Tuesday, October 25, 2011



Continued Recovery is Tenuous As Exit Markets Remain Fragile

Venture capital performance continued to improve as of the second quarter of 2011 according to the Cambridge Associates U.S. Venture Capital Index®, the performance benchmark of the National Venture Capital Association (NVCA). Increased returns were seen across all time horizons, with the exception of the 15-year number, and were driven by the recovering exit market and favorable valuations of companies currently in the venture capital industry portfolio. The quarter marks the first time since the third quarter of 2009 that the 10- year horizon showed a positive return.

The Cambridge Associates LLC U.S. Venture Capital Index® is an end-to-end calculation based on data compiled from 1,319 U.S. venture capital funds (870 early stage, 172 late & expansion stage, 274 multi-stage and 3 venture debt funds), including fully liquidated partnerships, formed between 1981 and 2011.

“We are encouraged by the continued performance improvements that the venture industry exhibited in the first half of this year, but we remain extremely cautious as the current exit environment has threatened the asset class’s ongoing recovery,” said Mark Heesen, president of NVCA. “In order to achieve the level of historical performance that limited partners have come to expect, we must have a thriving IPO and acquisitions market, and the former essentially closed mid-August of this year. Many fine companies await the market’s strengthening so that they can access the capital needed to continue their growth trajectories.”

“Venture firms distributed more capital than they called for the third straight quarter, which is encouraging,” said Theresa Sorrentino Hajer, managing director and venture capital research consultant at Cambridge Associates. “However, since June 30, 2011, the volatility of the public markets and economic uncertainty have challenged the IPO market, which may hinder distributions in the near term. If prolonged, this uncertainty may also negatively impact private company valuations and, therefore, fund performance going forward.”

View the full, comprehensive report


Private Equity Fund-Raising Stumbles in U.S.; European Fund-Raising Exceeds 2010 Total


Dow Jones LP Source: Buyout funds a bright spot in both regions

U.S. private equity fund-raising slipped in the third quarter, raising concern that fund-raising is starting to lose momentum. Thanks to a strong start to the year, however, fund-raising is still on pace to top the $95.9 billion raised in 2010. According to Dow Jones LP Source, 110 U.S. private equity funds raised $24.8 billion in the third quarter, accounting for 27% of the $92.5 billion raised during the first nine months.

“Private equity fund-raising appeared to be on a steady flight back to the land of recovery during the first half of 2011,” said Laura Kreutzer, managing editor of Dow Jones Private Equity Analyst. “But recent public market volatility, concerns about Europe and a heightened sense of economic uncertainty created some turbulence in the third quarter. The pilot has now turned on the ‘fasten seatbelt’ sign and it’s still not clear whether the industry will get back to its regular cruising altitude in the fourth quarter.”

In Europe, capital committed to private equity funds has already exceeded the 2010 total. Driven by a significant uptick in buyout fund-raising, 92 European funds raised $36.8 billion through the first three quarters, more than the $32.8 billion raised throughout 2010.

“In Europe, a handful of firms raising large funds, such as BC Partners and EQT Partners, have provided some ballast to the region’s overall fund-raising levels this year,” said Ms. Kreutzer.

LPs Continue to Commit to Buyout Funds

U.S. buyout and corporate finance funds raised $66.6 billion across 139 funds during the first three quarters, a 52% increase in capital over the same period last year. Within this sector buyout and acquisition funds, which saw fund-raising more than double to $30.8 billion, and industry-focused funds, which saw fund-raising jump 69% to $19 billion, pushed up the sector’s total. Throughout the sector, small and mid-size funds continued to capture investors’ attention.

In Europe, buyout and corporate finance fund-raising doubled to $29 billion for 53 funds during the first three quarters. Within the sector, buyout and acquisition funds saw the biggest spike as funds raised more than quadrupled to $22.6 billion for 24 funds from the $5.3 billion raised for 19 funds during the first three quarters of last year.

Secondary Funds Lose Favor in the U.S., Attract Investors in Europe

U.S. funds focused on investments in the secondary market collected $3.6 billion for 13 funds during the first three quarters, a 59% drop in capital collected from the same period in 2010. The drop comes after three years of secondary funds collecting more than $10 billion annually and general partners turn their focus from raising capital to investing it.

In Europe, six secondary funds raised $4.8 billion during the first three quarters, significantly more than the $1 billion raised for two funds during the same period last year.

Funds-of-Funds Commitments Spike in U.S., Plummet in Europe

During the first three quarters, 43 U.S. funds-of-funds raised $7.4 billion, a 74% increase in capital collected from the same period last year. This is more capital than the $6.2 billion raised throughout 2010, the worst fund-raising year on record for the sector.

