By Lucy Parkinson, Research Manager, LSN
Another quarter, another round of number-crunching in the venture capital space, and as Q1 2014 has come to an end the message is quite clear; VC deals continue to trend away from early stage opportunities. According to Pitchbook, who tracks venture activity in all industries, 1348 companies raised $15.4 billion from VCs in Q1 2014; in Q1 2013, 1856 companies raised $11 billion from VCs. That’s 500 fewer companies getting VC funding, while the median deal size has doubled from $2 million to $4 million.
This trend is magnified in the life science sector, which represents 14% of VC deals. According to PWC, this trend became clear at the end of 2013, at which point life science venture investment decreased by 15% year over year, while deal volume declined by 2% over the same period. Compared with the previous quarter, investment declined by 26%. Developing a single therapeutic product might cost a company $1b before the product can bring in so much as a dime of revenue, and that is largely incongruent with the shorter exit timelines that VC’s are seeking. At LSN, we often encounter very early-stage life science startups running on NIH grants and hoping to step out into the world as their grant funding dwindles and be instantly supported by a big-name VC firm. The Q1 figures send a clear message that it is unlikely to happen. However, this is clearly a major opportunity for investors filling the VC void (virtual pharma, venture philanthropy, family offices and the like).
Are there any upsides in the data? Potentially two: Firstly, VC funding for healthcare IT companies is booming, with Q1 venture investments up 78% over 2013. It’s a new field with a lot of risk lying between early investments and eventual success; most of the funding flooding into the sector is being allocated in seed and Series A rounds, and some experts are concerned that this bubble might burst due to companies failing to hit the targets required to secure Series B funding. Secondly, this trend is making room for more early stage investors from other categories who now have the opportunity to invest in emerging assets.
So what does this mean for entrepreneurs in life sciences? Simply put, the data shows that things are still in a period of major transition, and the state of investment. It is critical for entrepreneurs to have insight into where the capital is flowing to successfully navigate the changing landscape. It’s never been more important to have your ear on the ground regarding funding, or to work with a fundraising partner who does. There’s dozens of new funds out there that might be a fit for your company, and there’s also increasingly many funding possibilities outside of accepting a venture capital investment. Here at LSN we’re keeping an eye on the space, and we’ll keep you abreast of new trends as they happen.
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