Chicken Little and Life Science Venture Capital

Posted in General Venture Capital, VC-backed Biotech Returns

The sky is falling.  The sky is falling.  Seems like every day there’s another piece of news about the drop in Life Science venture capital (and here), with bouts of flagellation around each new quarterly press release from NVCA/PwC MoneyTree, Dow Jones VentureSource, or CB Insights.  Everyone repeats the news with the same grim perspective and soon enough it just becomes well accepted fact, and runs the risk of being self-fulfilling.  We all deride public investors for being too focused on quarterly numbers and yet here we are in the long-term venture industry whining about quarterly ups and downs. The reality is over the past decade Life Sciences venture capital has been incredibly stable source of capital.

Here’s the data – using the 1995-2011 quarterly dataset from PWC MoneyTree and the NVCA.  Life Sciences is defined here as Biotech, Pharma, and Medical Technologies.

A few takeaways:

  • Since Jan 2001, Life Science investing as a percentage of total VC investing each quarter has averaged 26% with a standard deviation of only 5%.  That’s reasonably consistent.  And in 2011, at 26%, we’re squarely on that decade average.  Quarterly volatility may be up, but that’s reflective of the broader capital market gyrations as well.
  • In terms of dollars invested per quarter, its averaged $1.6B with a standard deviation of $400M since Jan 2001.  Again, quite consistent over much of the last 10 years
  • LS investments as a share of VC investing are up considerably from the 2nd half of the 1990s, 3x in terms of dollar flows and 2x in terms of its share of venture flows.
So the longer term data don’t support the Chicken Little view of our sector.
Another common refrain is the increasing capital intensity of LS relative to other sectors.  Its true that our biotech deals tend to raise more than internet startups, but the relative capital intensity vs all other sectors has been incredibly stable.  The chart below plots the ratio of the percentage of dollars in VC that go to LS companies vs the percentage of the total deal numbers that are LS deals.  Simply put, its a ratio that captures relative investment per deal.  Its been 2.2 +/- 0.3 since 1995.  So our deals haven’t become more or less capital intensive vs other sectors for much of the last 15 years.  In recent years, its clear most sectors have become more capital efficient – virtualization of biotechs and “lean startups” on the Tech side.  More signs of consistency in our funding patterns relative to other sectors.
The conclusion for me is we should stop whipping ourselves into a frenzy about the dismantling of Life Science venture capital every time a quarterly report comes out or a firm decides to bail out on raising their next fund.  We’re still financing a good number of new companies.  Yes, we need to improve returns in venture as an asset class and LS will do its part in improving that (starting from better position than other VC sectors I might add).  Yes, we need to continually refresh the pool of VCs that have active funds to deploy.  But I don’t see the sky falling: Life Science is a core part of the venture community and will continue to provide a steady source of funds to startups, and hopefully quality returns to LPs.
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  • http://www.PharmaDirections.com Richard Soltero

    Bruce,

    I
    think you are “right on” with your assessment. 
    It has been scary recently for start up biotechs.  We see lots of small biotechs trying to raise
    their first round and understand their frustration with the current economy and
    the state of venture capital.  However,
    their laments are nothing new.  I have
    been hearing these same issues for at least the last 10 years.  The only thing that I see changing is that
    better, more valuable assets are getting the funding. That might be because VCs
    are getting better at picking good investments. 
    I also see more hope for the biotechs that get their funding.  If their assets were good enough to attract
    the attention of VCs in their early stages, they are likely to be good take
    over targets for large Pharma when these assets have been adequately developed.  Thanks for providing your insights.

    Rick

  • http://www.biotechtranslated.com Biotech Translated

    Bruce,

    Thanks for injecting some reason and logic into the current discussions on life science VC investing.  I’ve noticed a lot of people in the industry have a very short-term view of VC investing and as soon as the NVCA sends out a press release about a XX% drop in life science VC funding, everyone’s heads start spinning.

    The industry is in transition right now (then again, when has it ever NOT been in transition?) and I think that has a lot of people scared.  I think the key takeaway from your post is that although life science VC investing is changing, we’re still doing pretty dam good from a historical perspective.

    Mike

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  • http://twitter.com/sciencescanner David Grainger

    Maybe.

    The trouble with this kind of sector-wide analysis is that the numbers are biased by the smaller number of larger investments.  In the same way the ‘apparent’ performance of the sector is dominated by the headlines and stock prices of the larger public biotechs.

    But thats not the whole picture.

    DrugBaron noted that the bigger biotech’s are really the “silver medallists” not the winners (http://www.tcpinnovations.com/drugbaron/?p=152).  The key is understanding whats happening at the grass roots level, with the early stage start-ups.  Here, the picture at least for the conventional “company building” model for start-ups isn’t so rosy (http://www.tcpinnovations.com/drugbaron/?p=157)

    So you are right – its definitely not armageddon.  Its not time to panic and head for the exits.  But it would also be wrong to conclude on the basis of this analysis that everything in the garden is rosy and its OK to carry on just as before.  Evolutionary change of the investment model in early stage life science start-ups is needed (and is definitely happening).  And this evolution is taking different investors in different directions – and as usual survival with the privilege of the fittest!

  • Anonymous

    Your general point about evolution is definitely right.

    But the idea that a few big venture financings bias these numbers isn’t the case. No single financing is ever more than 10% of the quarterly numbers, and I suspect the Top 5 deals in most quarters are in aggregate still below 10% of the $ flow. Another way to state this is that while the average is certainly higher than the median, its not dramatically different (because there are few major outliers).

    ________________________________

  • http://twitter.com/Biobenj Mark Benjamin

    Hey Bruce.  As always, a solid and nicely articulated analysis. Did you look at all about the distribution of financings across LS companies at different stages of maturity?  From the trenches there seems to have been a very significant shift within LS financing such that early stages are being funded at a much lower frequency (I can’t speak to A round investment $s, but they seem decent when they occur).  A number of VCs have stated that they are shifting resources to “later stage” (mid-clinical or later) opportunities along with sustaining existing portfolio companies.  If you’re in the early stage bucket the sky may well appear to be falling, even though total investments into LS are stable.  “Armageddon” isn’t necessarily a reduction in funding, but a restructuring of the whole industry resulting from a movement of funds away from early to later stage.  This could have a dramatic impact on the industry over the next 10 years.

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