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12:00 AM
Jul 25, 2011
 |  BioCentury  |  Finance

Unsustainable blip

VCs see 2Q11 uptick in biotech deals as a blip; funds continue to be culled out

A report showing a 46% quarter over quarter rise in VC funding for biotech companies is just a blip on the screen. Despite the report's headline numbers, VCs think the real story still is the downward trend in both the number of firms focused on life sciences and the dollars they can raise from LPs.

But venture players also say this isn't necessarily bad, as it could improve the overall quality of VCs and focus more funding on fewer, but better, companies.

According to the report unveiled last week by the National Venture Capital Association and PricewaterhouseCoopers, venture dollars flowing into life science companies increased 37% to $2.1 billion in 2Q11 from 1Q11. Biotechs fared even better, as their funding rose 46% to $1.2 billion in 2Q11 from $846 million in 1Q11. VC investment in the medical device and equipment space increased 26% to $841 million for the quarter.

The report attributes the rise to a recent uptick in exits, which has encouraged VCs to put dollars back into biotech and device plays. Nevertheless, NVCA said the increased funding to companies is unsustainable because VCs have been investing at a rate that outstrips their fundraising from LPs.

VCs who spoke to BioCentury concurred that sustainability is the real story. Indeed, the number of U.S. venture funds and total capital they have raised has been trending downward since 2007 (see "Meaningful Uptick?").

"Focusing on the LP fund flow is the key, and there I would say that they have been putting a whole lot less in healthcare," said Foresite Capital's James Tananbaum.

Alex Barkas of Prospect Ventures noted a lot of the LP fund flow is heading towards the social networking space.

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