Analysis: 2012 life sciences VC fundraising and new bets shrivel

Brace for more dour figures on venture investment in biotech. Despite some bright spots in life sciences venture investing, a new study finds that VC players in biotech and devices might struggle to sustain investment levels. And one of the few consolation prizes for the companies that won venture deals is that valuations inched up in 2012.

In a study from the law firm Fenwick & West, the group surveyed 2012 investments in U.S. life sciences companies and analyzed some figures from other sources. As has been reported, the bad news was that the number of first-time deals for life sciences companies fell last year to the lowest level since 1995, according to figures cited from PriceWaterhouse Cooper and the National Venture Capital Association's MoneyTree report. The good news: 52% of venture rounds included increased valuations for life sciences companies compared to valuation declines in 17% of deals last year. This bested the average of 47% of "up" rounds and 25% "down" rounds in 2011.

Yet life sciences-focused VC outfits face a shrinking pot of capital to wager on biotech and devices companies. In their own efforts to raise capital for new funds, VC firms in life sciences haven't recovered since the financial meltdown in 2008. Fenwick estimated that VC fundraising allocated to life sciences dropped from 19% of funds in 2009 to 12.5% in 2012. The drop in total funds raised has been steeper, as life sciences VC fundraising has sunk down from a $7.8 billion average in 2007 and 2008 to just $2.5 billion last year, according to the firm. Corporate backers and disease foundations have helped make up some but not all of the scarcity of capital for life sciences companies. 

The deal numbers might give some industry people pause. Less money, fewer first-time deals and other downward trends might spell disaster for the biopharma sector down the road. Venture-backed biotech and device startups have been one of the key feeders of large life science company pipelines over the years. And pharma groups have been scrambling to capture biotech assets in recent years and have recently started seeking more early-stage deals now that most of the ripe late-stage programs are taken. In some pockets of the venture industry, such as at New Enterprise Associates and Third Rock Ventures, partners have been sounding bullish about investing in biotech as demand mounts for those companies' new therapies. Many other VC players have moved away from biotech, however.

"The life science venture financing environment remains challenging with an increasingly short supply of capital, despite factors--such as aging world populations and rising living standards in developing countries--that will help support long-run demand for life science innovation," said Matt Rossiter, a partner at Fenwick. "Our analysis shows that fundraising by life science venture capitalists continues to decline, and represented only 12.5% of venture funds raised in 2012."

"While funding from corporate investors, wealthy individuals and disease foundations is helping to fill some of the gap," he added, "entrepreneurs that plan to seek venture capital financing would do well to carefully consider factors, such as capital efficiency and a faster path to exit, that can increase the odds of raising scarce funding."

- get the full report here
- see VentureBeat's article

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