Medtech venture funding total hits all-time high

So far, 2017 has been a record-breaker in a number of ways – and none of them bode well for start-ups.

Analysing the trends in venture fundraising by medical device makers usually throws up falling numbers of smallish rounds punctuated by one or two large deals. In the first half of 2017 that pattern reached a truly astonishing extreme. The total raised in the first quarter was over $2.5bn, more than twice as much as the quarterly average over the last seven years.

This was fuelled by Grail’s $900m series B and the $800m investment brought in by Google’s sister company Verily Life Sciences. But two almost unimaginably vast investment rounds do not mean more money for the rest of the sector. As usual younger companies seeking more reasonable sums have had a hard time finding them, with just 48 fundraisings in the second quarter – the fewest deals since the second quarter of 2006.

The first half of this year saw the three biggest ever VC rounds in medtech. As well as Grail and Verily’s rounds tipping the scales at nearly a billion dollars apiece, Guardant Health hooked $360m in May.

Both Guardant and Grail are developing DNA-based blood tests for cancer – the technology known as liquid biopsy. (Tenth-placed Epic Sciences is working on one too.) The cheapness and enormous potential of these tests, if they can be shown to work, accounts for investors’ ardour.

But when a round is worth $900m the participants are still taking on a substantial financial risk. The largest investor on Grail’s round was Johnson & Johnson Innovation, and Bristol-Myers Squibb, Celgene, Merck and Amazon also participated. The company still has an enormous amount to prove, with trials in up to 120,000 patients and vast amounts of data that must somehow be analysed (Early liquid biopsy data hint at Grail’s travails, June 5, 2017).

The distorting effect of these unusually huge deals is displayed by a look at the average sizes of medtech VC rounds on a quarterly basis over the last few years. Since 2008 this figure has tracked at about $11m. During the first quarter of 2017 it was more than $30m, and in the second quarter $25m.

The figure for the second quarter is explained not so much by the vast total raised – that sum was in keeping with recent periods, albeit on the high side, at $1.2bn – as by the sheer paucity of deals.

Proportion of VC cash going to top 10 deals
Date Total investment in top 10 deals ($m) Total investment in all deals ($bn) % going to top 10
H1 2017 2,406 3.8 64%
2016 900 4.0 22%
2015 1,115 4.5 25%
2014 866 4.5 19%
2013 652 4.2 16%
2012 586 3.7 16%
2011 786 4.5 17%
2010 1,231 4.5 28%
2009 590 3.5 17%
2008 699 3.2 22%

VCs clustering together into fewer, bigger rounds as a means of limiting risk is hardly a new phenomenon. But medtech start-ups are getting a smaller slice of the pie than ever before. In previous years the top 10 rounds have accounted for around one fifth of the total VC cash raised. In the first half of this year the figure was 64% – for the first time, the top 10 rounds have taken more money than all the others.

It seems unlikely that the second half will see deals on the scale of those done by Grail and Verily. Even so 2017 to date has been a record-breaker in a number of ways – and none of them bode well for the average medtech start-up.

Top 10 rounds of H1 2017
Date Round Company Investment ($m) Focus
March 1 Series B Grail 900.0 In vitro diagnostics
January 26 Seed Capital Verily Life Sciences 800.0 Diabetic care; ophthalmics; patient monitoring
May 11 Series E Guardant Health 360.0 In vitro diagnostics
May 2 Undisclosed Outset Medical 76.5 Nephrology
January 09 Undisclosed Neuropace 50.0 Neurology
March 16 Series C Moximed 50.0 Orthopaedics
May 11 Undisclosed Impulse Dynamics 45.0 Cardiology
May 2 Series E Advanced Cardiac Therapeutics 45.0 Cardiology
March 8 Series F Vertiflex 40.0 Endoscopy; orthopaedics
April 28 Series D Epic Sciences 40.0 In vitro diagnostics

To contact the writer of this story email Elizabeth Cairns in London at [email protected] or follow @LizVantage on Twitter

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