Who Needs Biotech VCs, Anyway?

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would that no longer be the case? Or will traditional investors turn back to early stage biotech once it’s obvious how the handful of VCs such as Third Rock and Flagship Ventures building companies from scratch are faring?

There are some signs. Venture as a business took major body blows during the recession, topped by savage punches in 2012 from the Kauffman Foundation and CALPERS. Kauffman, surveying a decade of crummy venture returns in its own portfolio, issued a damning report about venture capital. “Our research suggests that investors like us succumb time and again to narrative fallacies,” the report read. “To fix what’s broken in the LP investment model, institutional investors will need to become more selective and more disciplined investors in venture capital funds.”

The same year, CalPERS—the largest public pension fund in the U.S. with $290 billion in assets—chopped its venture allocation from 7 percent to less than 1 percent.

Yet U.S. venture firms of all stripes raised 134 funds in the first half of 2014, a pace that would make this year the best of the past ten years, according to Thomson Reuters and the National Venture Capital Association. Total dollars committed so far this year, $17 billion, are also on pace to hit ten-year highs. Even if that pace falls off, it’s been a good year for venture fundraising.

But these days, venture is driven by high tech. How much of the fundraising is ticketed toward health care and life sciences? Using healthcare venture plus healthcare allocations from diversified funds as a measure, Silicon Valley Bank’s Norris estimates annual fundraising levels settled into the $3 billion to $4 billion range the past three years. Looking at a ten-year window, that’s up from the nadir of 2010 but about half of the peak of 2007. Norris sees the current level remaining stable the next five years. And that means traditional venture dollars going into healthcare and life science, no longer buoyed by the pre-recession fundraising peaks, have to decline, he says.

If that’s true, then the fruit of the next decade of biomedical innovation—from genomic secrets put to practice to the integration of Big Data and consumer health technology—could be left under-harvested, unless corporate support continues to rise and the U.S. National Institutes of Health’s translational medicine ambitions are realized.

No doubt we’ll hear arguments that these fears are overblown, that great science will always find funding, or that the thousands of Pharma layoffs in the past decade have freed up all kinds of talent to lead next-generation biotechs. But you won’t convince me until the field sees the emergence of new venture firms—like Third Rock seven years ago—dedicated to turning thrilling science into much-needed treatments.

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4 responses to “Who Needs Biotech VCs, Anyway?”

  1. Theral says:

    Kudos on the commitment to a regular personal column, Alex. Looking forward.

  2. Barbara Nelsen says:

    Agreed on all counts- but alternative investors are filling the gaps and taking the risks. Particularly those looking for a more direct route for their philanthropic giving with a potential return to humanity. Nature Biotechnologies recent article on alternative early-stage investors http://www.nature.com/bioent/2013/131201/full/bioe.2013.15.html

  3. MikeG says:

    Great column, Alex. These are important questions. A few thoughts . . .

    With a few exceptions, venture is no longer a significant mover of early-stage ideas. HBR’s Gary Pisano famously said that venture’s secret sauce was its unrivaled proximity to academic research. Most ideas come out of academia. But five years into ever-deepening ties between universities and big pharma has put pharma in that position. VC’s are essentially high-paid midwives. Pharma can do that, too. And do you remember at Elsie’s 2011 PSA, McKinsey’s Ajay Dhankar saying that VCs have never been able to deliver the “smart money” . . a fully optimized lead that a pharma could look at and say “Yep, that’s what we need.” Instead, pharma has to spend time and money redoing a lot of the assays. In many ways, it’s a very inefficient model. And despite VCs pulling out of early-stage investing, there has not been a noticeable diminution of really good therapeutic ideas moving through the pipeline. Thanks in large part to big pharma. Also to disease foundations and highly-motivated angels. And research hospitals like Children’s Hospital of Philly — nurturing and launching Spark Therapeutics. I have to think other well-capitalized hospitals are taking note.Yup, its a whole new world out there, and venture doesn’t seem to be part of it.

  4. Nice read, Alex. Thanks for the “deep dive” column; and the title “In Translation” is super! Looking forward to future columns.
    One comment: very little in the article on philanthropy. we in the business of drug discovery must invite/welcome philanthropy, HNW individuals and small family foundations to participate in the early discovery/translational research to bring forward modern medicines for the underserved patients. As the founder/CEO of a nonprofit drug discovery organization (http://americanmedchem.org) with a cause to serve the needs of effective medicines for kids with serious diseases, I expend much effort to bring drug discovery science to the community. My observation is that people are facinated by the output and outcomes of drug discovery research. This interest leads to hope in what we can deliver, and a great incentive for small family foundations to work harder to raise money and participate in this work – in most cases to honor the memory of a lost child. These family foundations never get much visibility.
    Drug discovery is to serve the people; the great teacher George W. Merck III taught us this lesson in the 1950’s.
    A radical label change would help our work very much; lets stop using “valley of death” in the context of creating medicines, and instead call it “valley of serendipity” – drug discovery is all about serendipity, whether we like it or not! George W. Merck III said so too!