In Europe, five funds-of-funds collected $269 million, significantly less than the $3.3 billion put into the 13 funds during the first three quarters of last year.

Venture Capital Fund-Raising Continues to Show Signs of Weakness

In the U.S. and Europe, venture capital fund-raising was cut in half after the 2008 recession and has yet to rebound. In the third quarter, 32 U.S. funds raised $2.2 billion, a 24% drop from the same period last year. Through the first three quarters of the year, U.S. venture fund-raising was up 9% but more than half of the $10.6 billion collected for 90 funds was committed during the first quarter.

In Europe, venture capital fund-raising is on pace to set another record low as 25 funds garnered $1.8 billion during the first three quarters, a 31% drop in capital committed from the same period in 2010. In the third quarter, four funds raised $424 million.

For a complete overview of venture capital fund-raising, visit http://www.dowjones.com/pressroom/releases/2011/101011-Q3VCFund-0162.asp.

Venture Investment Into U.S. Companies Rises in Third Quarter of 2011


Dow Jones VentureSource: Early-stage investing picks up; Capital pours into consumer Internet companies; Healthcare and IT industries a mixed bag

Investors put $8.4 billion into 765 deals for U.S.-based venture companies during the third quarter of 2011, a 29% increase in investment and 8% increase in deals from the same period last year, according to Dow Jones VentureSource. The median amount raised for a round of financing during the third quarter was $6 million, up from the $5 million median a year earlier.

“Venture investment rose in the third quarter, putting the industry on pace to near pre-recession investment levels by the end of the year,” said Jessica Canning, global research director for Dow Jones VentureSource. “While it’s unclear how long venture capitalists can continue at this pace given the weak fund-raising and difficult exit environments, the increase in deal activity, especially among early-stage start-ups, shows VCs are optimistic they will be able to support the next generation of start-ups.”

Medical Device Companies Raise More Than Biopharmaceuticals for First Time Since 1998

In the third quarter, Medical Device companies raised more venture financing than Biopharmaceutical companies for the first time since 1998. Sixty-eight Medical Device deals raised $857 million, a 15% rise in deal activity and 30% increase in capital invested from the same period last year. In the Biopharmaceuticals sector, 78 deals raised $715 million, a drop in capital invested from the year-ago period when 71 deals raised $865 million.

“Although the Biopharmaceuticals sector lost its long-held place as the leader of the Healthcare industry, early-stage investment was strong, showing that investors are building a pipeline,” according to Ms. Canning. “In Medical Devices, investments were weighted toward the later-stage deals, which could be a result of concerns over the clarity of the FDA’s requirements weighing more heavily on device investors.”

Forty-two percent of Biopharmaceuticals deals went to early-stage companies and 26% of Medical Device deals went to early-stage companies.

Medical IT companies maintained the strong investment numbers seen over the last year as 24 deals raised $207 million, not far from the same period last year when 24 deals collected $182 million.

Overall, the Healthcare industry raised $1.9 billion for 184 deals, an 11% decline in capital invested and 9% increase in deal flow.

Capital Pours Into Consumer Internet Companies

Consumer Information Services, which includes online search, entertainment and social media companies, raised $1.3 billion for 104 deals during the third quarter, more than double the financing collected for 94 deals during the same period last year. Having collected $3.8 billion throughout the first three quarters of 2011, the sector is on pace to exceed the $4.2 billion companies raised in 2010.

“VCs are actively funding new Consumer Internet companies and pouring significant amounts of capital into later-stage deals, but second rounds are lagging,” said Scott Austin, editor of Dow Jones VentureWire. “If investors continue focusing on later-stage companies that would likely have exited years ago had market conditions been better, the hundreds of young Web start-ups that raised financing in the last two years will face intense competition for second rounds.”

Within the Consumer Internet sector, deal activity for young start-ups was strong as 57% of deals were seed- or first-rounds. While 30% of deals went to later-stage companies, these companies accounted for $1 billion of the $1.3 billion companies in the sector collected. Thirteen percent of deals were second rounds.

Software Keeps Investments Flowing in IT

Companies in the Information Technology industry raised $2.1 billion for 227 deals in the third quarter, a 9% increase in financing but 7% drop in deal flow. The Software sector continued to be a bright spot for IT and collected the lion’s share of investment as 165 deals collected $1.3 billion. While investments in the Semiconductors and Hardware sectors declined, deal flow for Communications and Networking companies showed some strength as 25 deals raised $354 million, up from 22 deals that raised $246 million in the same period last year.

