This post was inspired by the Xconomy story Wisconsin 2013 VC Activity Drops, Shifts to Software from Biotech. To recap, Wisconsin has historically fared very poorly by virtually any measure related to venture capital. And 2013 was ugly form a numbers perspective: VC funding in the state dropped from $95.3M in 2012 to $35.9M. (Here’s my explanation from Q3 2013.)
But here’s the key: Reading the story, one might think that the VC community has walked away from life science investments altogether. Indeed, I have heard this story more than once over the last year or so locally. This point is relevant whether or not your biotech is currently interested in raising VC dollars. Why?
- Wisconsin companies get equity investment from individual angels (~$60M a year across industries) that catalyze activity beyond the grants (e.g. WI companies received $31M in SBIR funding in 2012) and revenues from products and services. If biotech is not a good investment, angels will not continue to fund this innovation.
- Venture capital can be the only way for certain companies to grow. For example, the $92M that the now public Cellular Dynamics raised between 2010, 2011 and 2012 is counted in the VC funding rounds. This capital was critical in building to a scale that allowed them to go public last year. Changes in biotech VC impact entrepreneurs’ ability to attract this funding.
(Yes, there should be alternative models for funding medical innovation but we shouldn’t ignore the $4.5B of life science VC invested in 2013.)
After answering a few questions, I’ll tell you why I believe the biotech VC numbers should cause some concern for WI companies for reasons that have nothing to do with the performance of the asset class.
Does the venture capital industry see value in investing in life sciences?
Are Venture Capital Investments Shrinking?
Maybe. Since the $105B invested in 2000, the amount of VC invested each year has been between $19.7B (2003) and $32B (2007). While the $29.4B invested in 2013 is up slightly relative to 2012, it is slightly less than the $29.7B invested in 2011.
Are Life Science Venture Investments Shrinking…Disproportionately?
Not currently. The NVCA data are provided for the percent of venture capital dollars invested since 2004. In the 2004 release, it was noted that: “Life Sciences accounted for 27% of all venture capital dollars; hovering at its historical high.” Based on this additional information, the proportion of VC invested in life sciences appears to have remained relatively steady.
Is Venture Capital Funding Shrinking?
Yes. While the dollars invested inform about the current appetite for investment, fundraising from limited partners for VC funds provides a glimpse into the future. Overall, dollars raised for VC funds and the number of funds have shrunk significantly, whether using the high marks of 2000 or 2007. The scale on the graph below may be misleading: between 2007 and 2013, VC dollars invested fell by more than half.
Are Life Science Venture Funds Shrinking…Disproportionately?
No. In a state of the healthcare VC industry update, Jon Norris of Silicon Valley Bank presented the following table with a header of The Declining Numbers (slide 4). These numbers show a clear decline in both number of funds and dollars raised by life science VCs.
Pulling from the venture capital fundraising data from NVCA, the decrease in dollars raised is similar for the industry as a whole over the selected time periods (full data in Appendix). A concern I have with this comparison is that the table above comes from a different source and I was unable to access NVCA data for fundraising by industry.
Does the venture capital industry see value in investing in life sciences?
Yes, but.
Ch, ch, changes….in Life Science VC
The large swings in VC investments and fundraising have resulted in changes to what life science VCs are interested in funding. For example, there is more of an emphasis on corporate partners, either venture or collaborations. The types of exits available are impacting the desired investment structures. You can read more about the opportunities ahead from Jon Norris at Silicon Valley Bank and Bruce Booth at Atlas Venture.
Other changes include early life science VC taking a more active role in starting companies and achieving initial proof of concept than in the traditional VC model. Here are descriptions from a sampling of firms that raised new funds in 2013:
- 5AM Ventures, new $250M fund: 5AM is unusually hands-on when starting companies, assuming short-term operating roles and proactively providing guidance throughout a portfolio company’s life.
- Frazier Healthcare, new $377M fund: Since 2002, our team has been the founding investor in over 50% of our biopharma portfolio companies
- Third Rock Ventures, new $516M fund: We have dedicated full-time employees working on A, B and C projects to build new companies organically.
- Atlas Venture, new $265M fund: We regularly play an active role in company formation, as with…Zafgen, where we seeded and incubated the company for 18 months in our offices after negotiating with Children’s Hospital to license the intellectual property.
Finally, biotech VC dollars appear to be concentrating in fewer hands. Although from early 2013, this post by Michael Greeley of Foundation Medical Partners discusses this phenomenon. While I don’t have the life science specific data, the graph below shows VC funds raised each year that are either new or follow-on funds. New fund refers to the firm not the general partners. In other words, a new fund may be experienced partners who started a new firm. For life sciences, the tables above suggest that the number of healthcare venture capital funds raised has decreased more rapidly over time than funds across all industries.
What Do the Changes Mean for Biotech Entrepreneurs…in Wisconsin?
Reviewing VC funding for Wisconsin biotech, the majority of the major transactions involve companies in later stages of development, often including VC alongside large individual investors or corporate partners. In other words, your chances of raising early stage VC for WI biotech companies were previously low and haven’t improved with the emphasis on VCs building companies. The part that I find more interesting is the apparent consolidation of life science VC into fewer, more established firms. I would like to see data for the geography of funds raised over the last few years because I suspect that many of the smaller funds in the Midwest have been impacted. These firms often syndicated deals with one another. I believe the consolidation of biotech VC is more likely to impact WI biotech than the strength of the asset class as a whole.
Selfishly, continued funding for biotech innovation in Wisconsin increases the likelihood that I will be able to build something else here in the future. But more important, there have been great companies and solid returns built from investing in biotech in Wisconsin.
The answer to the next question is more pressing:
With all the changes in the life science industry, how can Wisconsin biotech attract new capital, regardless of source?
Appendix:
Venture capital fundraising data from NVCA (See Q42008, Q42013, Q42004)
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