The heyday for nanotech venture capital (VC) likely saw its peak in 2008, when overall investment reached $1.4 billion. Last year, the sector raised only $792 million, signifying a 42% decline from 2008. But while overall nano VC backing is down, it's not out, according to a new report from Lux Research.
Investment in nano-driven healthcare and life sciences increased last year at the same rate that overall nanotech VC dropped -- 42%. These two segments attracted $404 million last year, and are likely to lead VC investments in nano for the near future.
Titled "2009 Nanotech Venture Capital: Healthcare and Life Sciences Provide Life Support," the report will help VCs, large corporations and start-ups understand what developments will drive VC investments in nanotech over the next few years, and where future funding will likely turn.
"Life sciences had been a big sector for nanotech VC early on, but energy and environmental deals grabbed the lead during the past several years," said Jurron Bradley, a senior analyst at Lux Research, and the report's lead author. "As deals in energy and environment dropped 69% last year, the life sciences and healthcare segments are back on top."
Drawing on its proprietary database comprising primary interviews with 1,000 start-ups and corporate players, Lux Research also spoke to 15 of the top VC firms that have invested in nanotech. The firm asked VCs whether funding would go up or down, and where the most activity would be. Among its key observations:
- Reflecting global VC trends, nanotech funding fell 42% to $792 million in 2009. Despite the drop in overall value, the number of deals in 2009 actually increased slightly to 92, as VCs distributed the wealth more broadly. Specifically, they bid farewell to mega deals, slicing average deal size by 41% to $8.6 million.
- Series D or later investments plunged 73% to $235 million. After a year of triple-digit investments in single companies, the Series D party ended in 2009. In contrast, Series B rounds surged 49% to $339 million and almost reached parity with Series C and later rounds, which collected $376 million. As in 2008, Series A walked away with the smallest portion at 7% or $56 million.
- Most VCs expect near term funding to decrease or remain flat. Some 53% of VCs interviewed said they expected their peers would likely maintain existing portfolios rather than pursue new deals. Less than half of those interviewed predicted their investments would increase over the next two to three years.
Despite the gloomy outlook, nanotech will survive. While VCs play a crucial role in providing investments for early-stage companies and guiding them to exits, VC backing is only a small piece of the funding puzzle.
"Unlike corporate or government investors, VCs tend to accept more risk and fund early stage companies," said Bradley. "That helps explain their increased interest in nano-enabled healthcare. Although the long cycles imposed by clinical trials increase the risk of funding these start-ups, healthcare is a premium-based sector where margins are high."
"2009 Nanotech Venture Capital: Healthcare and Life Sciences Provide Life Support" is part of the Lux Nanomaterials Intelligence service. Clients subscribing to this service receive ongoing research on market and technology trends, continuous technology scouting reports and proprietary data points in the weekly Lux Research Nanomaterials Journal, and on-demand inquiry with Lux Research analysts.