Investment in Enterprise and Energy Start-Ups Strong

While deal flow for Business and Financial Services companies rose 7%, capital invested spiked 65% as 139 deals collected $1.5 billion. The industry’s most active investment area was Business Support Services, which is driven by interest in marketing, advertising and data management companies. Business Support Services start-ups raised $1.2 billion for 104 deals in the most recent quarter.

The Energy and Utilities industry raised $635 million for 33 deals, an increase from the same period last year when 23 deals raised $381 million. As usual, Renewable Energy companies claimed almost all of the industry’s investment as 30 deals raised $621 million.

VCs Do More Early-Stage Deals

Seed- and first-rounds accounted for 42% of deals and 21% of capital invested during the third quarter, an uptick in deal activity from the year-ago period when early-stage rounds claimed 36% of deals and 22% of capital raised. Second rounds dropped from 23% of deal activity in the third quarter of 2010 to 20% in the most recent quarter, while the proportion of capital garnered by these deals picked up slightly from 18% last year to 19% in the third quarter of 2011. Later-stage deals accounted for 37% of the quarter’s deals and 58% of total capital raised, a mild change from the same period last year when they accounted for 39% of deals and 57% of capital raised.

For information on Dow Jones VentureSource’s research methodology, visit http://bit.ly/VSFAQs. For general information about Dow Jones VentureSource, visit http://www.dowjones.com/privatemarkets.

Thursday, October 20, 2011

Rebuilding the IPO On-Ramp

Today, the IPO Task Force, a group of private sector professionals operating in the emerging growth company ecosystem, released formal recommendations to help re-energize the U.S. capital markets system. Spearheaded by former National Venture Capital Association (NVCA) chairman, Kate Mitchell, the task force authored a detailed report entitled Rebuilding the IPO On-Ramp: Putting Emerging Growth Companies and the Job Market Back on the Road to Growth which outlines three major areas in which government can help smooth the path to IPO for these important companies.

The NVCA participated on the task force and is very supportive of its efforts. The NVCA is encouraged by the interest the recommendations have generated in initial meetings with Congress, regulators and the Administration and look forward to seeing them become part of the dialogue around legislative and regulatory initiatives to address the capital markets issue.


This report recommends specific measures that policymakers can use to increase U.S. job creation and drive overall economic growth by improving access to the public markets for emerging, high-growth companies.

For most of the last century, America’s most promising young companies have pursued initial public offerings (IPOs) to access the additional capital they need to hire new employees, develop their products and expand their businesses globally. Often the most significant step in a company’s development, IPOs have enabled these innovative, high-growth companies to generate new jobs and revenue for the U.S. economy, while investors of all types have harnessed that growth to build their portfolios and retirement accounts. We refer to these companies in this report as “emerging growth” companies.

During the past 15 years, the number of emerging growth companies entering the capital markets through IPOs has plummeted relative to historical norms. This trend has transcended economic cycles during that period and has hobbled U.S. job creation. In fact, by one estimate, the decline of the U.S. IPO market had cost America as many as 22 million jobs through 2009.(1) During this same period, competition from foreign capital markets has intensified. This dearth of emerging growth IPOs and the diversion of global capital away from the U.S. markets – once the international destination of choice – have stagnated American job growth and threaten to undermine U.S. economic primacy for decades to come.

In response to growing concerns, the U.S. Treasury Department in March 2011 convened the Access to Capital Conference to gather insights from capital markets participants and solicit recommendations for how to restore access to capital for emerging companies – especially public capital through the IPO market. Arising from one of the conference’s working group conversations, a small group of professionals representing the entire ecosystem of emerging growth companies – venture capitalists, experienced CEOs, public investors, securities lawyers, academicians and investment bankers – decided to form the IPO Task Force to examine the conditions leading to the IPO crisis and to provide recommendations for restoring effective access to the public markets for emerging, high-growth companies.

In summary, the IPO Task Force has concluded that the cumulative effect of a sequence of regulatory actions, rather than one single event, lies at the heart of the crisis. While mostly aimed at protecting investors from behaviors and risks presented by the largest companies, these regulations and related market practices have:

1. driven up costs for emerging growth companies looking to go public, thus reducing the supply of such companies,

2. constrained the amount of information available to investors about such companies, thus making emerging

growth stocks more difficult to understand and invest in, and
3. shifted the economics of the trading of public shares of stock away from long-term investing in emerging growth companies and toward high-frequency trading of large-cap stocks, thus making the IPO process less attractive to, and more difficult for, emerging growth companies.

