By: Maureen Kingsley

Life sciences had a solid third quarter of 2009 in venture capital (VC) investment relative to other industry sectors. A late-October report by PriceWaterhouseCoopers indicates that the biotech industry received the highest level of funding for all industries in the quarter with $905 million going into 104 deals. (The report includes private, emerging companies only.) This level of investment reflects a 4% decrease in dollars but a 16% increase in deals compared to the previous quarter, when $947 million went into 90 deals.

In its list of Q3 2009 top investments in biotech and medical devices, the number-one recipient was Pacific Biosciences Inc. (Menlo Park, CA), developer of the SMRT DNA sequencer. Hugh Martin, the company's CEO, believes that after the “lull in both the macroeconomic environment and healthcare in general,” a turnaround is now underway. He believes that innovation and investment are two of the first places in which this turnaround will occur.

“Increasingly I'm seeing more and more interest on venture investors' part to get back into the market,” Martin says. “They went through a period of time where they were trying to save their ‘dry powder,' as they call it, to help any of their current investments get through this difficult period of time. Now I'm seeing a level of interest and enthusiasm increasing—a belief that the worst is over and that they're now concerned not just with saving existing portfolio companies but with investing in new directions.”

Nick Galakatos, PhD, Managing Director of Clarus Ventures (Cambridge, MA), a lifesciences VC firm, explains the status quo from the investors' perspective. He describes the current funding environment as “very selective.” Every three years or so, he says, a VC firm goes out and raises funds. If that one year happens to be one in which “the macroeconomic picture is difficult,” he says, the firm will have a tough time raising capital. Since last fiscal year was one such year, roughly one-third of VC firms are “spending more time protecting their existing investments than making new ones.” Taking this scenario one step further, he says, there's probably then “about a third less fresh venture capital available, on average.” That results in the very selective environment, because whatever capital is raised is focused on companies that have the greatest chance of succeeding in any sector.

Galakatos says that Clarus is currently most interested in early-stage companies with very promising technology and great management teams, which can be the targets of acquisitions early on; and late- or commercial-stage companies, which can operate as businesses and reach profitability relatively quickly. “They don't need the financial markets for a lot of additional equity capital,” Galakatos explains of the latter.

Another factor that seems to enhance a company's ability to attract investors right now is a technology that has potential uses in a variety of applications and market sectors. Pacific Biosciences' DNA sequencer is one such technology, Martin says. “Sequencing in diagnostics means not just sequencing a human but also viruses and bacteria. There are a lot of applications that are not just sequencing humans. That makes it attractive.”

Nanostring Technologies (Seattle), one of the companies Galakatos's firm invested in recently, was appealling to Clarus for the same reason. Nanostring's technology performs expression profiling of hundreds of genes in a single reaction and “has the ability to operate in multiple markets and create value in both instrumentation and molecular diagnostics areas,” Galakatos says.

Companies seeking venture capital may also want to be prepared to share with potential investors how much capital they will need to break even or turn a profit, according to Tom Salemi in a recent issue of Start Up magazine. Reporting on the Medtech Insight IN3 Medical Device Summit in San Francisco this past autumn, Salemi writes that venture capitalists are looking for companies that can “get the job done” for around $40 million to $60 million. He also notes that the amount of venture capital invested across all industries as compared to the national gross domestic product is at a 30-year low.

Still, though, there is reason for those in life sciences, biotech, and medical devices to be optimistic. Mark Heesen, president of the National Venture Capital Association, is quoted in a press release as saying that this third quarter “illustrates a gradual and deliberate industry shift toward a longer term venture capital investment strategy. Venture capitalists are becoming increasingly focused on industry sectors that require multiple rounds of financing for an extended time horizon.” He points to life sciences as one such sector, noting that it requires “significant capital and expertise, often over a ten- to twelve-year period.”