VC funding increased in third quarter with shining life sciences

01 Nov VC funding increased in third quarter with shining life sciences

Last week, we reviewed the IPO market based on data from Burrill & Co.
By the way, Chicagoans will get not one but two chances to see and hear U.S. biotech guru Steve Burrill this coming week. He will be featured at the NanoCommerce event at McCormick Place in Chicago on Tuesday morning and he will co-produce this year’s iBIOMarketplace event at Navy Pier on Nov. 2.
Though we’re now at the end of October, the PricewaterhouseCoopers MoneyTree report on U.S. venture capital results for the third quarter of 2005 was just released this past week. This review of venture capital funding is critical to understanding the growth of our life sciences sector. It’s also a predictor of our future IPO market.
So what happened in the third quarter of 2005? Overall results showed U.S venture capitalists investing almost $5.3 billion in 714 companies or about $7.4 million per company. How does this compare with other results this year and last year?

Third-quarter results were not only strong overall – growing 13 percent above last year’s level (though lower than the prior quarter) – but they were even stronger for the life science sector. This sector outperformed the overall results with 20 percent sector growth. Remember that the life science sector results include not only biotech but also medical devices.
Year-to-date results (nine months) for the U.S. for total VC investment were $16.3 billion versus $15.9 billion last year or a growth rate of 3 percent. For the life science sector, VC investment levels were $4.2 billion or about 26 percent of the total investment. This level compares to $4.1 billion for last year or a growth of about 2 percent. It appears that life science venture investing is picking up in the last part of 2005.
Given that the life science results comprise two very different segments (biotech and medical devices), let’s review how each of these groups did.

Both the biotech and medical device segments had outstanding growth for the quarter (though the medical device segment outperformed the biotech segment growth). For the nine-month period, the medical device segment maintained a very high growth rate while biotech segment funding declined versus last year despite an excellent third quarter.
According to the MoneyTree report, the life science sector in total had investments in 155 companies in the third quarter for an average investment size of $10.1 million per company versus total VC average investment of $7.4 million per company. Another area of interest to us is the investment by stage of development.

It’s clear from the above that start-up/seed investment stage companies fared poorly in the third quarter versus the other stages (both in terms of the numbers of companies and the number of deals).
It’s also clear from the above analysis that it’s getting harder to attract VC groups to fund the earliest stage deals. Though not part of this analysis, we would also need to take a look at national angel investment levels to get a more complete picture. I would be willing to bet that angel investment is filling the void left by VC groups (or at least I hope so).
According to the report, there were 215 companies that received their first-ever round of institutional VC investment during the third quarter (a total of $1.1 billion or an average investment of $5.1 million per company). On a nine-month basis, 653 companies received their first VC money in 2005 (a total of $4.0 billion or an average of $6.1 million per company).
In our next edition, we will take a look at Midwest VC investment. See you next week!

Michael S. Rosen is president of Rosen Bioscience Management, a company that provides CEO services including financing, business and corporate development to start-up and early stage life science companies such as Renovar and Immune Cell Therapy. Rosen is also a founder and board member of the Illinois Biotechnology Industry Organization. He can be reached at rosenmichaels@aol.com.
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