These outcomes contradict the spirit and intent of more than 75 years of U.S. securities regulation, which originally sought to provide investor protection through increased information and market transparency, and to encourage broad investor participation through fair and equal access to the public markets.

To help clear these obstacles for emerging growth companies, the IPO Task Force has developed four specific and actionable recommendations for policymakers and members of the emerging growth company ecosystem to foster U.S. job creation by restoring effective access to capital for emerging growth companies. Developed to be targeted,
scalable and in some cases temporary, these recommendations aim to bring the existing regulatory structure in line with current market realities while remaining consistent with investor protection. The task force’s recommendations for policymakers are:

1. Provide an “On-Ramp” for emerging growth companies using existing principles of scaled regulation. We recommend that companies with total annual gross revenue of less than $1 billion at IPO registration and that are not recognized by the SEC as “well-known seasoned issuers” be given up to five years from the date of their
IPOs to scale up to compliance. Doing so would reduce costs for companies while still adhering to the first principle of investor protection.

2. Improve the availability and flow of information for investors before and after an IPO. We recommend improving the flow of information to investors about emerging growth companies before and after an IPO by increasing the availability of company information and research in a manner that accounts for technological and
communications advances that have occurred in recent decades. Doing so would increase visibility for emerging growth companies while maintaining existing regulatory restrictions appropriately designed to curb past abuses.

3. Lower the capital gains tax rate for investors who purchase shares in an IPO and hold these shares for a minimum of two years. A lower rate would encourage long-term investors to step up and commit to an allocation of shares at the IPO versus waiting to see if the company goes public and how it trades after its IPO. (

In addition to its recommendations for policymakers, the task force has also developed a recommendation for members of the emerging growth company ecosystem:

4. Educate issuers about how to succeed in the new capital markets environment. The task force recommends improved education and involvement for management and board members in the choice of investment banking syndicate and the allocation of its shares to appropriate long-term investors in its stock. Doing so will help emerging growth companies become better consumers of investment banking services, as well as reconnect buyers and sellers of emerging company stocks more efficiently in an ecosystem that is now dominated by the high-frequency trading of large cap stocks.

The recommendations above aim to adjust the scale of current regulations without changing their spirit. Furthermore, the task force believes that taking these reasonable and measured steps would reconnect emerging companies with public capital and re-energize U.S. job creation and economic growth – all while enabling the broadest range of investors to participate in that growth. The time to take these steps is now, as the opportunity to do so before ceding ground to our global competitors is slipping away.

For this reason, the members of the IPO Task Force pledge their continued participation and support of this effort to put emerging growth companies, investors and the U.S. job market back on the path to growth.

Wednesday, October 19, 2011



Life Sciences and Clean Tech Investing Falls as Software Surges to a 10-Year High

Venture capitalists invested $6.95 billion in 876 deals in the third quarter of 2011, according to the MoneyTree™ Report from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA), based on data provided by Thomson Reuters. Quarterly venture capital (VC) investment activity fell 12 percent in terms of dollars and 14 percent in the number of deals compared to the second quarter of 2011 when $7.9 billion was invested in 1,015 deals.

For the first three quarters of 2011, venture capitalists invested $21.2 billion into 2,725 deals, representing 20 percent more dollars and three percent more deals as the first three quarters of 2010. The Life Sciences (biotechnology and medical device industries combined) and Clean Technology sectors saw marked decreases in both dollars and number of deals while the Software sector enjoyed its strongest quarter in almost 10 years.

"Challenges in the regulatory environment for Life Sciences companies are prompting VCs to look to other industries to put their money to work for a faster return on their investment as indicated by the notable increase in Software investments," remarked Tracy T. Lefteroff, global managing partner of the venture capital practice at PwC US. “Accordingly, over the past two quarters, we've seen a clear shift in Life Sciences investments from Seed/Early Stage companies over to more Later Stage companies. VCs are continuing to support the companies in their pipeline but appear to be curbing their investments in new Life Sciences companies. Despite the dip in Life Sciences and in the overall investment total for Q3, 2011 is still on track to exceed the $23.3 billion invested in all of 2010."

“Given the tremendous impact that venture capital has on company creation, it is easy to forget that our industry is small and highly susceptible to the many market forces presently at work,” said Mark Heesen, president of the NVCA. “Public policy challenges in the life sciences and clean technology sectors are impacting investment levels this quarter as is the IPO market that basically came to a screeching halt in August. Venture fundraising levels are the lowest they have been in nearly a decade so it is reasonable to expect investment levels to decline in the coming years. Yet despite the challenges, the industry continues to fund new companies because history has shown us that innovation always prevails and there remains significant promise across all industry sectors for these emerging growth companies."

