Driven largely by record investment levels in life sciences and clean technology companies, US venture capital spending hit a six-year high in 2007, according to a report released last week by PricewaterhouseCoopers and the National Venture Capital Association.
The report also indicated that startup or seed funding – the most crucial stages for university spinouts – stagnated last year after posting increases each year since 2003. Still, the total number of seed-stage deals increased in 2007, reflecting smaller average investments.
Furthermore, according to additional data from the NVCA, the biotech sector experienced the opposite effect last year as the number of seed-stage deals in that segment dropped slightly, but the average amount invested per deal increased – underscoring the greater investment amounts needed to bring biotech products to market.
The annual MoneyTree Report from PwC/NVCA is based on data obtained from Thomson Financial and measures cash-for-equity investments by the professional VC community in emerging US companies, according to a statement accompanying the report.
The survey includes the investment activity of professional VC firms with or without a US office, SBICs, venture arms of corporations, institutions, investment banks, and similar entities whose primary activity is financial investing, the statement added. All recipient companies are private, and may have been newly created or spun out of existing companies.
The report primarily breaks down investment deals and dollars by industry segment, geographical region, and the company’s development stage, including startup/seed, early-stage, expansion, and later stage.
The report does not contain specific information on VC investment in companies built around technologies developed at universities, hospitals, or non-profit research institutes. However, information on those types of investment deals can be gleaned from the startup/seed data since this is generally the stage at which most university spinouts seek VC funding.
According to the report, funding for seed-stage companies in 2007 was unchanged compared with 2006 in dollar amounts but increased in the number of deals: Last year, private-equity investors bet $1.2 billion among 415 deals compared to $1.2 billion going into 342 deals in 2006.
Investments in early-stage companies, the next level of a company’s life cycle, increased in 2007 both in deal volume and dollar amount, with $5.2 billion going into 995 deals compared with $4.1 billion going into 923 deals in 2006. The most dramatic change occurred in companies in the later-stage category, investments in which swelled in 2007 to $12.2 billion across 1,168 deals compared with $9.8 billion across 1,006 deals in the previous year – keeping it the preferred stage of investment for VCs.
The life-sciences sector, which includes biotechnology and medical device companies, set an all-time record for VC capital investing in 2007 with $9.1 billion invested in 862 deals compared to $7.6 billion shared among 786 deals in 2006.
The most significant growth was in the medical-device industry, whose VC take last year rose 40 percent to $3.9 billion scattered among 385 deals compared with $2.8 billion over 333 deals in 2006. In the biotech segment (excluding medical devices), VC investment in 2007 rose to $5.2 billion in 477 deals from $4.8 billion spread among 453 deals in 2006.
In 2007, life sciences accounted for 31 percent of all VC bets in the US — also an all-time high — making it the top-ranked investment sector last year.
Overall, US VCs invested $29.4 billion in 3,813 deals across all sectors and stages in 2007, marking the highest yearly investment total since 2001, according to the report.
Mark Heesen, president of the NVCA, said that despite this broad uptick, the comparatively weak seed-stage numbers support the theory of the so-called funding “valley of death” faced by companies based on university-developed technologies. The theory describes a gap that starts when government funding for an invention runs out and ends when venture capitalists become sufficiently interested in the technology to make an investment.
“There is no question that when you look at tech transfer from universities that there is a lack of very early-stage money,” Heesen told BTW last week. “Some schools, [like Stanford or MIT], are able to do it right and they have the inside track. Of course, schools that don’t have the inside track, or have only been doing it for a short period, see this valley of death out there. If you’re a state university in the Midwest, it’s going to be a lot tougher for you.”
“The interesting thing here is VCs are investing right now … a lot in medical devices, which are not as expensive as biotech. Biotech seed deals and energy seed deals are very expensive compared to IT and medical device deals. Down the line we could see some differences shake out there.”
Heesen also said that certain industry segments, such as biotech and energy, are treated differently than other segments, like IT and even medical devices, because they require more investment.
NVCA has data on the biotech and medical device segments supporting this phenomenon. According to this data, the amount of seed-stage investment in biotech companies increased in dollar amount to $208.7 million in 2007 from $166 million in 2006. However, the number of seed-stage biotech deals dropped to 45 in 2007 from 50 in the prior year, meaning that the average amount per deal rose to $4.6 million in 2007 from $3.3 million in 2006 (see related graphs below).
The increase in the average dollar amount invested per seed-stage deal in the biotech industry bucked the trend of general seed-stage investment amounts, which dropped to $2.9 million per seed-stage deal in 2007 from $3.5 million in 2006.
Investments in seed-stage medical-device companies in 2007, however, more closely reflected the general trend in that year-over-year dollar amounts and deal volume increased (though dollars only slightly), which caused the total amount of investment per seed-stage medical device deal to drop to $4.2 million from $4.6 million year over year.
“In the whole area of biotech, it’s so incredibly expensive that a seed deal is not always really viewed as a seed deal,” Heesen said. “I think that sometimes what may be a first-time financing is really kind of a seed round.
“The interesting thing here is VCs are investing right now … a lot in medical devices, which are not as expensive as biotech,” he added. “Biotech seed deals and energy seed deals are very expensive compared to IT and medical device deals. Down the line we could see some differences shake out there.”
The valley of death may also be a little wider in the life sciences in general because of a recent abundance of investable technologies. In other words, many more potential companies built on university life-sciences research exist today than VC money exists to support them.
“I think the doubling of the NIH budget several years ago has had a profound impact on [the broader life-science] industry,” Heesen said. “You’re starting to see the fruits of that, and you’re starting to see very exciting technology coming out of … the university setting and through NIH itself.
“When I talk to life-science investors, there are certainly a lot more ideas out there to be funded,” he said. “And when you look at where VCs are looking specifically – personalized medicine, obesity, cancer, diabetes, and the whole medical device arena – it’s very wide open.”
Seed-Stage VC Investments (2006-2007)