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Thursday, Jun 8, 2023

Biotech Bears Brunt of VC Deal Slowdown

Fundraising efforts around Southern California in the first quarter were fruitful for semiconductor and software companies but biotech companies saw a significant loss of interest from investors. Across the country, venture capital firms invested $4.6 billion in the first quarter, down 14.9 percent from $5.4 billion in the fourth quarter of 2004. Investments in Southern California fell 26 percent despite gains for semiconductors and software. Los Angeles saw a big jump in investment for semiconductor companies, but its software companies did not add to the region’s success, investment in them dropped by 77 percent in the first quarter. There were a total of 20 deals in the Los Angeles area, three of them in the Valley. GoTV and Internet media company Vendare Media, both in Sherman Oaks, received venture funding, so did Pentadyne Power, an electric company in Chatsworth. Despite an overall slowdown in the first quarter, data collected by PricewaterhouseCoopers in the Money Tree Survey, prepared by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association shows that funding is almost exactly where it should be. “Over the last couple of years, on a quarterly basis the funding has ranged from $4.4 to $6 billion. This is considered by the experts to be a good, healthy range,” said Randy Churchill, director of business development for the Southern California technology and entertainment practice at PricewaterhouseCoopers. “I think everybody is fairly comfortable that we’ve returned to some sense of normalcy after the Internet bubble.” The software industry is a traditionally reliable sector in terms of a rapid return on investment but biotech companies may be turning off some investors since they typically require a longer incubation period. Investments in the semiconductor sector more than doubled in Los Angeles in the first quarter, but that was mostly the result of a few companies receiving several late-stage rounds of funding, not evidence of new interest. Across Southern California, biotech saw its first drop in venture capital investment in several quarters, falling 69 percent from the previous quarter. “This really has to do with several biotech IPOs in 2004,” said Churchill. “A lot of them didn’t perform well. There were a lot of product withdrawals and a lack of liquidity events in the biotech sector. It’s taking a lot longer to get money out of them.” John Dilts, president of the Los Angeles and Westlake Village chapters of the Keiretsu Forum, the largest network of angel investors in North America, said that concern about biotech companies is a constant topic of discussion throughout the group. “One trend that seems to keep coming up is the drop-off in biotech,” said Dilts. “We actually funded a biotech company in the first quarter having said that, we also passed on a biotech deal. It was one that had come to us before, and the reason we passed on it was because of the long period it takes to get FDA approval.” Despite the slowed interest in biotech companies, however, venture capital firms are paying more attention to the medical devices and equipment sector. Across the country, the sector was one of the few to see its investments increase by 7.9 percent to a total of $445 million. In Southern California, biotech and medical devices companies combined to attract $92.9 million in the first quarter. The top ranked semiconductor industry attracted $76.7 million. Brent Reinke, a corporate partner in the law firm Musick, Peeler & Garrett LLP, said that the Valley may soon be ground zero for some interesting new biotech companies. As Amgen has grown from a startup to a pharmaceutical giant, Reinke said, more of its scientists and executives are looking to go to smaller companies with more growth opportunity. Reinke said he’s spoken with at least one executive who’s considering an offer from a much smaller biotech company. “It looks like she may jump, even though it will be a significant reduction in salary, because she’s looking for that entrepreneurial environment. She’s looking for that stock option opportunity with a real pop to it,” he said. First rounds of funding from venture capital firms were a bright spot in the first quarter report. For the first time since the height of the Internet investment bubble in 2000, there were more first rounds of funding than fifth rounds and beyond. Nationally, first rounds of funding grew five percent to $1.2 billion, while fifth rounds and beyond dropped 39.5 percent to $1 billion. The resurgence of first rounds of funding could mean two things, Churchill said. The first is that companies are starting to make money faster, giving venture capitalists the opportunity to sell their stakes and avoid further investment into a company. Several venture capital firms have shown in recent months that they are more willing to invest in early stage businesses, Churchill said. A reluctance to deal with younger companies has created a gap in funding for new businesses that some firms are rushing to fill, he said. Still, most small investors and venture capitalists remain a bit gun shy four years after the dotcom bust. A lot of the businesses receiving first round funding aren’t necessarily brand new, Churchill said. “A lot of venture capitalists are looking more like private equity firms in that they’re going out looking for mature companies,” Churchill said. “We’ve seen some companies that have been around 10 or 12 years. In two cases, new clients of ours were software consultants that suddenly had the opportunity to expand.” In the near future, Churchill said, venture capitalists are going to be looking for opportunities in industries that haven’t been so heavily mined. “One of the things that came out of our analyst call a few weeks ago when this data was first released is a fairly new phenomenon, at least in the eyes of some of the venture capitalists on the call, where VCs are looking for what they call ‘white space opportunities.’ Those are investments that haven’t been over-invested,” said Churchill. “When you talk about white space, one are we’ve been spending a lot of time in recently is software for automotive dealerships,” said Dorothy Pavloff, a director with California Technology Ventures. “That’s not typically an area that venture investors have looked at.”

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