For health care as for other industries such as information technology, venture capital plays a critical role in allowing the formation and growth of new companies. These new companies tend to provide many well-paying jobs and may develop innovations which can improve quality and lower costs. The venture capital cycle consists of fund-raising, making investments and being able to exit investments profitably, which facilitates a renewal of the cycle. All parts of this cycle were severely stunted during the recession and the latest data from the National Venture Capital Association suggest that while there is improvement, many businesses are probably still not finding the capital they need. (NVCA Data) (Links on Home Page)
In terms of the start of the cycle, 37 venture funds raised a total of $2.7 billion in the second quarter, compared to 48 funds raising $2.1 billion in 2010. Both dollars raised and number of funds were relatively low compared to the last few quarters, an ominous sign. One fund accounted for almost half the total; 13 new funds raised money and there were 24 follow-on funds. At the other end of the cycle, exits showed some improvement. IPOs and acquisitions are the two most common exit vehicles for venture-backed firms. In the second quarter there were 22 IPOs with a $5.5 billion value and 79 venture-backed acquisitions, for the 36 with a reported value, the total was $5.4 billion. The number of IPOs, total value and average value were all up compared to 2Q of 2010, but internet companies skew the numbers. The only health care IPOs were 3 biotech companies. The number of M & A deals was down compared to 2Q 2010, but the total announced value and average size were up. There were 7 biotech deals and 10 general medical transactions, which accounted for almost half the announced deal value.
Venture investing led to $7.5 billion being invested in 966 deals in the second quarter. Both numbers are up about 20% from the first quarter, and about 10% from last year. The health care sector saw $2.1 billion in 206 deals, up 37% in dollars and 12% in deal volume from the first quarter. About half the financings went to seed and early stage investing, which is important. Expansion deals accounted for 27% of the total and the remainder were later stage transactions. First time venture financing increased 30% in dollar value and 22% in number of transactions. Health care trails several other industries in obtaining funding from VCs.