Good medicine for VC market

Investment in medical device firms rises, breaking a spell

An unusual surge in medical device investments helped Washington state post its first quarterly increase in venture capital financings in more than a year and half.

Thirty-two companies raised $235.5 million in the second quarter, a 49 percent jump over the first quarter, according to the PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey.

Such investments were down slightly from the same period last year, when 37 companies raised $280 million and well off the peak of the Internet boom times when 76 companies raised $699 million in the second quarter of 2000.

Still, the first jump in investments since the third quarter of 2000 could be an early sign that a bottom has finally been reached in the state’s slumping start-up community.

Medical devices, a sector that was largely ignored during the dot-com years, came on strong as six local companies — including Calypso Medical Technologies, Tessera Diagnostics Inc. and Vertis Neuroscience — closed rounds valued at $81 million. Because of the growth in medical device investing, the state’s overall ranking rose from ninth to fifth.

The only other states that pulled in more money last quarter were California, Massachusetts, Texas and Georgia.

The MoneyTree survey mirrors a report issued last week, which showed that venture capital investments in the state increased by 59 percent. That report, released by Ernst & Young and VentureOne, said that 25 companies raised $241.5 million in the second quarter.

Despite the positive numbers, local venture capitalists — spooked by a lackluster initial public offering market and an ongoing slow down in information technology spending — say a turnaround is not quite here. Some even suggest that the high levels of medical device deals was an irregularity.

“I do think that the medical instrument/biotech deals last quarter were somewhat of an anomaly,” said Kent Johnson, managing director of Alexander Hutton Venture Partners in Seattle. “I don’t expect that to continue. … If you took out medical instruments, it probably would be fairly reflective of where things are.”

Johnson, whose firm was the most active local investor in the state last quarter, said he is seeing good deal flow from entrepreneurs. But he also remains cautious.

“There is still money on the sidelines waiting,” he said. “With the economy and the last few days who knows? But I think once there is some consistency that there is an upturn, the venture capital money will flow behind it.”

Nationally, venture capital investments fell to the lowest level since the third quarter of 1998. Investments were down 11 percent over the prior quarter as 819 companies raised $5.7 billion. That’s the tenth straight quarter of declining investment activity, according to the report.

But mirroring the local trend, investments in early-stage health care companies mushroomed. Led by a 15 percent increase in biotechnology investing and a 43 percent increase in medical device investing, health care firms attracted 27 percent of all venture capital dollars in the second quarter.

That compares to about 7 percent for all of 2000.

Versant Ventures co-founder Sam Collela, whose Menlo Park, Calif., firm participated in the $28 million financing of Seattle-based Calypso Medical, said health care companies are attracting money because of a growing pipeline of products in late-stage clinical trials. In addition, he said many biotechnology companies are just starting to turn a profit — leading some of the larger pharmaceutical companies to acquire promising technologies.

“I could say — if I was a cynic — that life sciences and health care looks good because the other sectors are so dismal,” Collela said. “But the fact is, the fundamentals in life science are very positive.”

However, because health care companies require so much money — and take so much time to bring a product to market — they rely on a robust IPO market.

If the IPO market doesn’t open up, Collela said “we could also see some tightening in the venture community going forward.”

Nearly a quarter of the 56 IPOs this year have been completed by health care companies, including both of the local IPOs: Zymogenetics Inc. and Quinton Cardiology Systems.

Even with the gains in health care, the venture capital industry remains in its worst slump.

One-year returns at venture funds have fallen into the negative, primarily because of the high values venture capitalists placed on untested Internet, software and telecommunications companies during the late 90s and early part of 2000.

In order to survive those bad bets, venture capitalists are performing triage on their portfolios. They are also chopping fund size, slowing investment activity and diversifying their portfolios with non-tech investments.

Still, analysts say the industry — accustomed to boom and bust cycles — will emerge from this downturn. Venture capitalists are sitting on an estimated $90 billion to $100 billion. And early-stage companies — defined as businesses that are not yet generating revenues — still account for 25 percent of all deals.

“To put everything in perspective, I don’t think we have ever seen a peak like we saw in the last couple of years in the venture capital business,” said Tracy Lefteroff, managing partner at PricewaterhouseCoopers.

“But the overriding factor that you need to remember is there is still a lot of money in the pipeline and a lot of dry powder at a lot of these venture capital funds. Over the next couple of years, that money is going to need to be invested given the timelines and the life cycles of these venture capital funds.”

That may be the case. But with wild swings in the stock market and accounting scandals reaching into more boardrooms, it is a difficult time for entrepreneurs to make the leap.

“When Nasdaq is strong, a lot of entrepreneurs look at it as a great opportunity for capital raising and for capital appreciation,” said Collela. “So when it is down, a lot of entrepreneurs will stay in safe harbor and stay in their current company.”

Source: Venture Economics; National Venture Capital Assoc./ P-I


1. Vertis Neuroscience Seattle $36,999,800 Medical devices and equipment
2. Calypso Medical Technologies, Inc. Seattle $28,630,000 Medical devices and equipment
3. AccessLine Communications Bellevue $24,000,000 Software
4. Spiration, Inc. Redmond $22,010,200 Biotechnology
5. digiMine, Inc. Bellevue $20,300,000 IT services
6. Captura, Inc. Kirkland $15,000,000 Software
New Edge Networks Vancouver,Wash. $15,000,000 Telecommun- ications
7. Impinj, Inc. Seattle $14,000,000 Semiconductors
8. Not disclosed Kirkland $12,000,000 Medical devices and equipment
9. Myrio Corporation Kirkland $8,000,000 Telecommun- ications
10. Speakeasy, Inc. Seattle $6,500,100 Telecommun- ications
11. TeraCloud Corporation Bellevue $5,500,000 Software
12. Talisma Corporation Kirkland $5,000,000 Computers and peripherals
13. Consystant Design Technologies, Inc. Kirkland $3,000,200 Software
14. Esurg, Inc. Seattle $3,000,000 Retailing/ distribution
Singlestep Technologies Seattle $3,000,000 Software
15. MedManage Systems, Inc. Bothell $2,250,000 Biotechnology

By: John Cook


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