Venture capital funding for life sciences startups dropped in 2012, but some investors remain optimistic. While the sector requires large investments over long periods, recent fundraising like Third Rock Ventures' $516 million shows some feel the risk is worth the potential reward. However, others note the economic slowdown has investors favoring later-stage companies over startups. There is no consensus on investment trends, as priorities vary from basic research to applied sciences that can more quickly yield results. Overall, the life sciences sector remains high-risk but could see more investment if startups can prove market traction.

1. High-Risk, High-Reward,
No Consensus
Trends impact investment direction in life sciences
STORY BY MALCOLM GARCIA
BIO CORNER
After a little more than four hard years
of recession, investors see some hope that
investments in the life sciences will increase
this year.
The announcement by Boston-based
Third Rock Ventures, which raised $516
million in March to create over a dozen new
biotechnology companies over the next few
years, showed increasing optimism among
investors for life sciences start-ups.
Last year, U.S. venture capital funding in
the life sciences sector, which includes the
biotechnology and medical device industries,
dropped 14 percent in dollars and 7 percent
in deals. Venture capitalists invested a total
of $6.6 billion in 779 life sciences projects
during the year, compared with $7.7 billion
in 836 deals during 2011. The number of life
sciences companies receiving VC funding for
the first time reached the lowest level since
1995 with only 135 companies receiving
funding in 2012.
“Third Rock’s recent announcement
reminded me of the old days when things
were good,” Nicholas Franano, CEO of
Novita Therapeutics, a biopharmaceutical and
medical device company, says. “Since 2008,
there has been big attrition from venture capital
partnerships in the life sciences.”
The life sciences, Franano says, have always
proved to be a challenge for investors because
it requires large amounts of capital and time to
create products. “It is a high-risk, high-reward
investment,” he says. “Life sciences require a
lot of capital to create a product.”
Continued slow economic growth means
that investors willing to take chances will
more likely consider later-stage developed
companies rather than start-ups.
“The drop in investment last year sends
up a cautionary flag of concern,” Jeff Boily,
an entrepreneur and private investor in life
sciences in Philadelphia, says. Last year,
Boily was the CEO of the Center for Animal
Health Innovation in Olathe.
“The activity in early-stage businesses,
early high-risk, that activity has decreased,”
Boily says. “People are still holding back. It
takes a toll on young companies.”
According to Boily, large pharmaceutical
and biotech firms have begun looking at
early-stage developments from academic
institutions and not-for-profit organizations
to share costs. “It’s a new way to do deals,
to move forward on deals that bring value
to the table.”
Food and agriculture start-ups are beginning
to gain more interest from two kinds of
investors, says Ron Meeusen, managing
partner with Cultivian Ventures from
Carmel, Indiana, a venture capital firm.
“One group is basically saying the return
in traditional areas is down and they’re looking
for new areas to invest in,” Meeusen says.
“The other group of investors is interested
because of trends: How has population demand
caught up with supply? Will we have enough
grain next year? More food requires new
technology. It’s a long-term trend.”
With money tight at the federal level, now
especially with sequestration, the developments
in the areas of infectious diseases, cancer
research and patient care delivery offering
concrete results will rise on investor’s lists,
says Lawrence Dreyfus, the University of
Missouri-Kansas City’s vice chancellor of
research and economic development.
“The focus is shifting more away from basic
research,” Dreyfus says. “It’s short-sighted
because the trend ignores what underpins
everything and that is basic research.”
Despite improvement in the market and
developing trends, risks abound for investors
considering start-ups.
“Start-ups are so far away from where they
need to be,” Dreyfus says. “They are in what
we call ‘the valley of death.’ They’ve made
a discovery to get traction in the market.
But if for lack of investment they don’t get
pushed forward, they go nowhere.”
RELATED READING
“THE DROP IN INVESTMENT LAST YEAR
SENDS UP A CAUTIONARY FLAG OF
CONCERN” - JEFF BOILY
I N S I G H T, I N N O VAT I O N & I N S P I R AT I O N 41