TRENDS & PERSPECTIVES
According to the National Venture Capital Association’s (NVCA) third annual Predictions Survey of 400 venture capitalists conducted at the end of last year, the investment slowdown will continue in 2009. While it is not surprising that investors are keeping a tighter hand on their checkbooks, there is hope for IVD companies and some specific steps they can take to remain attractive to investors.
Most respondents to the NVCA survey said there would be a decrease in investments in semiconductor, media, entertainment, and wireless communications companies. However, many said that clean technology investing would increase and that biotechnology companies would see an increase or at least remain flat. One-third of respondents believed that investments in medical device companies would stay flat.
The survey presents decent news, considering that 92% of respondents said they expected a decrease in investing in 2009 compared with 2008, with 60% expecting a decline in seed investment overall, and 64% expecting a decline in all early stage investing.
Mark Heesen, NVCA’s president, confirmed that while the investment community is seeing a pullback in general in venture investing, there is a stronger interest in maintaining venture capital in biotech and medical device companies.
Still, according to a report by NVCA, PriceWaterhouseCoopers, and Thomson Reuters, there was a 33% drop in venture capital investments in the fourth quarter of 2008, bringing the total that quarter to $5.4 billion. That amount is $2.7 billion less than investments made during the same time the previous year, and is likely due to fears that the recession will not be resolved quickly.
Heesen added that since 15 years have passed, many more people understand the need for healthcare reform, and entrepreneurs and investors are willing to be at the table. “Regardless of the outcome, there will be opportunities, and the task will be in finding the opportunities,” he added, emphasizing that the new administration’s decision to invite the key players to the table and remain transparent will mean a very different investment response.
Gary Kurtzman, MD, who teaches entrepreneurship in life sciences in the Health Care Systems Department at the Wharton School of Business, University of Pennsylvania, says there are good reasons for investors to be concerned about flowing capital. “Some have to do with an individual fund, and some have to do with the macroenvironment, but there is a lot of hesitancy to play with capital,” he said. “Whether that’s going to change in a month, six months, or never remains to be seen.”
Heesen says that venture-backed companies have always understood that they were on a short leash as far as where they were going to put their money, but that leash is even shorter now. “Those entrepreneurs that have been lucky enough to get venture capital in the last six months know they have to focus their efforts on that one thing that will take the company to the next level,” he said.
For companies seeking money in the life sciences arena, Heesen says investors are interested in those companies with products that are further along the pipeline. Some key questions are: Is FDA approval sooner or later? Does it depend on Medicare or Medicaid reimbursement? Are there potential acquirers of the company lined up?”
Kurtzman also emphasized the importance of IVD companies making their balance sheets more attractive. “Companies should reduce spending,” he said. “They should do what is most important for their businesses. If there is an opportunity to become profitable or generate capital, this is the time to do it. Companies should make sure that the cash on hand will last as long as possible.” That doesn’t mean cutting the business down just so it will survive, but it means focusing on those projects that are most important to the long-term interests of the company, he said.
Any kind of exit strategy early on is very important to venture capitalists, and Heesen stressed the importance of IVD companies always keeping the relationship and communication open, even when the news is bad. “It is better than surprising the venture capitalist,” he said. “Venture capitalists hate surprises.”
On the upside, there is much hope on the part of the investment community for 2010. Most say things should pick up by then, and that IVD companies that tough it out through this year will be poised to do very well. “While we see the short term as having some very severe issues as our predictions show, many see 2010 as being a very good year,” Heesen said optimistically, adding, “The companies that are funded in 2009 will be the stars of 2015.”
