A healthcare bubble?Sarah Lacy
There's a flurry of news and speculation about fourth quarter venture capital numbers released by VentureOne today. Expect that to continue Monday when VentureEconomics and the National Venture Capital Association release their numbers. There seems to be some debate already about how rosy Silicon Valley specific numbers are. (More on that in Monday's Deal Flow)
But what's clear is that healthcare funding was up again. For the year, $600 million more was invested in life sciences companies, according to VentureOne. If you're like me and you've spent much of the past few years asking, "Are we in a healthcare bubble?" this quarter is all the more befuddling. I have been talking to a lot of healthcare-focused VCs lately and they've sounded pretty bearish.
Yes, healthcare had a healthy number of IPOs last year, but that's not as exciting as you might think. For one thing, few traded up. And in the weird, laborious, capital-intensive world of biotech, an IPO is merely another funding event, not a way for investors to get returns. Put it this way: If you invested $100 million in a company and their market cap is $200 million, are you going to sell? No, because that company is hopefully on the verge of some sort of FDA approval that will vaunt it above $500 million in market cap overnight. And there’s debate over whether this year's IPO crop will even be that successful.
Several VCs I've talked to lately are getting gun shy about funding young biotechs, even as investment in early stage IT companies is set to take off. Chris Ehrlich, of InterWest Partners, was on a panel recently and one of the topics was, "Why invest in early stage?" He had a hard time coming up with reasons. The problem is VCs have tried out several business models from those focusing on drug discovery to those focusing on commercializing the discovery of others and guess what? They've been burned on all of them.
So what's driving this torrent of money if investors are worried about returns? I have a new theory. It's Friday and we're all probably sick of business speak so indulge me in an analogy: The biotech "bubble" vs. the IT bubble is like The Sopranos vs. Goodfellas. (If you aren’t intimately familiar with both pop-culture touchstones, you are spending too much time looking at deals. Get out of the office and sign up for NetFlix, stat!)
Goodfellas first: Like many gangster movies, there's a clear arc to the story—a rise and fall of Henry Hill. He gets roped in by the glitzy allure of the mafia, flies too close to the sun and it proves his undoing. Likewise, the Tech boom went up, up, up and then crashed.
Tony Soprano, on the other hand, constantly experiences mini-arcs. Different parts of his life are up and down within each season and sometimes each episode. Maybe the bubble in biotech is like that. Back in 2000, when the supposed bubble began, it was driven by an excitement around genomics, which some would argue is only now paying off. Since then types of startups have gone in and out of vogue. But there's always something counter-inflating the industry, even if air is seeping out somewhere else.
What is that catalyst? Part of it is that decoding the genome really did change things, just not immediately. Part of it is the bone-dry pipelines of big pharma. And part of it is what draws many investors to healthcare in the first place—the market demand is recession proof. Can it last forever? Nothing does in life, venture capital or gangster movies. But for now, 2005 looks like another good year.