It’s long been the case that life sciences investors don’t get the attention that their more traditional tech counterparts do. They’re underrepresented on lists of top investors in venture capital. They’re also remarkably underfunded, according to institutional investors (or limited partners) who back venture firms.
It’s the “life sciences guys who are smart as hell,” says one LP who’s grown frustrated with some of the tech-focused firms he has backed because they’ve haven’t produced the cash-on-cash returns he expected, yet who’s exceedingly happy with bets on firms like Third Rock Ventures, a 10-year-old, Boston-based outfit that incubates biotech startups and which took many of those companies public before the IPO window largely slammed shut last fall.
Taking companies public is “exactly what the tech guys should have been doing,” says this person, who represents a sizable endowment.
Whether the LP is being completely fair is an open question. Certainly, in recent years, many more biotech startups have gone public than consumer or enterprise startups, with public investors seemingly drawn in part to unprecedented levels of innovation, including new machine therapies and other treatments for a variety of diseases that couldn’t be addressed earlier in time.
However, even healthcare investors are quick to point out that they took so many companies public in part because they didn’t have much choice.
“An incredible biotech bull market over last four years begot more successes, and it became a self-enforcing prophecy,” says Jamie Topper, a Stanford biophysics PhD who has long been a managing general partner at Frazier Healthcare Partners. But he notes that the “big difference between biotech and consumer is that biotech companies need hundreds of millions of dollars if they’re going to keep their products moving toward commercialization, versus [a] consumer [startup], which may need $20 million. So when there’s an open capital market and you need access to money, that’s most easily done in the public markets.”
And there are other reasons we saw more healthcare IPOs in recent years. Among them: many of today’s buzzed-about private companies are still young compared with those of their life sciences peers to get out the door.
“Firms that remained committed to life sciences saw results because more mature companies were delivering what they said they would deliver,” says Terry McGuire, a cofounder and general partner at Polaris Ventures of the three years ending last year. “There were a lot of companies that made it through a tough period of six, seven, nine years, and when the market opened to them again,” they seized on the welcoming public market, he says.
Indeed, healthcare investors weren’t necessarily following a better playbook than IT investors, says Bryan Roberts, a Harvard PhD and longtime partner at Venrock, who focuses on healthcare IT, biotechnology, diagnostics, and medical devices.
While life sciences VCs pushed their companies to go public faster, Roberts says that, “I don’t know much credit to give. Taking companies public is just half the battle. Then you have to get out of the stock,” which isn’t always easy or quick, as many biotech companies don’t see a lot of trading volume.
The VCs’ candor notwithstanding, it’s easy to understand the LP’s point.
With so much capital sloshing around, many tech VCs seemingly fell into the trap of letting many of their portfolio companies linger too long as private companies, and many of those companies are paying for that decision right now. On average, private tech companies are reportedly 30 to 50 percent less valuable than they were last year at this time. Maybe they would have been exactly as valuable right now as public companies, but at least they’d have a currency, including with which to buy other startups.
According to Renaissance Capital, just 23 tech companies raised a total of $4.2 billion in 2015, down from the 55 firms that raised $32.3 billion in 2014. Meanwhile, Venrock alone has seen 18 healthcare-related portfolio companies go public since early 2013. Polaris has seen a dozen. Frazier has seen eight.
It’s no wonder Venrock’s seventh fund, closed with $450 million in 2014, was $100 million larger than its predecessor fund, which closed in 2010. (If its eighth fund is even larger, don’t be surprised.)
Frazier meanwhile raised a $262 million early-stage fund last fall, and it separately announced a $525 million growth-stage fund this past week.
Even outfits that didn’t pay much attention to biotech startups are focused on them now, including the venture firm Andreessen Horowitz, which established a separate, $200 million bio fund last November, and the popular accelerator Y Combinator, which began focusing more on healthcare, biotech, and pharmaceutical startups in the summer of 2014.
Now, everyone just needs the IPO window to reopen.
It could take some time, says John Fitzgibbon, founder of the research firm IPOScoop. “Healthcare startups are like any merchandise. It if sells, people will continue to sell it.”
For now, he says, investors have decided that too many related companies are “based on faith, hope, and charity.”
In fact, of the six biotech companies to go public this year, only two are trading above their offering price. Still, it’s not a terrible comparison when looking at tech IPOs. The number of offerings so far in 2016? Zero.