Industry Analysis

The Software industry received the highest level of funding for all industries with $2.0 billion invested during the third quarter of 2011. This level of investment represents a 23 percent increase in dollars, compared to the $1.6 billion invested in the second quarter, and the highest quarterly investment in the sector since the fourth quarter of 2001. The Software industry also had the most deals completed in Q3 with 263 rounds, which represents a one percent decrease from the 267 rounds completed in the second quarter of 2011.

The Biotechnology industry was the second largest sector for dollars invested with $1.1 billion going into 96 deals, falling 18 percent in dollars and 20 percent in deals from the prior quarter.

The Medical Devices and Equipment industry also experienced a decline, dropping 18 percent in Q3 to $728 million, while the number of deals declined 21 percent to 74 deals. Overall, investments in the Life Sciences sector (Biotechnology and Medical Devices) fell 18 percent in dollars and 21 percent in deals, dropping to the second lowest quarterly deal volume since the first quarter of 2005. To the contrary, Healthcare Services investments surged with $152 million going into 11 deals, a 200 percent increase in dollars and 38 percent increase in deal volume over the second quarter.

Investment in Internet-specific companies fell in the third quarter to $1.6 billion going into 231 deals. This level of investment represents a 33 percent decrease in dollars and a 21 percent decrease in deals from the second quarter when $2.4 billion went into 292 deals, a ten-year high. Internet-specific is a discrete classification assigned to a company with a business model that is fundamentally dependent on the Internet, regardless of the company’s primary industry category.

The Clean Technology sector, which crosses traditional MoneyTree industries and comprises alternative energy, pollution and recycling, power supplies and conservation, saw a 13 percent decrease in dollars to $891 million in Q3 from the second quarter when $1.0 billion was invested. The number of deals completed in the third quarter also declined nine percent to 80 deals compared with 88 deals in the second quarter

Fourteen of the 17 MoneyTree sectors experienced decreases in dollars invested in the third quarter, including Telecommunications (49 percent decrease), Semiconductors (44 percent decrease), Consumer Products & Services (51 percent decrease), and Media & Entertainment (11 percent decrease).

Stage of Development

Seed stage investments fell 56 percent in dollars and 26 percent in deals with $179 million invested into 89 deals in the third quarter. Early stage investments also fell seven percent in dollars and six percent in deals with $2.0 billion going into 341 deals. Seed/Early stage deals accounted for 49 percent of total deal volume in Q3, compared to 48 percent in the second quarter. The average Seed deal in the third quarter was $2.0 million, down from $3.3 million in the second quarter. The average Early stage deal was $5.7 million in Q3, down from $5.8 million in the prior quarter.

Expansion stage dollars increased two percent in the third quarter, with $2.5 billion going into 260 deals. Overall, Expansion stage deals accounted for 30 percent of venture deals in the third quarter, up from 26 percent in the second quarter of 2011. The average Expansion stage deal was $9.6 million, up from $9.2 million in the prior quarter.

Investments in Later stage deals decreased 20 percent in dollars and 30 percent in deals to $2.3 billion going into 186 rounds in the third quarter. Later stage deals accounted for 21 percent of total deal volume in Q3, compared to 26 percent in Q2 when $2.9 billion went into 265 deals. The average Later stage deal in the third quarter was $12.5 million, which increased from $11.0 million in the prior quarter and represents the largest average deal size for Later stage companies since the third quarter of 2001.

First-Time Financings

First-time financing (companies receiving venture capital for the first time) dollars decreased 22 percent and the number of deals fell 18 percent with $1.2 billion going into 269 deals. First-time financings accounted for 17 percent of all dollars and 31 percent of all deals in the third quarter, compared to 20 percent of all dollars and 32 percent of all deals in the second quarter of 2011. Companies in the Software, Media & Entertainment, and IT services sectors received the most first time rounds in the third quarter. There was a significant decline in the number and dollar level of first time rounds in the Life Sciences sector. The average first-time deal in the third quarter was $4.5 million, down slightly from $4.7 million in the prior quarter. Seed/Early stage companies received the bulk of first-time investments, garnering 74 percent of the deals.

MoneyTree Report results are available online at www.pwcmoneytree.comand www.nvca.org.

