Life Science Insights: Venture Capital Funding Slows

By Patricia Van Arnum - DCAT Editorial Director

October 19, 2016

Overall venture-capital (VC) activity declined in the third quarter of 2016, both in the number of deals and in dollars, compared to the second quarter as well as year over year. So how did the biotechnology sector fare?

VC funding is an important measure of the financial strength of emerging and small pharmaceutical companies, and the biotechnology sector fared better than other industries. Overall, VC funding declined 36% in dollars and 25% in deals in the third quarter of 2016 compared to the year-ago period, but biotech VC financing increased 5% in dollars in quarterly gains although the number of deals decreased 16%. DCAT Value Chain Insights examines the numbers, trends, and impact for the pharmaceutical industry.

Overall VC funding trends
Venture capitalists invested $10.6 billion in 891 deals in the third quarter of 2016, according to the MoneyTree Report from PricewaterhouseCoopers LLP (PwC), based on data provided by Thomson Reuters. Total venture dollars deployed to startup companies for the quarter decreased 32% and total deal count was down 11%, compared to the second quarter when $15.6 billion was invested in 999 deals. Compared to the third quarter of 2015, dollars and deals were down 36% and 25%, respectively. This is the eleventh consecutive quarter of more than $10 billion in venture capital invested in a single quarter, and the second time deal count has dropped below 1,000 since the first quarter of 2013.

“The decline in venture capital activity this quarter is part of the normalization process that is expected after a quarter in which record-breaking investments dominated headlines,” said Tom Ciccolella, US Venture Capital Market Leader at PwC, in commenting on the results. “Despite deal count being the lowest since the third quarter of 2010, quality deals continue to receive funding. The broader ecosystem remains healthy, bolstered by a lift in biotechnology within the top deals and overall, strong fundraising, and a continuation of the trend towards investments in non-traditional industries.”

The top 10 deals accounted for 22% of total dollars invested in the third quarter, up from 38% of total venture capital deployed during the second quarter. There were 10 megadeals (investments of $100 million or more) in total, down from 12 in the previous quarter and 27 in the third quarter of 2015.

With respect to overall VC funding, dollars invested in seed-stage companies declined 23% during the third quarter, totaling $388 million in 37 deals and representing just 4% of all venture investment dollars and deals for the quarter. Early-stage investment declined 12% in dollars and 14% in deals with $3.6 billion going into 398 deals. Seed and early-stage deals as a percent of the total remained flat versus the previous quarter, accounting for 49% of total deal volume, compared to 51% t in the prior quarter. The average seed-stage deal in the third quarter was $10.5 million, versus $11.1 million in the second quarter. The average early-stage deal in the third quarter was $8.9, flat versus the $8.8 million average in the prior quarter.

Expansion-stage investment was down 63% in dollars and 13% in deal count for the third quarter, at $3.2 billion and 266, respectively, from the previous quarter. Expansion-stage deals accounted for 30% of all venture dollars in the third quarter and 30% of deals. The average expansion-stage deal was $12 million, down from $28.1 million in the second quarter.

Investments in later-stage companies increased 43% to $3.5 billion going into 190 deals in the third quarter. Later-stage deals accounted for 33% of total dollar volume for the quarter and 21% in deals. The average later-stage deal in the third quarter was $18.3 million, up from $13.0 million in the prior quarter.

First-time financing (companies receiving venture capital for the first time) dollars decreased 9% to $1.5 billion and deals decreased 8% to 259 in the third quarter, compared to the previous quarter. First-time financings accounted for 15% of all dollars and 29 percent of all deals in the third quarter.

Biotechnology VC funding trends
The biotechnology industry received the second largest amount of venture capital for the third quarter, with $1.8 billion invested into 87 deals, increasing 5% in dollars despite a 16% decrease in deals, compared to the previous quarter, according to the PwC and MoneyTree analysis. Three of the top 10 deals overall were in the biotechnology industry. Investments in the life-sciences sector (biotechnology and medical devices combined) during the third quarter accounted for $2.5 billion going into 156 deals, increasing 8% in dollars and decreasing 7% in deals. Investments in life-sciences companies accounted for 23% of all venture capital deployed to the startup ecosystem in the third quarter. Of the companies receiving VC funding for the first time in the third quarter,first-time funding in the life-cciences sector during the third quarter was up 3% in dollars and down 8% in deals, with $370 million going into 33 deals.