Innovator capital rationing

Actual financing data paint different picture of biotech's 'valley of death'

Conventional wisdom says VCs don't fund research-stage companies, but the numbers - and investors who play in the space - tell a different story. Since the financial meltdown, companies with a lead program in discovery or preclinical development have secured about 20% of all venture dollars, or more than $1 billion on average annually.

Investors active in the early stage space believe this is sufficient to fund most of the great and many of the good ideas, particularly those that have managed to dispense with some initial technology risk.

The question is whether a fifth of all of private money is enough for research-stage companies to hit their milestones and become attractive to later-stage investors.

The other question is what to do about parts of the early research continuum that are still being left out, even though these academic groups and entrepreneurs need relatively small dollops of cash to fund applied science.

While pharma is boosting its efforts in this early translational space, the solution is still a work in progress.

Facts of life science

The numbers over the past five years paint a clear and consistent picture of the financing landscape for research-stage companies, which BioCentury defines as companies whose lead programs were in discovery or preclinical development.

In the discovery segment, BioCentury counts 86 discovery-stage companies that raised money in 97 financings over 2009-13, representing 22, 23, 19, 13 and 20 financing deals respectively.

The total raised per year by all discovery-stage companies consistently hovered above $200 million.

Over this time, 373 preclinical companies completed 465 financings, or 87, 78, 102, 85 and 113 deals in each of the years during 2009-13, respectively.

The total raised by these companies was $4.7 billion, ranging from $688.3 million in 2010 to $1.1 billion last year (see "Early Money").

All research-stage companies combined accounted for 20% of all venture dollars raised and about 30% of the deals completed annually.

Moreover, these figures undercount both the number of companies that received financing and the dollar amounts, as many companies receiving seed or series A rounds operate in stealth mode.

In any case, the picture contrasts sharply with the doom and gloom chatter that echoes through the hallways at conferences.

The hard fact may be that while many are called, few are chosen.

"If we were to take all the deal flow from people looking to tap early stage investors, it would add up to many, many billions of dollars," noted Stephan Christgau of Novo Seeds.

But, he told BioCentury, "many of those ideas should never get financed."

Several VCs think the best

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