Monday, October 10, 2011


Lowest Dollar Amount Raised Since Q3 2003

Fifty-two U.S. venture capital funds raised $1.72 billion in the third quarter of 2011, according to Thomson Reuters and the National Venture Capital Association (NVCA). This level marks a 53 percent decrease by dollar commitments and a 4 percent decline by number of funds compared to the third quarter of 2010, which saw 53 funds raise $3.5 billion during the period. U.S. venture capital fundraising during the first nine months of 2011 totaled $12.2 billion from 146 funds, a 26 percent increase by dollars compared to the nine months of 2010 and an 11 percent increase by number of funds. The third quarter marked the lowest amount raised in a quarter since the third quarter of 2003.

Fundraising by Venture Funds

Funds Capital ($M)
2007 233 30,739.7
2008 212 25,814.7
2009 153 16,191.9
2010 162 13,346.3
2011 147 12,249.7
1Q'09 58 4,945.9
2Q'09 39 4,844.2
3Q'09 34 2,332.0
4Q'09 47 4,069.8
1Q'10 45 4,033.8
2Q'10 48 2,098.4
3Q'10 53 3,593.8
4Q'10 45 3,620.3
1Q'11 46 7,634.2
2Q'11 49 2,895.7
3Q'11 52 1,719.7
Source: Thomson Reuters and National Venture Capital Association

“The quarter's low fundraising numbers are reflective of ongoing challenges within the venture capital exit markets,” said Mark Heesen, president of the NVCA. “Economic instability continues to impact the ability of venture-backed companies to go public which, in turn, has prevented many venture firms from delivering solid returns to their investors. Until we begin to see a steady and sustainable flow of quality IPOs which return cash, limited partners will remain on the sidelines and the venture industry will continue to contract. This situation is one that needs to be rectified in the near term if we want to have adequate dollars to invest in our country's startup companies in the long run.”

There were 33 follow-on funds and 19 new funds raised in the third quarter of 2011, a ratio of 1.74-to-1 of follow-on to new funds. The largest new fund reporting commitments during the second quarter of 2011 was New York-based Raine Partners which raised $72.5 million in its inaugural fund. A “new” fund is defined as the first fund at a newly established firm, although the general partners of that firm may have previous experience investing in venture capital.

VC Funds: New vs. Follow-On

New Followon Total
2007 64 169 233
2008 58 154 212
2009 39 114 153
2010 49 113 162
2011 46 101 147
1Q'09 10 48 58
2Q'09 12 27 3 9
3Q'09 12 22 34
4Q'09 12 35 47
1Q'10 14 31 45
2Q'10 16 32 48
3Q'10 19 34 53
4Q'10 13 32 45
1Q'11 13 33 46
2Q'11 14 35 49
3Q'11 19 33 52
Source: Thomson Reuters and National Venture Capital Association

Third quarter 2011 venture capital fundraising was lead by Menlo Park, California based Shasta Ventures Management & Longitude Capital Management which raised $265 & $159 million respectively for their Shasta Ventures III & Longitude Ventures Partners II Funds.

Thursday, October 6, 2011


U.S. venture capitalists are decreasing their investments in biopharmaceutical and medical device companies, reducing their concentration in prevalent disease areas and shifting investment away from the United States toward Europe and Asia, according to a report released today by the National Venture Capital Association’s MedIC Coalition.

The survey of more than 150 venture capital firms identified Food and Drug Administration (FDA) regulatory challenges as the most significant factor driving away investment from startup companies that are bringing critical therapies to market. Other factors included reimbursement concerns and an adverse financial environment. The report, Vital Signs: The Threat to Investment in U.S. Medical Innovation and the Imperative of FDA Reform, strongly indicates that America’s medical innovation economy is in grave danger of losing its primary source of funding, causing serious harm to both U.S. patients and the national economy.

“For decades, the U.S. has been the leader in delivering medical innovations to our citizens due to the thousands of startup healthcare companies that have been brought to life with venture capital funding. Millions of high quality jobs have been created, and iconic companies such as Genentech, Amgen, Medtronic, Biogen-Idec and Lifescan have been built. But our leadership is now at risk,” said Dr. Beth Seidenberg, partner at Kleiner Perkins Caufield & Byers and chairwoman of the MedIC Coalition. “This report confirms what has been suspected for some time, which is that venture capitalists are shifting investment capital away from lifesaving and life-sustaining products and into areas less regulated by the FDA as well as into other countries. This trend is one that the venture industry and, we believe, the FDA, wants desperately to reverse.”

