Biotech VC Dominates in Q3; Dollars Down But Deals Rise

The biotechnology sector received the highest level of venture capital funding for all industries nationwide in the third quarter of 2009, according to the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. A total of $905 million was invested into 104 deals, a four percent decrease in dollars and 16 percent increase in deals from the second quarter of 2009. The industrial/energy sector received $864 million; software, $622 million; medical devices and equipment $617; and media/entertainment, $446 million. But total biotech investments are down from $1.2 billion and 120 deals a year ago. And locally, most biotech investments are going to companies outside of the Los Angeles area. Lack of access to capital continues to be a major stumbling block for startups, according to industry experts. “Venture capital in general is playing the how low can you go game,” said Tom Bliss of Thousand Oaks, who consults biotech startups on funding and partnering issues and is interim CEO of Los Angeles-based startup, TheraKine. “There’s still a lot of capital on the sidelines, and there’s a lot of biotech companies that have hit a wall – meaning they’ve run out of money and have no idea where the next round of funding will come from,” he added. A total of $150.4 million was invested in 16 Southern California biotech companies in Q3, according to the MoneyTree Report. All but one of those investments went to firms in the San Diego metro area. Calabasas-based KYTHERA Biopharmaceuticals, which secured a $10 million fourth round of venture capital in Q3, is the only biotech company in the Los Angeles area to receive funding. Total venture investments in Southern California companies are up from the previous two quarters but down from last year. There was a total of $475 million invested in 65 deals in Q3 2009, compared to $431 million and 64 deals in Q2 and $315 million and 57 deals in Q1. There was $773 million invested in 87 deals in Q3 of 2008. “The challenge for development stage companies is competing with all of the wrecks out there,” said Bliss. “You have to be prepared to go wherever the venture companies are, and many biotech companies that would have gone the traditional venture capital route are seeking out money through alternative sources such as grants.” It’s not surprising that the majority of biotech dollars are going to San Diego, said, Randy Churchill, director of emerging company services for PricewaterhouseCoopers. The Los Angeles region has historically been a hodge-podge of industries and the biotech sector is less developed than San Diego and San Jose. In the past 10 years, a total of 18 biotech companies in the Los Angeles metro area have received $767 million in 50 venture capital deals. The average investment for all deals combined is $15.34 million, according to historical MoneyTree Report data. L.A. vs. San Diego In comparison, 162 biotech companies in the San Diego metro area landed 483 venture capital deals worth $5.5 billion in the past decade. A total of 172 companies in San Jose secured 566 deals and $7.3 billion. “Los Angeles’ location (right between two biotech hubs) has hurt us,” said Churchill. “Biotech really needs an eco system to support it.” Companies also take twice the funding and more time to bring products to market, he added. Venture capital firms are finding quality companies to invest in, said Mike Schoenfeld, partner at Ernst & Young. But like every industry, they’re struggling with the down economy and many of their portfolio companies are going through cost containment. Their hands are also tied because the number of people investing in venture capital funds has dropped. “Companies that are less capital intensive are more likely to get the money first,” said Schoenfeld, adding companies that are shipping product or can ramp up to that point quickly have an advantage right now. The bright side, however, is that venture capitalists are investing in seed and early stage companies rather than just sinking cash into later stage companies or keeping their portfolio companies afloat. Expectations about return on investment have also changed. “It used to be that a 3X return on investment was the worse case scenario,” said Schoenfeld. “In the last couple years a 3X is considered a homerun. Today, even singles and doubles are welcome. It’s an interesting time.”