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Venture Funding Down in 2Q, Health Companies Score in Exits

New York Stock Exchange entrance (A. Kotok)

(A. Kotok)

Venture capital (VC) funding of start-up companies in the U.S. continued its decline in the second quarter of 2013, but biotechnology start-ups figured prominently in gaining liquidity during that quarter. The data, compiled by the investment industry research service Dow Jones VentureSource, shows U.S. companies raised $7.2 billion in 801 deals during the second quarter, registering declines of 2 percent in funds raised and 0.5 percent in number of deals. VentureSource says it was the worst fund-raising period since the first quarter of 2010.

The magnitude of the decline in venture funding becomes more clear when compared to the second quarter of 2012, which shows a 19 percent reduction in the amount of funds raised and 16 percent drop in the number of deals. For those start-ups able to raise funds, however, the payoffs were bigger. The median venture deal size in the second quarter rose by one-third to $5 million, the largest median deal size in almost two years.

U.S. science and technology companies were by far the favored beneficiaries of venture capital in the second quarter. Together, the funds raised by information technology (IT) and health care companies comprised more than half (55%) of all venture financing in the second quarter.

IT start-ups ranked first in funds raised and number of deals, gaining $2.1 billion in 238 transactions, while health care companies came in second place with $1.9 billion raised in 168 deals. For health care companies, the dollars raised marked an 8 percent decline, while the number of deals represents a 3 percent decrease compared to the first quarter of 2013.

Alvine Pharmaceuticals, developing therapies for autoimmune and inflammatory diseases, had the fourth largest venture financing deal of the quarter. The San Carlos, California biotech start-up gained $70 million in a combination licensing and equity deal with pharmaceutical company AbbVie.

The outlook for venture funding later in the year may be a less bleak, if the funds raised by VC companies is any indication. During the second quarter, VCs raised $6.8 billion for future financing deals, up sharply from $4.6 billion in the first quarter of 2013. But the number of VC firms raising funds dropped slightly from 52 to 50.

Venture-backed companies gain liquidity, paying off their early investments through an “exit” —  either a merger or acquisition (M&A), or taking their stock public in an initial public offering (IPO). The number of M&As declined in the second quarter of 2013 by 3 percent, with 84 deals valued at $8.0 billion. However, the number of IPOs doubled from 9 to 18 in the second quarter, with the capital raised in the IPOs jumping to $1.66 billion from $640 million in the first quarter.

The acquisition of Pearl Therapeutics, a biotech enterprise in Redwood City, California, by pharmaceutical company AstraZeneca was the second largest M&A deal in the second quarter, valued at $1.15 billion. PTC Therapeutics in South Plainfield, New Jersey had the third-largest IPO of the quarter. The biotech issued 9.6 million shares, taking in $125.6 million.

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