Before jumping into the details of this thesis, it is important to establish a connection between this recession and periods of similar economic distress. Last year venture capital invested $28.3 billion in start-up companies in need of financing. This amount was the highest it had been since 2000, when VC’s invested a whopping 104.76 $billion . The dot.com bubble burst, coupled with the September 11th attacks of 2001, sent the country into a recession which saw a 80% decrease in 2001 and a 2002 4th quarter investment dollars of only $4.52 billion. In 1st quarter 2003, venture capital fell to its lowest point since 1998, before beginning the long journey to steadily increase its investment dollars.
If this country’s last recession is any indication of what to expect in the current situation, the outlook for 2009 cannot be good. Venture capital investments reached its lowest point in 2003, approximately two years after the recession began. Two years from the start of the current recession means venture capital will not see a comeback until mid-late 2010. According to the third annual National Venture Capital Association (NVCA) Predictions Survey, “most VCs predict a recovery in 2010 when the IPO market is expected to re-open and those companies and venture firms that weathered the storm will emerge strongly”. Furthermore, an 80% decrease in venture capital dollars means that only $5.6 Billion (28.3*20%) will be invested by venture firms in 2009. In the same survey mentioned above, over 60% said they believed venture capital investments to be below $27 billion (2009 NVCA Venture Capital Predictions Survey Report). It is important to note that just because things happened a certain way in 2001, it means they will happen the same way now. For example, Rory O’Driscoll of Scale Venture Partners believes 2001 and the recession today differs because in 2001 it was the companies that were broken, whereas today it is the world that is broken. Companies still have efficient business models and once the world “bounces back” they will prove to be a lucrative investment for those who got in at the right time. Even though O’Driscoll makes solid points, just as analyzing a different company’s financials can help evaluate one’s own company, so can looking at past events, such as a recession, help prepare and predict for current situations.
Similarly, looking at the industries that received venture capital during the 2001 recession could help predict which industries will receive venture capital during the current economic recession. One sector that did not receive as much capital during the 2001 recession was the software industry, though it had well outperformed other industries in prior years. It is true that this could be related to the dot.com bubble burst, but investments in software companies tend to be the most risky and many firms are not willing to take that risk in times of economic hardship. For example, Spatial Technology ended up selling for a measly $3 per share at the end of 2000, in part because they could not secure additional capital due to uneasy attitudes towards the software industry. Many companies may meet the same fate in 2009 and 2010 even though last year saw 881 venture deals in the software industry for a total of almost $5 billion invested (2009 MoneyTree Report). In the same survey mentioned before, 59% of those surveyed said they thought the software industry would receive less venture capital in 2009 than in prior years (2009 NVCA Venture Capital Predictions Survey Report).
Though most industries experienced the same misfortune as the software industry, there were two in particular that did not suffer such substantial losses. First, the medical device and equipment industry had approximately $2.5 million invested in it in 2000 and $2.1 million invested in it in 2001 (2009 MoneyTree Report). This may seem like a steep drop but it is a small pothole compared to the losses other industries took. Second, the energy industry, which encompasses clean technology, also did not incur debilitating losses. It dropped from $2.1 million to $1.7 million and would eventually start moving up the venture chain quickly in 2006 and 2007 (2009 MoneyTree Report). This past historical data may help in predicting clean technology and the medical device industry as the two to strive in 2009. VC’s tend to agree with this prediction. In the VC Predictions Survey Report, 62% said they believed the Medical device industry would either remain unchanged or increase and 80% said they thought the clean technology industry would remain either unchanged or increase (2009 NVCA Venture Capital Predictions Survey Report).
But analyzing the past is only part of the equation. It is also imperative to look towards the future and determine how current events will affect potential investing. As the new administration takes over the White House, there are many new issues President Obama wishes to accomplish. Two of these issues are the health services sector and green initiatives, or clean technology. Healthcare has always been an issue plaguing new administrations. Though many in the industry are nervous about Obama’s plan to put more healthcare control in the government’s hand rather than the private sectors, there is still good reason to think the health sector, more specifically the medical device industry, will be one of the few industries to increase its venture capital investment. Stephen Krupa of the Psilos Group believes universal healthcare will actually bolster venture capital in the industry by creating a need for products and services that provide the same level of quality at a reduced cost. He continues by stating, “There are high quality companies seeking to meet this challenge, which is essential to address as healthcare commands a greater and greater share of our GDP. The opportunity for us is to ensure we continue to identify the highest quality companies that have effective business models and management teams to deliver the kinds of returns we want for our investors while contributing positively to the healthcare economy as a whole.” (NVCA 2009 Prediction Quotes)
An article from the San Francisco business journal adds that “Next-gen” health-care services, new health-care information technology, and personalized devices will be among the areas to receive venture capital in 2009. Last year, the health sector received less than 1% ($195 million) of all venture capital invested. With Obama's economic stimulus proposal of $20 billion for the health sector industry, it is likely that many more companies will get the funding they need in 2009 (Rauber). As Michael Goldberg, general partner at Mohr Davidow Ventures claims “Personalized medicine, based on advances in genetics, will be a central tenet of President–elect Obama’s health-care reform proposals. By translating scientific innovation to clinical practice improved patient outcomes and reduced system costs can become a reality. This is good news for all involved.” (NVCA 2009 Prediction Quotes).
