Midwest venture capital funding declines in first half of 2005

03 Aug Midwest venture capital funding declines in first half of 2005

CHICAGO – The Illinois Biotechnology Industry Association (iBIO) recently held its annual event entitled “Breakfast With the Midwest Life Science Venture Capitalists” at the new Illinois Science & Technology Park in Skokie, Ill. It was an auspicious event for a number of reasons:
• All of the VCs present were Midwest VCs that were actually funding deals.
• It was the first event held at the new park, which many people hasn’t yet visited.
• The mayor of Skokie, George Van Dusen, opened up the event. His excitement to see life in what was the former Pfizer/Pharmacia/Searle R&D campus was palpable.
• It was a sold-out event.
The event featured:
• Two Illinois VCs: Illinois Ventures (Kathryn Hyer) and Adams Street Partners (Craig Taylor)
• A St. Louis VC: Prolog Ventures (Brian Clevenger)
• A new Wisconsin VC: Kegonsa Partners (Ken Johnson)
• A VC that straddles both Wisconsin and Illinois: Baird Venture Partners (Pete Shagory) with its HQ in Milwaukee but the life science practice being managed out of Chicago
It’s nice to see an event where you have five Midwestern VCs that are actually investing in companies and are interested in what the Midwest has to offer.
The panel ranged from the earliest stage of investment and seed funding for start-ups (represented by Kegonsa Partners and Illinois Ventures) to Series A to C funding (represented by Baird, Prolog and Adams Street). All in all, there was a nice blend of money on the table.
While all of this was very encouraging, what really happened with U.S. venture capital in the first half of 2005 and how did it impact the Midwest?
According to the recent PricewaterhouseCoopers MoneyTree survey, VCs invested about $5.8 billion in 750 companies during the second quarter of 2005. This level was better than that of the first quarter’s $4.9 billion but slightly lower than the $6.1 billion of the same quarter last year.
Of the above amount, life sciences (biotechnology and medical devices) funding was $1.5 billion for the quarter in 154 companies (or a little more than 25 percent of the total), which is a healthy chunk. This level compared to $1 billion in 135 companies during the first quarter. For the full six months, life sciences represented 25 percent of all investment.
Investment in start-ups and early stage companies was $1.3 billion (versus $830 million in the prior quarter) or 22 percent of the total. This represents a three-year high for this segment and is good news. For the first six months of 2005, 473 start-up and early stage companies garnered $2.1 billion or 20 percent of all money raised.
Let’s take a look to see how the Midwest fared:

Overall Midwest investments were down by 7 percent for the first six months.

While Illinois and Minnesota clearly lead the way in terms of amount of money invested and number of deals, Ohio ran a strong third. After that, there is a considerable drop off in amount of money invested and number of deals with Iowa, Wisconsin and Indiana having a poor showing for the first six months.
The Midwest should improve in the second half of the year due to new state initiatives in Wisconsin, Illinois, Indiana and Michigan that were launched in the first half of the year. These included:
• Wisconsin launched a new tax credit for angel and VC investors registered in Wisconsin and investing in Wisconsin-based companies.
Qualified new ventures in Wisconsin that have registered with the Department of Commerce and qualify will allow their new investors to receive a 12.5 percent tax credit for the money invested in each of two years for a total of 25 percent tax credit off state taxes. Missouri has something like this already in place as of a few years ago.
• Illinois launched a new state venture fund to consist of $50 million (of which about $10 million was disbursed into three VCs during the first part of 2005). While this isn’t a large amount of money, it is at least a beginning for Illinois, which has been late to the table.
• Michigan announced last week the launch of a $150 million venture fund for investing in Michigan companies.
• Indiana also recently announced the formation of Indiana Future Fund I, which is a $73 million fund for Indiana companies.
These four developments are all very encouraging and should help the Midwest’s prospects over the rest of 2005 and beyond.
See you next week!