2009 was a rough year for companies that rely on venture capital. Rocked by turbulent changes in the industry, venture funds were less generous with funding as they battened down the hatches and focused on core investments. While conditions improved a bit later in the year, there are still many unanswered questions going into 2010.
FierceBiotech spoke with three VC experts with front-row seats on trends in investment: Sherrill Neff (pictured, top), a founding partner of Quaker BioVentures, James Datin (pictured, middle) executive vice president and managing director, life sciences groupat Safeguard Scientifics, and Stephen Bloch (pictured, bottom), general partner at Caanan Partners all shared their perspectives on the financial and political forces that will shape venture capital investing not just in 2010, but for years to come.
The biotech and pharmaceutical industries were rocked by the financial crisis in 2009. While the industry has recovered somewhat from the darkest days of the crisis, venture capitalists are more cautious now than they were before. Specifically, they want to ensure their investments are as cost effective as possible. In 2010, look for fewer $50 million investment rounds, says Safeguard's Datin, as well as a sharper focus on lead products. It's not just about giving the company enough money to survive until the next round of funding. Now when investors back a company, they're more inclined to think about the total investment required to get a product from the earliest stages to market.
The stagnant IPO market also has had a wide-reaching impact on the industry. "We've had to finance our companies longer than we'd planned, and that's been really challenging for us," explains Bloch. Big Pharma, knowing that many developers had no exit strategy, were able to ink favorable deals at what some of the VCs we spoke to considered below-market value. Quaker Bioventure's Neff adds that if the IPO market is closed, "the only other channel for liquidity is acquisition. When there's a strong late-stage company with the opportunity to go public, then you can have a very different conversation with strength at your back when you're talking to buyers. But it's been a buyer's market in the last 18 months." He continues, "with the complete absence of a public market, buyers have had an upper hand in those discussions. There's no independent tool to keep them honest."