Investment Decline in Innovative New Therapies

The survey found that U.S. venture capital firms have been decreasing their investment in biopharmaceutical and medical device companies over the past three years and expect to further curtail such investment in the future. Overall 39 percent of respondent firms have decreased their investments in life sciences companies over the last three years and the same percentage expect to further decrease these investments over the next three years, some by greater than 30 percent. This is roughly twice the number of firms that have increased and/or expect to increase investment. While 40 and 42 percent of firms expect to decrease investment in biopharmaceutical and medical device companies respectively, 42 and 54 percent expect to increase their investment in non-FDA regulated healthcare services and healthcare information technology companies respectively.

In another alarming sign, survey respondents expect to see significant investment decreases in companies fighting serious and highly prevalent conditions including cardiovascular disease, diabetes, obesity, cancer, and neurological diseases.

“More than 100 million Americans suffer from diseases for which there are still no cures, or even meaningful therapeutic options. To conquer disease and relieve suffering, we must have a medical innovation pipeline that is as strong and robust as possible,” said Margaret Anderson, executive director, FasterCures. “Bringing critical therapies to market requires venture capital investment to spur a thriving life sciences industry as well as having a regulatory system that’s appropriately resourced and equipped to ensure innovation is translated to better health.”

Drivers of Investment Decisions

Among the multiple factors impacting investment decisions, FDA regulatory challenges were most frequently cited as having high and significant impact in driving these investment trends followed by reimbursement challenges. Respondents believe these challenges are primarily related to an imbalance in risk/benefit assessment, and unpredictability at the FDA.

“Venture capitalists have always embraced risk and long-term investment to fund breakthrough innovation and form great companies,” said Dr. Jonathan Root, general partner at U.S. Venture Partners and MedIC Steering Committee member. “While many factors are at work in driving away investment from U.S. medical innovation, it is the FDA approval process – and the cost, time, and unpredictability that it adds to the development of innovative products – that weighs most heavily on investors. The FDA and the Administration are already taking significant actions to reverse these trends, but we need the support of Congress to make sure these reforms are effective and lasting.”

U.S. Competitiveness and Job Creation at Risk

In response to FDA challenges, venture capitalists and the companies in which they invest are increasingly looking to Europe and Asia to bring their medical products to market. According to the survey, 36 and 44 percent of firms plan to increase investment in life science companies in Europe and Asia, respectively, while only 13 percent plan to increase in North America. Correspondingly, 31 percent of firms indicated plans to decrease investment in life science companies in North America while seven percent and zero percent of respondents plan to decrease investment in Europe and Asia, respectively. Additionally, a majority of the respondents indicated a continued trend for U.S.-based startup medical companies to seek regulatory approval and commercialization of their products outside the United States first and to establish and grow operations abroad. This major shift will reduce the availability of lifesaving and life-sustaining treatments for Americans and will result in a decrease in U.S. job creation, threatening the global leadership of the U.S. in medical innovation.

If left unaddressed, patient health care, job creation and the U.S. economy will suffer substantial further damage. Based on the survey responses, America can anticipate approximately half a billion dollars less of investment into healthcare start-up companies in the near term, placing American jobs at risk.

U.S. Game to Lose

Despite the grim prognosis, there remains an opportunity to address these challenges. Nearly all respondents indicated that FDA reform would have a significant positive impact on venture investment in 3 biopharmaceutical and medical device companies in the United States. Improvements that were favorably rated as showing promise include better predictability of decisions, increased efficiency and speed of decisions, rebalancing of risk/benefit requirements, expanded accelerated approval pathways and improved transparency in communications.

Recently, the FDA and the White House have begun a broad set of reform initiatives that are intended to address some of these problems, including new guidances on risk/benefit assessment, clinical trial design and new pathways for approval of innovative medical devices.

“The venture capital and startup communities are committed to working with lawmakers and regulators to continue to reform the FDA approval process so that Americans can have access to these important medical innovations without compromising safety,” said Mark Heesen, president of the National Venture Capital Association. “We are encouraged by our constructive dialogue with senior FDA officials, who recognize the gravity of the situation and are taking action. However, fundamental reform is urgent and will require a dedicated, bipartisan effort. We must give FDA the vital tools and resources it needs – along with a clear legislative mandate – to promote and protect the public health in a manner that encourages the development of innovative products for patients in need. We must act now or the U.S. public will lose access to breakthrough innovation at a very high cost to public health and the economy.”

