VC Funding Drying Up?

An oft-quoted ancient Chinese curse threatens: “May you live in interesting times.” The implication is that peaceful “uninteresting” times are more life enhancing. Some historians claim the saying is modern in origin and may not even be Chinese. Authentic or not, the warning is an interesting one. Given the current state of the economy, some orthopedic startups and venture-backed firms may feel “interesting times” approaching.
   
In 2007, venture capitalists pumped a record $9.1 billion into privately held US biotechnology and medical device companies, 20% more than in 2006, according to accounting firm PricewaterhouseCoopers and the National Venture Capital Association (NVCA). Yet another more recent study from PricewaterhouseCoopers and the NVCA, however, indicated the same sector saw a 14% drop in VC investing in the second quarter of 2008, with $1.9 billion going into 209 deals (a 9% drop in the number of deals from the first quarter of 2008). This decrease is attributed to declining investment levels in both biotechnology and medical devices. Some device industry insiders who have spoken with Orthopedic Design & Technology have expressed concern that the well for new funding may be drying up. That’s not quite the case, said Mark Heesen, president of the NVCA, based just outside Washington, DC in Arlington, VA.
   
“One quarter does not make a trend,” Heesen told ODT. “The medical device sector has been so strong for so many quarters that it was inevitable that we’d see a bit of a slowdown from the breakneck pace of 2007.”
   
Heesen said the venture capital community continues to be “optimistic” about the device industry, though there may be a bit of caution at work in an election year. Investors may want to wait and see how the market would be affected by a new FDA commissioner and a new administration, though he said the prognosis remains “very good overall” for medical devices, regardless of who becomes president. “The industry no longer is driven by just the US population,” he added. “There’s a global population willing to pay for effective medical technology.”
   
When asked about the direct impact the current state of the economy has on the flow of VC dollars, Heesen said though venture capitalists are long-term investors and are able to ride out some of the economy’s peaks and valleys, there aren’t as many exit strategies open to them currently as a result of a slowing economic performance—meaning there’s a soft market for acquisitions, and IPOs virtually have dried up.
   
“The economy of today is not going to be the economy of five, seven or 10 years from now. So, ultimately, I don’t see dramatic changes. Where you do see a change is that we’re not able to exit our deals right now,” he explained. “It means that a venture capitalist has to spend a lot more time and money than expected on existing deals. The most important commodity to a venture capitalist is time; so you could see, in general, fewer emerging-growth companies being funded over the next year or two because of today’s economy. That will impact medical devices just as it has impacted others areas such as communications, information technology and biotechnology.”
   
So there’s no cause for doom and gloom just yet?
   
“We continue to see very exciting discoveries in the medical device industry—areas where VCs and others continue to think there is significant financial opportunity and, at the end of the day, an opportunity to do something good,” Heesen emphasized.
   
Interesting times, indeed.

Christopher Delporte
Group Editor