Q3 accounted for 12.5 percent of the drop in dollars. Second, we’re seeing the VCs continuing to shift their allocations to the software industry, which is showing a faster ROI and requires less capital than life sciences companies. Despite the drop in dollars from Q2 to Q3, we saw an increase in deals over the same time period, which is a positive sign that VCs are still actively investing in the space. Additionally, the dollars are actually on track on a year-to-date basis. If you look at the first three quarters of 2012 compared to the first three quarters of 2013, we are seeing a very slight uptick in dollars, which also shows that VCs remain committed to the sector.”

The software industry dominated venture capital investing during the third quarter. “Software companies are less capital intensive, have a shorter time to liquidity, and are showing a higher ROI than biotech companies at this point in time,” Vlahos says. “VCs put their dollars where they can get the quickest returns and the biggest bang for their buck, and right now, that’s software.”

In addition, the report mentions that life sciences venture funding is experiencing intense competition for venture capital compared to other sectors.  Its share of total venture funding dollars has dropped from a peak of 32 percent in 2009 to 23 percent so far in 2013. An often discussed reason for this is the movement of venture capital dollars from capital intensive industries like biotechnology and medical devices into capital light industries like software. However, this only partially explains the drop in overall funding. Also, an increasingly complicated regulatory environment is a contributing factor alongside a change in behavior by both start-ups and their aquirors.

Boston, San Francisco Bay, San Diego Metro, New York Metro, and the Twin Cities received the most life sciences venture capital dollars during the third quarter of 2013, according to the report. The leader, Boston, received $381 million, with $234 million going into biotechnology and the remaining $147 million going into medical devices.

Vlahos told Med Ad News Daily, “There are several traits that VCs look for when they are choosing whether or not to invest in a company: the management team, overall market potential, and the level of risk. An experienced management team, a robust market for the product or service, and the ability to mitigate risk will be a winning combination that will be very attractive to VCs.”

Posted: December 2013


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