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Venture Funding Declines in Q1, Health Companies Buck Trend

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Venture capital funding in the U.S. declined in the first quarter of 2013, continuing a trend begun in 2011, but companies in the health care sector, particularly those based on scientific discovery, played a prominent role in the quarter’s venture transactions. VentureSource, a service of financial publishers Dow Jones, released the first quarter data today.

In the first three months of 2013, companies in the U.S. raised $6 billion in 752 venture capital deals, a decrease of 11 percent in capital raised and a 6 percent decline in the number of deals from the fourth quarter of 2012. Compared to the same quarter in 2012, the amount of capital invested declined 12 percent and number of deals decreased by 11 percent.

Science and engineering-based sectors — health care, energy/utilities, information technology, and industrial goods — registered declines in the first quarter of 2013. Business and financial services, along with consumer goods and services all recorded investment increases.

Health care companies, however landed 162 (22%) of the 752 deals and 30 percent of the total funds raised in the first quarter. Moreover, two of the top five venture deals during the first three months of the year were biopharamaceutical companies: Precision Medicine in Chevy Chase, Maryland collected $150 million and Revance Therapeutics in Newark, New Jersey brought in $14 million. In addition, the most active venture investment company during the first quarter — New Enterprise Associates with 22 deals — backs science-based companies in health care, energy, and information technology.

Exit opportunities for venture-backed enterprises in the first quarter of 2013, where companies gain enough liquidity to operate without further venture funding, generally declined over the past 12 months. Exits are typically accomplished through a company being acquired or by going public with an initial public offering (IPO) of its stock. Both acquisitions and IPOs declined from the first quarter of 2012, but the number of IPOs has remained stable — from 8 to 10 — for the past three quarters.

While the number of acquisitions overall declined sharply — 113 in the last quarter of 2012 compared to 86 in the first quarter of 2013 — health care companies accounted for the two largest acquisitions in the quarter. Verinata Health that develops pregnancy tests and prenatal diagnostics was acquired by Illumina for $350 million, and medical device developer Incline Therapeutics was bought by Medicines Company for $185 million.

One bright spot in the Venture Source first-quarter report was an increase in fund raising by venture capital companies, that suggests more funds may be available for investing in high-growth start-ups. During the first three months of 2013, venture capital companies raised $4.23 billion in 43 funds, which reverses two straight quarters of decline. In the first quarter of 2012, however, venture companies collected $6.33 billion in 52 funds. The second leading fund raiser during the first quarter was Third Rock Ventures in Boston and San Francisco that makes early-stage health care investments. In March, Third Rock closed a $516 million fund to support health care start-ups.

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