For a copy of the survey data slides, please visit: http://www.nvca.org/vital_signs_data_slides.pdf

About NVCA’s MedIC Coalition

The Medical Innovation and Competitiveness (MedIC) Coalition educates policymakers on the critical role America’s medical innovation plays in the U.S. healthcare system and high quality job creation, where and how disruptive innovations are developed and the challenges currently facing the medical innovation system. MedIC educates stakeholders and policy makers and supports legislation to address the threats facing America’s medical innovation system. Founded in 2010 as a partnership between the National Venture Capital Association (NVCA), member venture capital firms and their early-stage portfolio companies, the coalition aims to preserve U.S. leadership in medical innovation and ensure that America remains the primary incubator for global innovation. MedIC is based in Washington, DC.

About NVCA

Venture capitalists are committed to funding America’s most innovative entrepreneurs, working closely with them to transform breakthrough ideas into emerging growth companies that drive U.S. job creation and economic growth. According to a 2011 Global Insight study, venture-backed companies accounted for 12 million jobs and $3.1 trillion in revenue in the United States in 2010. As the voice of the U.S. venture capital community, the National Venture Capital Association (NVCA) empowers its members and the entrepreneurs they fund by advocating for policies that encourage innovation and reward long-term investment. As the venture community’s preeminent trade association, NVCA serves as the definitive resource for venture capital data and unites its nearly 400 members through a full range of professional services. For more information about the NVCA, please visit www.nvca.org.

Monday, October 3, 2011



Slowed by stronger economic headwinds and market volatility, venture-backed Initial Public Offering (IPO) exit activity fell significantly in the third quarter, with only 5 companies going public, down 77 percent from the second quarter 2011 and 64 percent from the third quarter of last year, according to the Exit Poll report by Thomson Reuters and the National Venture Capital Association (NVCA). By dollars, the quarter marked the weakest three-month period for venture-backed IPOs since the fourth quarter of 2009. For the third quarter, 101 venture-backed M&A deals were reported, 35 which had an aggregate deal value of $6.3 billion, up 8% over the second quarter of 2011.

“While the IPO market screeched to a halt in the second half of the 3rd quarter, the acquisitions market continued to move forward, said Mark Heesen, president of the NVCA. “Quality acquisitions continue to get done which should help venture capital firms return money to limited partners and better position themselves to raise new funds. However, current economic instability could reduce the number of high return acquisitions while keeping new IPOs at a seriously low level for the remainder of the year. Federal policymakers must address this market uncertainty if they want to fulfill the stated goal of increasing long term employment as it is these emerging growth companies that hold the key to future job creation in the United States.”

IPO Activity Overview

There were 5 venture-backed IPOs valued at $442.9 million in the third quarter of 2011, which represented a 92 percent drop in dollar value compared to the second quarter of 2011 and a 65 percent drop in dollar value from the same three months last year. Four of the five IPOs of the quarter were based in the United States, while Tudou.com (China) represented the only company based outside of the US to come to market.

Four of the five IPOs in the quarter represented the information technology (IT) sector which remains the most active sector having had fourteen of the 21 IPO exits for the second quarter as well. The only non-IT IPO of the quarter was from Skokie, IL-based Horizon Therapeutics, which raised $49.5 million July.

In the largest IPO of the quarter, Chinese Holding Company Tudou.com (TUDO) raised $174 Million on NASDAQ on August 17th. For the third quarter of 2011, all five companies listed on the NASDAQ stock exchange.

Three of the five IPOs in the third quarter, Zillow, Tangoe, and Carbonite are trading above their offering price as of September 29th, 2011. Sixty-four U.S. venture-backed companies are currently filed for an initial public offering with the SEC.

Mergers and Acquisitions Overview

As of September 30, 2011, 101 venture-backed M&A deals were reported for the third quarter, 35 which had an aggregate deal value of $6.3 billion. The average disclosed deal value was $181.3 million, up 17 percent from Q2 2011. By total disclosed deal value third quarter volume marks a 58 percent increase from the third quarter of 2010.

The information technology sector led the venture-backed M&A landscape with 86 of the 101 deals of the quarter and had a disclosed total dollar value of $3.66 billion. This was up over 33% from Q2 2011. Within this sector, Internet specific and Computer software and services accounted for the bulk of the targets with 37 and 34 transactions, respectively, across these sector subsets. For the first three quarters of 2011, venture-backed M&A activity is up 43 percent by disclosed value and down 7 percent by number of deals, compared to the first three quarters of 2010.

Deals bringing in the top returns, those with disclosed values greater than four times the venture investment, accounted for 88 percent of the total disclosed transactions during third quarter 2011. Venture-backed M&A deals returning less than the amount invested accounted for 6 percent of the quarterly total.