The glass is half full. I’ve been tracking the fundraising activity of healthcare venture firms for the last few years, and I estimate that there are about 250 VC firms actively investing in healthcare innovation worldwide. In contrast, a list I created ten years ago, at InfraReDx, included about 500 healthcare VC firms. Times are tight in 2013.
Why the drop?
The short answer is that limited partners (AKA LP’s – the endowments, pension funds, money managers, sovereign wealth funds, etc. who invest their money with VC’s) are allocating less of their money to venture capital, especially healthcare venture capital. One medical device VC told me that he first has to get an LP to consider investing in venture, among the myriad of other financial products available. Once the LP commits to venture, the VC has to sell them on healthcare venture, rather than consumer internet or other tech opportunities. Once the LP agrees to place some funds in healthcare venture, the VC must overcome a predisposition to healthcare IT, and persuade them to invest in medical devices and biotech.
It’s not a question of historical returns. Bruce Booth of Atlas Ventures demonstrates that biotech returns in the last five years have been at least as strong as those in other venture sectors. But past performance is no guarantee of future outcomes, and LP’s fear one major macro-trend: around the world, national healthcare spending must be cut, so demand for drugs and devices must go down.
To turn this perception around, the medical device industry must think and act disruptively. We must develop products that drive down healthcare costs while improving outcomes. We must take on costly chronic diseases with minimally invasive therapies, as Ardian did for hypertension, CardioMems did for heart failure, and Asthmatx did for asthma.
When we can demonstrate to LP’s that medical devices are driving down health care costs, money will return to our sector in a big way. Until we do, the 250 or so funds on my latest list will have to do. You can find my latest list of active healthcare venture investors here.
- Foundation with $249M invested with VCs says VC model is “broken” (kauffman.org)
- That new era of Venture Capital is here (sethlevine.com)
- Startups Face Tighter Market for Venture Capital ‘Fuel’ (blogs.wsj.com)
- [Growthology] A Reduction of a Review of Venture Capital Research (growthology.org)
- VC in 2013: Vivo Ventures’ Albert Cha on Convincing LPs to Invest in Life Science (blogs.wsj.com)
- Annual venture investment dollars decline for first time in three years, according to the MoneyTree report (pwc.com)
- Who’s Still Active Among the Early-Stage Biotech VCs? (xconomy.com)