VC Investmane Trends Signal a Positive Environment
The good news is that the life science sector—the biotech and medical-device industries together—saw an all-time record for venture capital investing in 2007, with $9.1 billion in 863 deals, according to The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association.
Nearly $2.4 billion of that total was invested into 366 seed and early-stage deals. Specifically, $497 million went to 116 seed-stage firms, and nearly $1.9 billion to 205 early-stage deals nationally. This represents a 58% increase in dollars invested versus 2006, when $1.5 billion was invested into 323 deals. The medical-device subsector enjoyed a 40% increase in funding—151 deals in 2007 versus 87 in 2006—reflecting renewed interest by investors.
Trends over the last five years also show an overall positive change.
• The size of the average seed-stage deal has increased dramatically since 2003, from $1.5 million to over $4 million in 2007.
• The average size of a Series A investment has also gone up during the same time period although less dramatically, from $5.2 million in 2003 to $7.5 million last year.
• The number of seed and early-stage deals increased by 70% over the last five years.
Investment in the life science sector for the most part is concentrated in established regional hubs. Fully 80% of all seed/start-up financing deals occur in only eight regions of the U.S.—Silicon Valley, Boston, Washington DC, San Diego, Philadelphia, New York City, Los Angeles, and Washington State. In 2007 the top three regions, Silicon Valley, Boston, and San Diego, accounted for 44% of national seed-stage investments. Silicon Valley alone accounted for 36% through 23 deals.
Although capital is theoretically fluid, start-up capital historically stays close to the investor’s home base, reflecting the need for a close working relationship at the early stages of a company’s growth. This factor explains why so much start-up capital gravitates to the regions where venture funds are located. Entrepreneurs located in those regions are well-positioned, at least geographically, to access this capital.
Fortunately, states, cities, and some private investors outside these hubs are beginning to recognize opportunities to mine technology in underserved venture capital markets. To target investment in these regions more effectively, angel investors are coming together as organized funds. Foundations and nonprofits are stepping in to provide capital for companies and researchers working in their disease areas. Biopharmaceutical companies such as Biogen Idec and MedImmune have established funds to complement their internal research efforts, and many large venture funds are now experimenting with accelerator models to generate deal flow.
In addition, states throughout the country are gearing up their efforts to capture the economic benefits of the life science industry. Pennsylvania was among the first, creating the Greenhouse initiative to support preseed and seed-stage firms, coupled with a venture program for follow-on capital. Together, Pennsylvania’s three Greenhouses have invested more than $36 million into more than 133 companies and projects throughout the commonwealth. These companies have gone on to leverage an additional $887 million in capital from other sources.