27 Jul VC Investments improve during the second quarter but a shadow of former self
CHICAGO – The second quarter brought some good news for U.S. venture capital and companies: investment was up for the quarter by 15% over the first quarter with the dollar investment level up 15% ($3.7 billion versus $3.2 billion), and the actual number of deals completed up 1% (612 versus 603 deals in the first quarter), according to PriceWaterhouseCoopers MoneyTree Report which is done in conjunction with the National Venture Capital Association.
While this news was positive, the full results for the first 6 months of $6.9 billion were down however 55% over the same period for 2008 ($15.2 billion) with total deals down 41% (1215 deals versus 2065 deals in 2008): not a pretty sight! In fact, as noted by this report, VC investment levels paralleled levels seen in 1996 and 1997.
One main difference in the second quarter was a small opening of the Initial Public Stock Offering (IPO) window.
Life Science investments (biotech and medical devices) jumped some 47% from quarter to quarter reaching $1.5 billion, or almost 41% of total VC investment. 160 life science deals were done, or 26% of the total.
Of the Life Science investments, Biotech deals achieved a level of $888 million in 85 deals ($10.4 million/deal) with a 54% increase over the prior quarter. Medical Devices had investments of $628 million in 75 deals ($8.4 million/deal) and were up 38 % over first quarter levels.
Clean Tech, which had been a hot area last year, was up 15% quarter-to-quarter with $274 million in 42 deals ($6.5 million/deal).
According to the MoneyTree Report, the Seed and Early Stage level of investing was up 67% in the second quarter with $1.5 billion in 221 deals ($6.8 million/deal). This is surprising because many VC’s in the last few years have been abandoning this space for the less riskier Expansion and Later Stage deals.
While this news is positive, in context of last year and recent years, let’s call a spade a spade – this is a sharp drop-off in venture investing.
If this were the only source of funds, it would be dismal funding market; however the major life science companies seem to have ratcheted up their licensing and acquisition appetite although no hard data is available yet.
One cannot forget the rich segment of angel capital, which has been the backbone of early stage investment. Although 2009 angel funding data is harder to track, 2008 funding trends can be helpful. According to the Center for Venture Research at the University of New Hampshire, angel capital investment for 2008 reached $19.2 billion (versus VC investment levels of $28.1 billion). While VC investments for 2008 were down 9% over 2007, angel capital investments were down a sharper 26% over 2007.
Angel capital funded 55,480 entrepreneurial ventures in 2008 (average investment of $346,000/deal), and the number of deals done was only down 2.9%.
Healthcare services/Medical Devices garnered the largest share of angel investment – about 16%, with Biotech getting another 11%, for a total of 26% for total Life Science investments.
Interestingly, Mergers & Acquisitions (M&A) represented 70% of angel capital exits in 2008, with 4% representing IPO’s. Bankruptcies represented 26% of the “exits”. According to the Center, angel returns for the first two groups were 22%.
According to the Angel Capital Association, the economy is having an impact on the size and frequency of angel groups’ investments. A survey done in November, 2008, showed that valuations are lower, and angels are taking more time to find the right deal and complete due diligence.
There is also an angel focus on types of products that will sell well in a down economy. An ability to get to cash-flow breakeven without needing to resort to venture capital is getting a higher level of attention from angel investors.
Angel groups, like VC’s are increasingly syndicating their deals with other angel groups, and sharing due diligence information. Evidence of this angel deal syndication in the Midwest has been also seen as the multiple Midwest (and growing) angel groups seem to be linking up and willing to share information with each other.
A number of angel investors have gone through bad economic times including the recession of 1981-82 and 1987, and some also experienced the recession of 1973-1975, and provide useful mentoring experience to new entrepreneurs.
Unfortunately, data on angel investments is less precise (and less frequent) than on the VC segment, but due to its large size and role in the earliest stage of investing, needs to be paid attention to. With at least 15 states with some kind of angel tax credit program on local state taxes, there is a strong incentive for angel capitalists to invest in local state companies. The local state tax credit program removes a lot of the risk.
At this juncture, it is difficult to predict how 2009 will end up for either venture or angel capital. In the Life Science business however, the voracious appetite of large life science companies needing to fill large pipeline gaps due to product patent expirations, should provide the impetus to further life science investing.
Recent columns by Michael Rosen
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This article previously appeared in MidwestBusiness.com, and was reprinted with its permission. The article is not meant to be a stock recommendation.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.