System requirements: Windows Media Player version 9 or above.Thomas Melzer spoke about the impact that the recent financial downturn has had on venture capital investment, specifically addressing bioscience investments

Melzer, Thomas C.

University of Missouri: MOspace

“Financial Do nt rn and Impact on w u     Biosciences Development” UM System Life Sciences SummitMarch 8, 2010Thomas C. Melzer, Co-founder and Managing DirectorRiverVest Venture PartnersIntroduction Will address three questions•How has financial downturn affected the VC industry?•How have VCs responded?•What are the implications for biosciences development?       First:•Brief description of VC investing model•Background on RiverVest2Venture Capital Investing Raise commitments from institutional and high-net-worth individual investors• Endowments• Foundations• Pension Funds Invest these funds in privately-held, technology-based companies participating in high-growth industries  • IT/software• Life sciences• Cleantech Support entrepreneurs leading these companies in building businesses that  can be sold to strategic investors or taken public through an IPO within specified timeframe3Heaviest venture funded industries in the U S today are software -     . .   , energy, biotech and medical devices 20084Source: PricewarehouseCoopers/National Venture Capital Association MoneyTree TM ReportLife sciences share of total has grown by 50%        in last decade from 20 to 30%20081998Bio16%Med Dev12%Bio8%Med Dev6%HC Svcs5%HC Svcs1%Everything ElseEverything 71%Else81%5Source: PricewarehouseCoopers/National Venture Capital Association MoneyTree TM ReportRiverVest Venture Partners• Focus on life science investing (medical device, biopharma)• Team with extensive research, clinical, operational, and investment expertise  committed to helping entrepreneurs build successful companies• Two funds totaling $165 million in capital; investments in more than 20 portfolio companies• Flexible with respect to stage; currently focused on later-stage opportunities, but have founded six companies in the past• Located in St. Louis, MO6Product/Stage at Investment Current StageFund I Unrealized InvestmentsSeed/Early Stagep  PreclinicalDevelo mentClinicalDevelopmentRevenueGrowth7Fund II Unrealized InvestmentsSeed/Early StageProduct/  PreclinicalDevelopmentClinicalDevelopmentRevenueGrowthStage at Investment Current StageKaperio8I. How has financial downturn affected VC industry?         Slowdown in exit activity•IPOs of VC-backed companies almost non-existent9IPO levels in numbers and dollars were down dramatically        in 2008 and 200910.012.080901006.08.0fer $B506070er of IPOs2.04.0Off10203040Numbe0.0 0Offer ($ B) 4.5 5.1 10.3 0.5 1.6Count 57 57 86 6 122005 2006 2007 2008 200910Source: Thomson Reuters/National Venture Capital Association I H h fi i l d t ff t d VC i d t ?.  ow as nanc a  own urn a ec e   n us ry Slowdown in exit activity• IPOs of VC-backed companies almost non-existent• Strategic acquisition activity also down, as are total proceeds11Number of acquisitions of venture-backed companies down 30% in 2009 vs 20073004001002000# VB Acq 350 369 372 342 2622005 2006 2007 2008 200912Source: Thomson Reuters/National Venture Capital Association Aggregate acquisition proceeds down almost 60% 2009 vs 2007$20$30$10$0Acq $B 17 19 28 14 122005 2006 2007 2008 2009S Th R t /N ti l V t C it l A i ti13ource: omson eu ers a ona  en ure ap a  ssoc a on Based on limited sample acquisition proceeds in 2009 were less   ,       than dollars invested in 40% of transactions100%Exits50%Known  M&A 0%% of K>10x TVI 1 2 2 71Q09 2Q09 3Q09 4Q094x-10x TVI 2 3 7 101x-4x TVI 3 2 2 9< TVI 8 5 11 814Source: Thomson Reuters/National Venture Capital Association I H h fi i l d t ff t d VC i d t ?.  ow as nanc a  own urn a ec e   n us ry Slowdown in exit activity• IPOs of VC-backed companies almost non-existent• Strategic acquisition activity also down, as is pricing of deals VC f d i i d d ti ll i 2009 un ra s ng own rama ca y n • Numerator effect associated with fewer exits/distributions15I How has financial downturn affected VC industry?.         Slowdown in exit activity• IPOs of VC-backed companies almost non-existent• Strategic acquisition activity also down, as is pricing of deals VC f d i i d d ti ll i 2009 un ra s ng own rama ca y n • Numerator effect associated with fewer exits/distributions  • Denominator effect associated with decline in value of publicly-traded iti f d t hi hsecur es rom pre- own urn g s16VC fundraising down somewhat in 2008 but almost     ,   40% in 200935 040.025.030.0.10.015.020.0-5.0$B Gross  29.0  31.9  36.1  28.6  15.2 2005 2006 2007 2008 200917Source: Thomson Reuters/NVCAI How has financial downturn affected VC industry?.         