Feb 28, 2010
How Massachusetts Life Sciences Venture Capital Funding Has Fared in the Downturn.
The massive Massachusetts life science cluster is made up of over 100 universities and colleges, 70 hospitals, 200 medical device companies and 400 biotechnology and pharmaceutical companies across the state1. In 2006, it directly employed over 75,000 people and was responsible for an estimated $25 billion in revenues2.
The sheer size of this cluster has attracted top scientists and business professionals to the region, creating a type of positive-feedback-driven supply of new talent. These individuals often set out to start their own ventures. These ventures tend to stay in the region, since their founders have generally already built strong social networks and established their lives here. Experienced entrepreneurs attract the attention of the financing community, which invests in their startups. Although many startups don’t make it, others will either go public via an IPO or be acquired by a larger company, which is then able to leverage the products and people gained in the acquisition. Either of these two liquidity events rewards the investors and gives them funds to make more investments that generate even more new enterprises, employ more people, and attract more talented people interested in cutting edge research.
A very small number of new ventures will grow into a corporate behemoth like a Genzyme or Boston Scientific that brings money into the region through worldwide sales, supports massive R&D work, and employs thousands of citizens. Massachusetts universities have a particularly special relationship with the Commonwealth’s life science community. The scientific breakthroughs developed in academic labs have served as the cornerstone for many new companies, and the students who are educated here wind up staffing and leading high-tech companies. In turn, the supercluster has provided Massachusetts schools with capital from technology licensing fees and research agreements, and an insatiable demand for well-trained graduates.
The oil that keeps this market for ideas lubricated is a steady stream of venture capital (VC). Venture Capitalists, as VC investors are known, take big risks on new ideas and provide young companies, or ventures, with the money and expertise needed to get off the ground in exchange for partial ownership in the company. Successful ventures reward their investors with big returns through a liquidity event. Big paydays encourage reinvestment into the system, and the whole process repeats.
The amount of capital that VC firms have available to invest in emerging companies is directly related to the amount of money that they can raise from their own investors, or limited partners (LP). These LPs consist of pension funds, charitable foundations, wealthy individuals, and wealth management funds. When LPs believe that venture investments are competitive with market rates of return and have cash available to invest, VCs are able to raise substantial funds. In the midst of recessions, though, LPs find themselves cash-strapped. Because venture capital firms invest in companies that cannot be sold on a moment’s notice, VC investment is relatively illiquid when compared to assets that can be readily converted into cash, like stocks and bonds. Illiquidity, compounded with the reduction of total money available for investment associated with downturn conditions, causes investment in venture capital to withdraw.
Even though Massachusetts accounts for only two percent of the US population3, data from Thomson Financial Services show that Massachusetts life science companies have received an average of fifteen percent of US life science venture capital funding over the last decade. However, from 2006 to 2009, venture funding received by the average startup has decreased from $13 million to $10 million. This hits companies in the early stages of product development particularly hard because they generate little or no revenues from sales. Interviews with entrepreneurs reveal that this decrease in available capital has caused many companies to reduce the number of products in their development pipeline, focus on a smaller number of applications for the products that are being developed, and forge more partnerships that give them less control over the destiny of their products.
All is not gloom and doom, though. The number of Massachusetts companies that have been invested 2007, 2008, and even 2009 are each well above the ten-year-median. Although each funded company received a reduction in investment size, it does not appear that significantly fewer companies are receiving funding. On the one hand, this means that companies will have to operate with fewer employees, less capital, and potentially pursue fewer research lines. On the other, for those same reasons companies will be pushed to be successful on a leaner budget. Hopefully, learning these lessons will cause a blossoming of efficient innovation that will benefit the commonwealth in the midst of this challenging time and force the Massachusetts life science supercluster to be even more robust in times to come.
Massachusetts Life Science Collaborative. Unpublished data.
PriceWaterhouse Coopers. 2008. Super Cluster: Ideas, Perspectives and Trends Shaping the Global Impact of the Massachusetts Life Sciences Industry.
United States Census Bureau. State Population Finder. Retrieved January 28, 2010 from http://www.census.gov/