Corporate venturing peps up health sector

The significant increase in corporate venturing in recent years is most evident in sectors where financial venture capital has failed to thrive. 

 Last week US-based financial group Silicon Valley  Bank in a wide-ranging healthcare report, underlined the extent to which corporate venturing firms are picking up the slack in the healthcare venture capital sector.

This is especially the case at the early stage. Silicon Valley Bank said: “In 2012 corporate venture was involved in 30% of all biotech Series A deals in 2012, up more than 100% from 2010 (14%) and 2011 (12%).”

 However, Silicon Valley Bank added it believed it was unlikely that corporate venture could fill the gap left by weak fundraising by independent financial venture firms. Its analysis found during the last three years investment in the sector had been 2.3 times the amount raised in fundraising. Last year $6.6bn was invested in healthcare venture deals down from $7.7bn in 2011,according to data from news provider Thompson Reuters and Silicon Valley Bank.

Silicon Valley Bank said: “Even though corporate venture has become more active in venture investment and has helped to fill some of that innovation gap created by reduced healthcare venture fundraising (especially in Series A biotech), paired with a reduced amount of capital from traditional venture it is not enough to sustain the current capital investing pace. As a result, we will see decreased dollar deployment into healthcare companies from its current level.”

What to make of this? The fact, fundraising in the sector is unlikely to keep pace with investment, clearly raises concerns for the health of the sector (excuse the pun). Although independent venture capitalists contributing to the report were quick to point out that this would help returns for their funds. 

However, perhaps the sector is more successful than these figures suggest. Silicon Valley Bank also estimates the sector has returned $16bn in exits during the last three years. 

Jonathan Norris, the author of the report for Silicon Valley Bank, said: “Specifically to biotech, I think rising corporate venture activity (especially in Series A/Early Development Stage) will help to sustain the trend of increased private M&A.”  

Norris added: “Venture investors and companies have embraced corporate venture as equity syndicate partners, and these groups provide two important functions.  One, corporate venture helps to fill the traditional venture role.   There is less capital available for early stage projects as the healthcare venture sector has shrunk and many firms that do raise capital raise less than their previous fund.  Two, corporate venture provides important validation around the technology.   Even financially focused corporate venture would not invest in a company it did not think could provide an important technology that they or a competitor would highly value.

Additionally, corporate venture can provide expertise from within the mothership around target validation, clinical trial design and commercial marketability.  This help is critical as it provides the company with feedback around how a potential acquirer would view the data it collects and the market around the potential drug.”

 Given many expect rising corporate venture activity will contribute to a future M&A surge, the fundraising sentiment towards the sector could be set to change. The contrarian corporate venturing investors which are helping prop up the sector could well be the first in line to benefit.

Furthermore, the fundraising problems in the sector may simply be a reflection of prior market funding excesses, and the current expected fundraising in the sector may be enough to fund innovation and drive solid returns.

Norris said: “I am cautiously optimistic that the sector is being right sized but not undersized.  Many experts agree that in the mid to late 2000s there was too much fundraised and invested in venture Healthcare.  The amount invested into companies must come down in the next few years as the available capital from that overfunded period is used up and the last few years fundraising numbers are much lower.” 

 Norris added: I think there is enough capital to support a smaller but more compelling stable of Series A companies.  With less capital and a bunch of older companies still needing equity support, any Series A company created today will have to be truly compelling, and thus will be well positioned for success.   I have seen venture firms that have a track record of successful exits and good returns still be able to raise capital, and other firms that have unique, differentiated strategies also close funds.  While the number of funds and the capital available to deploy will be lower than the mid to late 2000s, it is enough to support a healthy venture healthcare industry.”