As VC falters, early-stage biotechs look elsewhere for cash

First-time venture deals in biotech cratered to a 17-year low in the first three quarters of 2013, but that doesn't mean startups are starving. As The Burrill Report points out, despite the VC drought, about a quarter of all equity deals in that period went into Series A rounds, meaning early-stage companies are getting creative and nailing down alternative funding sources.

Series A financing accounted for $454 million of the $1.3 billion raised by biotechs in the first 9 months, giving startups about one-third of available funds, often through VC-free outlets like angel investors, venture philanthropists and non-traditional equity deals, according to Burrill's analysis.

And, considering the venture climate, it's no surprise early-stage companies are looking elsewhere in search of funds. The first 9 months of the year saw just 104 first-time venture investments in biotech, according to PricewaterhouseCoopers and the National Venture Capital Association data, and while the number of Series A deals increased by about one-third in the third quarter, overall dollar value dropped 56% to $150 million.

Those tepid figures mean small biotechs will have to take an all-encompassing approach to raising money, following the lead of companies like PharmAkea Therapeutics and their innovative dealmaking. This month, the San Diego upstart lured a $10 million investment from Bay City coupled with a $35 million collaboration deal with Celgene ($CELG) that gives the biotech giant a buyout option, a novel arrangement that funds the short-term development of its cancer and fibrosis programs while setting the table for an exit.

But while a prolonged early-stage venture slump forces biotechs to dream up outside-the-box deals, some of the industry's biggest investors are piecing together new funds with the promise of helping to reverse the trend. Startup-focused 5AM Ventures is raising cash for a new $240 million purse, and VC giant OrbiMed is gathering up $300 million with an eye on Asian biotechs. So far this year, venture stalwarts Third Rock, Atlas and Frazier Healthcare have debuted new life science-directed funds totaling more than $1 billion.

Special Report: VC funding follows tepid pace in Q3 as first-time biotech rounds shrivel

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