VC investment 2009: Challenges, hope, and a guide for finding money
The bad news is, experts predict the economy will worsen in 2009. VC funding is expected to fall, with more money diverted from seed financings and Series A to later stage companies that must hold off on exits while waiting out the markets. The good news is, biotechnology tops the list of industries likely to receive VC funds in 2009.
VC Funding in Third Quarter 2008 Ends High; Dip Expected in 2009
Biotech was the top industry sector in terms of dollars for the third quarter 2008, bringing in USD 1.35 billion invested in 114 companies. Software came in second, with USD 1.34 billion invested in 214 companies.
Third highest was industrial/energy, including clean technology, with USD 1.2 billion invested in 96 deals, according to a recent MoneyTree Report from the National Venture Capital Association (NVCA) and PricewaterhouseCoopers (PWC).
The entire life science sector, which includes both biotech and medical devices, brought in USD 2.2 billion in VC investments in the third quarter, a ten percent increase from the previous quarter. The number of deals that VC money went into dropped, however, to 207, an eight percent fall from the second quarter.
The decline is attributed not to biotech, but to a drop in investment in medical devices. In the third quarter, life science investments represented 31 percent of all investment money, and 23 percent of all deals.
Although third quarter VC funding ended high, expectations are low for the near future. “The financial crisis in October was not reflected in the third quarter venture capital investment levels,” said NVCA President Mark Heesen in a news release.
“We do expect to see a dip in investing over the next several quarters,” said Tracy T. Lefteroff, global managing partner of PWC’s venture capital practice, adding that “we also do not expect venture funding to dry up.”
Venture capitalists have slugged through difficult economic times before, said Lefteroff in a news release, and the current rough ride shouldn’t be any different. “They are long term investors and they won’t jump ship just because the times are tough. They may tighten their belts and those of their portfolio companies, but they still have money in their coffers and will continue to make investments.”
Dire Predictions for VC Funding in 2009
Venture capitalists forecast a difficult year in 2009, not only for the US economy as a whole, but also for the capital markets and the venture industry.
The third annual NVCA Predictions Survey sheds light on what industry insiders say lies in store for the rest of this year. The survey, which included more than 400 VCs, was conducted from Nov. 24 to Dec. 12, 2008.
Most respondents said that 2009 will bring a slowdown of investing across most industries, but companies that can ride out the financial storm should come out robust. Of the VCs surveyed, 92 percent predict a slowing of venture investment in 2009. More than half (53 percent) expect to invest in the same number of, or even more, portfolio companies in 2009, which suggests that dollar amounts may be lower but the same number of companies may still get a piece of the pie.
Of respondents, 48 percent view clean technology, including industrial biotechnology segments like biofuels, as potentially receiving increased investment in 2009. Biotechnology came in second, with 25 percent saying investment in the industry will increase (33 percent predict unchanging investment levels). Third on the list of promising sectors was medical devices, with 24 percent predicting investment increases and 38 forecasting stable investment. Industries expected to decline in funds received include semiconductors (79 percent expect decline), media/entertainment (71 percent), and wireless communications (60 percent).
Nearly all respondents (96 percent) forecast that in 2009 it will be more difficult for new companies to get funded, and 93 percent said they believe that it will be harder to sustain existing portfolio companies throughout the year.
The dire predictions from the NVCA survey align with BioWorld International’s report by John Brosky from BIO-Europe in November 2008, an event organized by the EBD Group.
At the session “A Day in the Life of Experienced Dealmakers,” panel moderator James Watson, managing director and head of merchant banking for Burrill & Co., said “it will be hard to raise any new money.” Regarding his own venture fund, he said, “we must focus on our existing portfolio right now as the participating limited partners and insurance company investors have ratios for performance that we need to maintain.”
Simon Turton, managing director for Warburg Pincus, echoed these sentiments at the BIO-Europe BIO-Europe event, saying he had only “doom and gloom to offer.” He said we need to recognize that these conditions have not been seen since 1929, and that the hard times will go on for at least two to three years. And, he added, “we have not yet seen the worst of this.”
NVCA’s Heesen did offer a light at the end of the funding tunnel, stating in a release that most VCs anticipate a much improved 2010. “Those firms and companies that can weather this storm—and there will be those that do not—will emerge strongly. Venture capital backed companies represent a critical engine of economic recovery for this country. It is in everyone’s best interest that these companies continue to prosper, creating jobs and bringing innovation to market.”
IPOs and Other Exits: How Tough Exits Impact VC Funding
The biotech industry saw only one IPO last year—Sunrise, Florida-based Bioheart Inc.’s much-derided USD 5.8 million in February. Only six VC-funded companies went public across all industries, making 2008 the worst year for public entrance since 1977. With a total IPO value of USD 470.2 million, it was the worst year since 1979’s USD 339.7 million, according to data from the NVCA and Thomson Reuters.
Respondents to the NVCA survey predict a continued weak exit market in 2009. But in addition to overall market improvement, the majority of VCs surveyed expect that in 2010 the IPO market will finally reopen. Until then, however, newly founded start-ups may have the roughest ride of all. VCs may end up committing unexpected funding to their existing portfolio companies if exits remain difficult, leaving little left over for new investments.
“The recession and shuttered IPO market will place tremendous pressure on portfolio companies to tighten their belts and re-tool where necessary,” said Heesen. “We will likely see a marked slowdown of new investments as venture capitalists turn their attention to supporting these existing companies.”
On a brighter note, Heesen pointed out that most VCs would say that a down market is the best time to invest—valuations are down and competition is less severe. “There is no recession on innovation, and great ideas will still get funded—especially in sectors that have more insulated demand such as clean technology and life sciences,” he said.
A Guide to Finding Capital in 2009
Biotech companies are now feverishly trying to “extend the runway” before running out of cash, and new companies have more competition than usual for funds. The recently released BioAbility, BioWorld’s Biotechnology and Medical Device VC Directory 2009: U.S., Canadian, European, and Asia Pacific Venture Capital Firms and Contacts is one way to gain instant access to information about hundreds of VCs throughout the world, putting you a step ahead of that competition. The directory includes each VC’s portfolio, along with a comprehensive list of relevant subsidiary sites and investment areas. Also included are listings of VC firm partners’ names, their locations and site phone numbers. Nearly 3,000 individuals are included, and emails are listed for many.
Coverage includes VCs located in the USA, Canada, Europe, Israel and Asia Pacific. There are 952 VC firms profiled at 1,595 locations, including:
- 757 in the USA;
- 67 in Canada;
- 460 in Europe;
- 278 in Asia Pacific; and
- 33 in Israel.
For not only biotech, but also medical device companies in need of funding, this report could be a lifeline to staying afloat through the remainder of the year. It also will be of interest to venture capital firms looking for co-investors, local governments and support groups looking to facilitate funding programs, and attorneys seeking to retain new clients.
This unique directory, researched and written by BioAbility and published by BioWorld Today, could not come at a better time. With investment interest low, it can help you locate VCs that are still investing in the biotech and device industries. With this directory, you will be able to:
- Pinpoint firms that are investing in companies similar to yours;
- Find out if the VC has a specific scientific/technological interest;
- Learn the preferred stages of investment for each VC (Seed, Bridge, Series A-B, etc.); and
- Plan site visits using the regional index included in the directory.
By Amanda Lyle, BioWorld Perspectives Managing Editor
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