Medical device/life science startups that survive the next 36 months “will be in the catbird seat”

A survey of 31 San Francisco venture capitalists’s outlook for the next six to 18 months has found confidence up slightly in the third quarter of the year, but not for life science and healthcare investing where the landscape will get more challenging before it improves.

The Silicon Valley Venture Capitalist Confidence Index measured 3.53 for the quarter in a scale of 1 to 5 with 5 being very confident and 1 not so much. It was an improvement over the second quarter, albeit a modest one, which registered 3.47.

The report is authored by Mark V. Cannice, a professor and chair of the department of Entrepreneurship and Innovation with the University of San Francisco School of Management.

It noted that capital commitments to US venture funds fell in the 3rd quarter of 2012 compared with the previous three months. The number of new funds increased, reducing the concentration of the new capital that was raised.


The source of the increased optimism firmly rested with opportunities in cloud computing, mobile Internet and big data. The 6-18 month outlook for raising life science funds is pessimistic. Joe Mandato, managing director of De Novo Ventures, observed that life science funds have continued difficulty raising new funds, as venture firms conserve their capital for follow-on investments, according to the report.

But the long-term outlook for life science and medical device companies and their venture capital investors — 18-36 months — looks better, according to Mike Carusi, general partner with Advanced Technology Ventures:

“I believe things will get worse before they get better. However, those firms and companies that survive this very challenging period will be in the cat bird’s seat in four to five years when strategic acquirers are looking for innovation and have limited companies to choose from. It is in essence, ECO 101, the supply of innovation is going down while demand (from the strategics) is going up. I believe this will cause acquisition prices to go up (down the road). Again, things will be tough for the current crop of companies/VCs, but I believe the 2012-2013 vintage for early stage healthcare deals will be a very compelling one.”

Lisa Suennen, a managing member with Psilos, expressed concern that a focus on technology and Internet companies was coming at the expense of venture capital healthcare funds:

“Because investment in the VC sector has dropped dramatically and is being limited largely to firms that make exclusively tech/Internet investments, many of which neither improve national economic productivity nor have profitable business models, areas like healthcare are being rejected by LPs, who are reluctant to invest in longer liquidity vehicles like venture capital despite the incredible opportunities afforded by the changing economic structure of the healthcare industry…New firms can’t enter the field, many established successful firms are dying, and critical areas of innovation are lagging or moving offshore.”

The report acknowledged that the political uncertainty is likely to continue in the short term. It predicted that innovations that are supported will “tend to stretch across more sectors and lead to necessary and unexpected new products.”

Hmm. That sounds a lot like some of the interesting crossovers in the healthcare and life science industry I’ve seen lately (here, here and here).

[Photo Credit: chanpipat]

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