If your work involves life sciences dealmaking, you know it’s the time of year to start firming up your plans for the week of the J.P. Morgan Healthcare Conference. In the last 10 years, the second week of January in San Francisco has evolved from a J.P. Morgan private meeting for healthcare investors to a week
The need for innovation in healthcare has arguably never been greater. A range of factors, from aging world populations to rising standards of living in developing countries, are poised to drive long-run demand for innovative drugs, devices and medical technologies that can improve outcomes and reduce costs.
Ironically, however, funding for healthcare innovation remains in short supply. As industry participants are keenly aware, life science venture capital financing – which has played a critical role in helping translate research ideas into commercially useful medical technologies – is becoming increasingly scarce.
Understanding the Capital Crunch
Results from a recent survey of 2012 life science venture capital (VC) activity by Fenwick
& West illustrate the magnitude of the situation. The survey summarizes results from over 350 therapeutic, diagnostic and medical device financings occurring during 2012, and shows that financing valuations continued to trend modestly upward, evidence that companies are continuing to develop promising technologies that justify a step-up in valuation.
However, fundraising by life sciences VCs has continued to decline. While overall VC fundraising rebounded modestly during 2011 and 2012, the percentage of fundraising allocable to life
science investments declined from 19% in 2009 to 12.5% in 2012. In absolute dollar terms, we estimate thatfundraising by life science VCs was $2.5 billion in 2012, compared to an
average of $2.9 billion/year for 2009-11 and an average of $7.8 billion/year for 2007-08.
Given these fundraising statistics, it should come as no surprise that 2012 saw the fewest first timeventure financings of life science companies of any year since 1995, according to the MoneyTree Report. Venture capitalists typically spend three or four years making new (first time) investments out of a fund, and then reserve the fund’s remaining capital for follow on investments. So at this point, the 2008 vintage funds have stopped making new investments, and there are fewer new funds to fill the gap.
However, Fenwick’s First Half 2012 Life Science Venture Capital Survey highlights a few potential bright spots as well. In particular, while the number of…