Clean Technology is another sector that will be the recipient of large government funding. Statements taken right from Obama’s campaign website, such as “create five million new jobs by strategically investing $150 billion over the next ten years to catalyze private efforts to build a clean energy future” and “Deploy the Cheapest, Cleanest, Fastest Energy Source – Energy Efficiency” (Barack Obama Official Site) show that the energy sector, more specifically clean technology, is in line for a venture blast off in 2009 and proceeding years. In fact, while President Obama was on the campaign trail, he championed the creation of a Clean Technologies Deployment Venture Capital Fund backed by an outstanding $10 billion annual investment over five years (Fehrenbacher). Most likely, this fund would be a hybrid between venture investing and a government grant. It is still unclear whether the fund would be headed by a government official or a typical VC firm or if they would be looking for standard venture returns.
Not all are convinced Clean Technology will be leading the venture world in 2009. Alan Salzman, CEO of Vantage Point Venture Partners argues that “Despite an overall optimism for Clean Tech among the incoming administration, because traditional energy companies have larger, secured capital stores, they will further use their influence to expand drilling measures. Likewise, because young Clean Tech companies lack the same financial resources, they will see their energy policy hijacked, leading to overall frustration among their numbers as well as with the Obama cabinet and policy leaders." (NVCA 2009 Prediction Quotes). Salzman, though he brings up valid points, fails to consider the dedication the new administration has to the development of clean technologies. In addition, it is likely to assume the administration may put limits on efforts to expand drilling measures, greatly hindering the traditional energy companies. Lastly, the world is constantly changing and evolving. It is only a matter of time before traditional energy goes through a metamorphosis. And with over $50 billion in clean technology funding, Obama seems to be pushing for change.
The new President recently put into law the American Recovery and Reinvestment Act, intending to promote speedy expansion of renewable energy sources and to enhance energy efficiency in buildings, appliances, and other sectors of the recessionary economy. New government loans will help companies actually commercialize their ideas by being able to afford a manufacturing facility to produce their products. Once the product is produced, these companies will be much more likely to receive venture capital as they have already proven to be fairly successful. President Obama hopes “this investment will ignite our imagination once more in science, medicine, energy and make our economy stronger, our nation more secure, and our planet safer for our children," (LaMonica).
After analyzing both past historical trends and future investment possibilities, it is important to look at the present to see what has currently received funding throughout the first quarter of 2009. One such company within the medical device industry is Primaeva Medical. By the end of February 2009, the company had secured $6 million in third round venture capital. Over three firms were involved in the deal, including Affinity Capital, showing that many VCs are still willing to invest, especially if they see a unique opportunity. (Venturedeal.com).
Another medical company to receive third round venture financing is Avantis Medical. In mid-January they received $10 million from a total of 4 separate investors, all of which had already invested money into the company. This may touch on the notion that investors will be much more willing to lend money to companies they already have a stake in, in order to help keep them afloat in tumultuous times (Venturedeal.com).
Though this may be true overall, a few small companies have received first round venture capital. OrthAlign, another medical device company, recently secured $7.2 million through angel investors, one VC firm, and founders’ capital. The company stated that this first round of financing would finish the manufacturing process and bring the product to market. Typically, investors, specifically VC firms, like to see the product already active in the market before giving venture capital. Luckily for OrthAlign, they were an exception to this rule (Venturedeal.com).
One clean tech company that has received a large amount of venture funds in 2009 is Borrego. The solar energies company secured $14 million of venture capital in their most recent round of financing which closed at the end of January 2009. Rated as the eleventh fastest growing solar companies, Borrego had over $60 million in revenues last year and just recruited two industry leaders to sit on their board of directors, suggesting the company has no plans of slowing down in 2009. In fact, this is the highest amount of venture capital received by any company in any industry so far in 2009 – further proof that 2009 will see a substantial increase in Clean Technology venture capital.
Through the analysis of past historical trends, future governmental actions, and current investment activities, evidence exists for the medical device and Clean Technology industries to be among the leaders in venture capital funding in 2009. Though the facts lend themselves to this statement and though many industry leaders agree with it, it should still be taken as nothing more than an educated guess. If one thing can be learned throughout the past few months, it is that even the most thorough analyses cannot always accurately predict the future. Clean Tech and the Health Sector may very well be the most lucrative investments in 2009. But as Michael Greeley so optimistically states, “Ultimately, backing passionate talented people will generate superior returns. In five years from now, some of the best returns will be from companies that were founded and funded in 2009 which puts a premium on creativity and resourcefulness in the near term.”
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