What are we talking about?
Some of the data in yesterday’s excellent post by Bruce Booth on Early Stage Venture Scarcity really caught us by surprise.
What really caught our eye was this nugget:
To address this issue, FLAG Capital Management did a further refinement of “active” investors and shared it with me earlier this year (thanks to Kirsten Morin): by filtering ThomsonOne’s dataset for only investors that had made at least four new investments with at least $4M in aggregate during 2013, they identified only ~25 active healthcare venture capital investors. That’s not a big pool. And only a subset of those VCs actually help start or back drug discovery and research stage biotechs – probably only a dozen firms regularly start or fund more than 4-6 new biotech companies a year.
Think of it this way.
Let’s suppose that there are 250-500 life science start ups every year. This is a reasonable number, given the data published by the AUTM.
Out of this pool, only a fraction will be funded, since they will be competing with the companies which we formed last year, and so on.
So if there are 50 new funded biotechs per year (~10-12 firms funding ~4-6 companies p.a.), that leaves hundreds that remain unfunded.
OK, so it’s not quite that bad.
A percentage of these new companies will sign licensing or other deals with Big Pharma, even though there are not many multinational companies who would engage in these types of investments either.
Then there are the foundations, but they are typically highly focused on a specific disease or cause.
Regardless, unlike the go-go genomic days of the late 1990s, today we are in a strong buyers market.
That is, if you are a successful venture firm, you can likely raise another fund (if you haven’t already) and keep plugging away, evaluating and rejecting more opportunities than ever before.
If you are on the other side, trying to raise capital to bride the gap between early-stage research and FIM studies, you are potentially in a real predicament.
Creative sources of funding, coupled with creative licensing deals, may be the only way forward for many companies who don’t have a technology or platform that is quite sexy enough for most VCs.