Q1 venture capital data show bigger earlier rounds remain common

Analysis

While indicators of total venture capital funding for drug development suggest another retrenchment is possible this year, a look at where the money raised is flowing reveals a continuation of recent trends (see tables).

The first quarter is traditionally a quiet period for raising venture capital, making it premature to draw conclusions about the full year’s turn out. However, data from EvaluatePharma reveal that follow-on funding in rounds C and later have been few and far between so far in 2012, while earlier stages have kept pace. Meanwhile broad syndicates of investors continue to emerge, to help support a project for longer without the need to seek fresh sources of funds.

Broader earlier

An analysis published last week revealed that the flow of venture capital money into companies developing human therapeutics fell to a five year low last year, reaching only $4.4bn over 276 deals (Slow Q1 for VC funding points to another challenging year ahead, May 3, 2012).

The data only encompass companies focused on human drug development and do not include the fundraising activities of groups working in areas such as medical technologies or devices. So while this does not provide a complete picture of the life science landscape – and many reports suggest life is little easier for medtech companies - it does provide a snapshot of those operating in the very highest risk end of the sector.

A further breakdown of the numbers shows where the funds are flowing, in terms of stage of investment. Last year, saw a drop off in series B and C rounds, a trend that seems to have continued to a certain extent over the first quarter. This can be seen most markedly in C rounds, which historically attracted a much higher proportion of the VC dollars – around 20% - a figure that dropped to around 12% last year and so far this year has barely budged.

Venture Capital Investment Analysis
Total Investment ($m) Total Finance Deals % Investment per Financing Round
Financing Round Q1 2012 2011 2010 2009 2008 2007 Q1 2012 2011 2010 2009 2008 2007 Q1 2012 2011 2010 2009 2008 2007 5yr average (07-11)
Seed Capital 12 20 27 22 14 80 2 14 20 14 14 20 2% 0% 1% 0% 0% 1% 1%
Series A 93 1,021 908 1,253 993 1,234 10 78 81 95 80 80 13% 24% 19% 26% 22% 21% 22%
Series B 201 997 1,351 1,002 1,073 1,141 16 53 63 57 62 51 29% 23% 29% 21% 24% 19% 23%
Series C 89 509 1,047 923 894 1,237 5 20 51 43 36 48 13% 12% 22% 19% 20% 21% 19%
Series D 95 426 225 490 439 525 4 16 18 21 13 18 13% 10% 5% 10% 10% 9% 9%
Series E 15 278 63 46 145 266 2 6 4 5 4 9 2% 7% 1% 1% 3% 4% 3%
Series F 204 159 303 110 50 4 2 10 2 1 0% 5% 3% 6% 2% 1% 4%
Series G 127 78 27 2 1 1 0% 3% 2% 0% 1% 0% 1%
Series H 10 2 0% 0%
Series Undisclosed 199 667 826 839 856 1,458 33 79 93 85 94 108 28% 16% 18% 17% 19% 24% 19%
Annual Totals 703 4,249 4,694 4,879 4,551 5,991 72 272 335 330 306 335

A dearth of available capital in the last few years has persuaded many investors to the benefits of broader and larger earlier-stage syndicates. This can avoid the struggles and distraction of having to find follow-on funds and, if necessary, existing investors will be able to support a project for longer. This can be seen in last year’s figures, where Series A and B rounds attracted the largest proportions of VC money.

However this trend is in some ways making the A, B, C categories less relevant, as in many cases these rounds will morph into larger, tranched fundraisings. This should logically mean fewer C rounds and this does appear to be reflected in the data.

At the same time, there has been a marked rise in undisclosed rounds, whereby companies and investors are choosing not to label a financing that would seem to fit a certain category. This is probably a reflection of the same trend – a move away from the classic ‘escalator model’ of venture capital investing towards fitting a financing around the specific needs of a company.

Later financing

What did emerge in 2011 and has yet to be seen this year, although there is certainly still time, is a number of large very late stage rounds. Not only are these a reflection of the well-documented flight to later stage investments supposedly preferred by VC funds with an eye on an exit, these are also being conducted by companies that in the past would have made a debut on the stock exchange.

Last year saw two Series G rounds - Merrimack Pharmaceuticals raised $77m ahead of its 2012 IPO that saw that another $100m added to the coffers, while Sangart, a California developer of products to boost the oxygen carrying capacity of blood, raised $50m. In 2010 when the IPO window remained more firmly shut the rounds stretched even later, with a Series F from Pacific Biosciences, also now public, what was effectively a Series G from Reata and very late stage rounds from the likes of Quark Pharmaceuticals and ProCell.

With the IPO window barely cranked open, particularly in Europe, these later stage rounds are likely to become more common.

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