would that no longer be the case? Or will traditional investors turn back to early stage biotech once it’s obvious how the handful of VCs such as Third Rock and Flagship Ventures building companies from scratch are faring?
There are some signs. Venture as a business took major body blows during the recession, topped by savage punches in 2012 from the Kauffman Foundation and CALPERS. Kauffman, surveying a decade of crummy venture returns in its own portfolio, issued a damning report about venture capital. “Our research suggests that investors like us succumb time and again to narrative fallacies,” the report read. “To fix what’s broken in the LP investment model, institutional investors will need to become more selective and more disciplined investors in venture capital funds.”
The same year, CalPERS—the largest public pension fund in the U.S. with $290 billion in assets—chopped its venture allocation from 7 percent to less than 1 percent.
Yet U.S. venture firms of all stripes raised 134 funds in the first half of 2014, a pace that would make this year the best of the past ten years, according to Thomson Reuters and the National Venture Capital Association. Total dollars committed so far this year, $17 billion, are also on pace to hit ten-year highs. Even if that pace falls off, it’s been a good year for venture fundraising.
But these days, venture is driven by high tech. How much of the fundraising is ticketed toward health care and life sciences? Using healthcare venture plus healthcare allocations from diversified funds as a measure, Silicon Valley Bank’s Norris estimates annual fundraising levels settled into the $3 billion to $4 billion range the past three years. Looking at a ten-year window, that’s up from the nadir of 2010 but about half of the peak of 2007. Norris sees the current level remaining stable the next five years. And that means traditional venture dollars going into healthcare and life science, no longer buoyed by the pre-recession fundraising peaks, have to decline, he says.
If that’s true, then the fruit of the next decade of biomedical innovation—from genomic secrets put to practice to the integration of Big Data and consumer health technology—could be left under-harvested, unless corporate support continues to rise and the U.S. National Institutes of Health’s translational medicine ambitions are realized.
No doubt we’ll hear arguments that these fears are overblown, that great science will always find funding, or that the thousands of Pharma layoffs in the past decade have freed up all kinds of talent to lead next-generation biotechs. But you won’t convince me until the field sees the emergence of new venture firms—like Third Rock seven years ago—dedicated to turning thrilling science into much-needed treatments.
