Friday, April 22, 2011

Why it Matters How VCs Spend Their Money

In the biotechnology sector, when non-profit and government organizations can't or don't provide funding, venture capital firms (VCs) often do. The for-profit VCs, of course, want a good return on their investment -- first through promising clinical trials that lead to FDA approval for a product, then through wide and profitable adoption of the product by patients and their health care providers.

But because this process can take a decade or even longer, many VCs are putting their investment dollars into other projects with a quicker payout, particularly social networking, according to a recent Fierce Biotech post by John Carroll that cites a Reuters survey on the topic ("VCs: Chill sets in on biotech as social networking gets hot"). "Why invest in biotech companies which face years of risky clinical trial work," writes Carroll, "when you can grab a stake in a social networking company and potentially cash out in a year or two?"

This investment fickleness is one reason why we need government agencies like the NIH to fund promising research. But we also need VCs, because they have the deep pockets and the business expertise to bring needed health products to market, as long as their investors are willing to make long-term investments.Venture capital-funded companies are developing new vaccines, pain medications, gene therapies, and cancer treatments, to name just a few products.

Venture capital firms invested $5.9 billion in the first quarter of this year, and $784 million of that went to biotechnology, according to the MoneyTree (tm) Report created by PricewaterhouseCoopers, the National Venture Capital Association (NVCA), and Thomson Reuters. The software industry ($1.1 billion) and "Internet-specific companies" such as social networking sites ($1.2 billion) received the biggest pieces of the VC pie in the past quarter, according to an April 15 press release from the NVCA.

Venture capital firms invested more money in biotechnology over the past quarter than in the last quarter of 2010. But the NVCA press release stated that the money is divvied up among far fewer biotechnology companies now than in the past. This means that VCs are funding a smaller range of potential therapies.

It's hard to predict which therapies will succeed, but we need better treatments for widespread problems such as cancer and chronic pain. Ultimately we all benefit when VCs patiently fund the greatest possible number of promising therapies, instead of diverting funds to look for the next FaceBook.

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