There are different ways to gauge the temperature of venture capital investment activity at any given point. One of them is to track the amount of money going into the life sciences sector which includes investments in biotechnology and medical device companies. Despite the potential for blockbuster returns, venture investments in life science companies are generally viewed as risky since they often take several years to yield results and carry a high risk of failure. As a result, an improving or even a stable venture funding environment for life science companies is usually interpreted as a sign that things are looking up for the venture industry. A recent report by PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA) shows that venture capital funding to life sciences sector has remained relatively stable in the last three years and is on track this year to exceed that of the last two years.
VC Firms Add to Life Sciences Investments
According to the NVCA report, venture capital firms invested more in life science companies in each of the first three quarters this year over the corresponding quarters last year. VC investments in the sector has already reached $5.8 billion at the end of the third quarter and is on track to exceed the $6.6 billion in investments the sector received in each of the last two years.
Deepa Pakianathan, who is a General Partner at venture fund Delphi Ventures, says the entire biotech ecosystem is in very good shape and attributes the higher venture funding to opening up of the IPO window. Biotech accounted for two third of the venture capital funding into the life sciences sector this year while a third of funding went to medical device makers.
Heavy Regulation Hinders Innovation
Despite higher funding this year in the life sciences sector, the share of life sciences in venture dollars has been steadily decreasing in recent years. Last year, life sciences captured 23 percent of total venture dollars, a significant decline from 2009 when life sciences attracted 32 percent of venture investments. In terms of the number of venture deals, the share of life sciences decreased to 19 percent last year from 26 percent in 2009.
Paypal co-founder and venture capitalist Peter Thiel blames the high costs associated with getting regulatory approvals for the venture capitalists preferring other sectors over life sciences. Thiel adds that a startup trying to develop a new drug will have to spend a billion dollars to get through the Food and Drug Administration (FDA) while the costs associated with a software startup is much smaller because of very light regulation.
Despite a vastly improved environment for venture funds, a prominent life sciences venture capital firm in Cincinnati, Ohio is planning to wind down operations following its inability to raise fresh capital. Triathlon Medical Ventures co-founder John Rice has revealed that the fund will be closed in the next few years. Triathlon’s biggest success story is biotech firm Akebia Therapeutics which went public this year.
Relevance to Job Market
Though the venture capital industry has recovered significantly in the last two years as a result of an improving exit environment with several IPOs in recent quarters, investor sentiment is captive to volatility in financial markets. A recent survey of Silicon Valley venture capital firms by the University of San Francisco found that confidence among venture capitalists declined for the first time in two years on concerns over high valuations for many startups and a spate of delayed initial public offerings as a result of volatility in financial markets. Though the current favorable funding environment would be a positive for the job market, growing concerns over valuation and declining confidence in the stability of the financial markets may temper hopes for a robust recovery for jobs in the venture industry.