Slowdown in exit activity• IPOs of VC-backed companies almost non-existent• Strategic acquisition activity also down, as is pricing of deals VC f d i i d d ti ll i 2009 un ra s ng own rama ca y n • Numerator effect associated with fewer exits/distributions  • Denominator effect associated with decline in value of publicly-traded iti f d t hi hsecur es rom pre- own urn g s• Premium on liquidity in an over-leveraged economy18Private investments of five major university endowments      6/30/2008100%72%ndowment39% 33%% of Total EnTotal Endowment ValuePrivate Investments Unfunded CommitmentsTotal Private & Unfunded19II. How have VCs responded?      Cut back on investment activity• Culled portfolios • Marshaled reserves to support existing portfolio companies20II. How have VCs responded?      Cut back on investment activity• Culled portfolios • Marshaled reserves to support existing portfolio companies• Slowed down pace/reduced size of investments in new portfolio companies21Despite recession Q4 VCs funded 1 202 new companies in 2008  ,   ,     , but number funded down 40% in 2009 1,4008001,0001,200200400600Source: PricewarehouseCoopers/National Venture Capital Association MoneyTree TM Report-First Fundings 1,028 1,219 1,316 1,202 7252005 2006 2007 2008 200922VC dollar investment was down only 8% in 2008        ,  but down another 35% in 2009$35,000$$25,000$30,000vested$10,000$15,00020,000$ Million Inv$0$5,0002005200620072008200923Source: PricewarehouseCoopers/National Venture Capital Association MoneyTree TM ReportII H h VC d d?.  ow ave s respon e Cut back on investment activity• Culled portfolios • Marshaled reserves to support existing portfolio companies• Slowed down pace/reduced size of investments in new portfolio companies Focus on later-stage opportunities• Need to provide support to companies that haven’t exited  • Attractive valuations• Prospect of earlier future exits 24Share of later stage deals has tripled in last yearMetric 1995 1998 Most recent 4 qtrs*-    # Venture Deals/Year 2,802 2,814# Later Stage Deals/Year 311 848Source: PricewarehouseCoopers/National Venture Capital Association MoneyTree TM ReportLater as % of Deals 11.1% 30.1%* Through 3Q 200925II. How have VCs responded?      Cut back on investment activity• Culled portfolios• Marshaled reserves to support existing portfolio companies• Slowed down pace/reduced size of investments in new portfolio companies Focus on later-stage opportunities   • Need to provide support to companies that haven’t exited  • Attractive valuationsP t f li i t• rospec  o  ear er ex s   Closed up shop• Number of VC firms falling26• Capital under management decliningThe number of US VC firms and managed capital have declined by 22%and 35%, respectively, from 2006 to 2009At Year End# VentureFirmsCapital Under Management1970 28 $1B   1980 91     $4B1990 390   $29B2000 882 $225B2006 1022 $277B2009 794 $179B27Source: 2008 NVCA Yearbook, prepared by Thomson Reuters, figure 1.04III.  What are implications for bioscience development? Growing funding gap between founding and becoming venture-ready Heightened capital risk for private, venture-backed companies, particularly  those at an early-stage Need to access alternative funding sources         28What alternative sources are there? R01 grants R l i l NIH Cli i l d T l i l S i A d (“CTSA ”)e at ve y new  n ca  an  rans at ona  c ence war s s University funds, like WUSTL’s Bear Cub Fund Other community-based funding like that from BioGenerator in St Louis  ,     . 29What alternative sources are there? (cont.) Corporate research collaborations SBIR/STTR grants after startup company founded Angel funding• St. Louis Arch Angels   • Mid-America Angels (Kansas City)• Centennial Angels (Columbia)30IV. Conclusions   Recent financial downturn created short-term dislocations in the capital markets and exposed longer-term issues, like inadequate attention to liquidity Focus on liquidity has had a particularly adverse impact on private investments Accordingly, access to venture capital for early-stage technologies is evenmore difficult than it had been      This has encouraged doing more development under the university umbrella, a trend that was already underway31IV. Conclusions (cont.)     It is also encouraging established businesses to consider expenditures on earlier-stage technologies, often in collaboration with universities, to assure a f future pipeline o  opportunities Could imply more licensing deals with established businesses and fewer startups, at least for a time Innovative technologies will remain a key factor in assuring the future competitiveness and growth of the U.S.; those with merit will ultimately be    funded, but the process won’t be easy32Q estions?u33

Financial Downturn and Impact on Biosciences Development

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