A New Jersey venture capitalist told Rhode Island medical technology innovators this month that medical devices and biotechnology firms are likely to get the most investment dollars in the current climate.
Speaking at a Brown Forum for Enterprise conference, Battelle Ventures principal Ralph E. Taylor-Smith said about one-third of all money invested by venture capitalists in recent years went to firms in the life sciences, which comprises the biotechnology and medical device sectors.
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According to the National Venture Capital Association, 608 life science deals were made in 2005, accounting for $6 billion. That figure represented a $200 million increase over 2004’s investments.
The trend toward life sciences began after a burst in the information technology bubble, said Taylor-Smith. According to PricewaterhouseCoopers Money Tree Survey – which monitors venture capital investments – IT firms gained the most capital around the turn of the century. In 2000 alone, IT companies received more than $8 billion in venture capital funds.
Following its peak, the investment in the industry dropped off instantly, with IT service companies receiving a little more than $2 billion in 2001, the survey said.
While venture capital firms still give large amounts of funding to IT companies, Taylor-Smith said the drop-off created interest in other sectors.
“That involved a lot of flight over to the life science arena,” he said. “For those of you out in the life sciences arena, this is a good time for you to be looking for money.”
In the area of health care, Taylor-Smith said, most of the funds tend to go to biopharmaceutical and medical device firms. However, he said there tends to be more interest in drug delivery technology than the actual drugs.
“The reason is that the probability of success and high return is there,” Taylor-Smith said. “Venture capitalists tend to be greedy and are looking for the biggest returns.”
For that reason, venture capitalists are willing to hold back if they consider the environment less than positive. For that reason, the PricewaterhouseCoopers survey revealed that venture capital investment in all sectors has decreased by nearly $80 billion since 2000. Still, biotechnology has remained fairly steady.
More than $4 billion was invested in the sector in 2000. In 2005, the amount was about $3.7 billion.
Examining investments by region, Taylor-Smith said the most activity occurs on the West Coast, which is anchored by California’s Silicon Valley.
New England – particularly Massachusetts, which reaps the benefits of the Massachusetts Institute of Technology, Harvard University and Boston University – immediately follows Silicon Valley when it comes to investments, the survey said.
In the fourth quarter of 2005, New England pulled in $703 million, second to Silicon Valley’s $1.7 billion.
Of the money invested in New England that quarter, $204 million went to biotechnology, while medical devices and equipment received $62 million. Software companies received $122 million, and IT services received $35 million. Health care services received only $12 million during the three-month period.
Taylor-Smith also said there is a tendency for firms to give a bulk of their money to companies in the later stage of product development.
According to the National Venture Capital Association, 2005 continued the five-year shift toward later-stage investing. The practice of investing in companies on the verge of making a product available rose 22 percent in 2005, with $9.7 billion going to those firms. Seed money remained relatively low in 2005, with early-stage firms receiving less than 2 percent of all venture capital investments in the fourth quarter of 2005.
Battelle Ventures, which controls about $200 million, does not do drug discovery, Taylor-Smith said. The high costs associated with getting a drug through a clinical trial can be a deterrent for investors, he said.
Also, with only so much funding to invest, venture capital firms tend to evaluate a company’s management, valuations and potential market, he said.
“Oftentimes, denial has nothing to do with the technology,” Taylor-Smith said.
