“There’s a lot of dry powder sitting on the sidelines waiting for valuations to normalize,” said Keith Figlioli, a managing partner of LRVHealth, which recently closed its fifth venture fund.
Recently, healthcare venture returns have declined as volatility in the stock market has curbed initial public offerings. But limited partners in venture funds are focusing less on recent performance and more on the promise of advances in biotechnology and digital health that could lead to giant returns over the next decade.
“LPs understand this is a long-cycle investment thesis and still believe the core drivers are intact,” said Frank Angella, a managing partner of Grove Street Advisors, which invests in venture funds.
Healthcare venture investment jumped in 2020 and 2021 as the pandemic cast a spotlight on life-sciences companies while low-interest rates drove investors into equities. A strong IPO market prompted public-market investors to join venture rounds of startups just before they went public, inflating venture-investment totals.
Now, though, large crossover rounds have grown scarce and many mid- to later-stage startups financed during the boom face the prospect of raising money at a lower valuation than their last venture financing, investors said.
“There are a number of companies out there trying to raise capital that are probably going to have to raise down rounds or already have,” said David Steinberg, a general partner of biotech venture firm Longwood Fund, which recently closed its sixth fund.
U.S. and European healthcare startups banked $9.85 billion in venture capital in the first quarter, well behind the clip of last year, when these companies collected $65.73 billion for the year. Medical venture investment peaked in 2021 at $98.42 billion, according to SVB.
Healthcare venture returns as well have slipped from pandemic-era highs. In the first quarter of 2021, for example, healthcare-focused venture funds posted a 22.5% return, according to market tracker PitchBook Data. Just a year later, that quarterly return had plummeted to a negative 9.5%, improving somewhat in the next three quarters.
But to abandon healthcare now would be to miss a digital revolution taking shape, some investors say, as startups apply machine-learning to ever-larger biological and medical data sets to create insights that will lead to new treatments and better patient care.
“Companies we’re funding today are not just a chemist and a biologist, there’s a computer scientist in the mix and there’s a heavy computational component,” said Stuart Peterson, managing partner of Artis Ventures, a venture firm that seeks opportunities at the intersection of biology, health and technologies like artificial intelligence.
Several venture firms are going down similar paths. FoundersX Ventures, which has gathered about $60 million of an expected $100 million fund targeting healthcare and other sectors, plans this summer to begin raising a separate, $50 million pool focused only on AI, including its use in healthcare, because of demand LPs are showing for this technology, said Founder and Managing Partner Helen Liang.
Constant innovation is one reason for continued LP interest in healthcare, said Amanda Outerbridge, managing director of HarbourVest Partners, an LP in venture funds. Investing evenly across cycles and market environments is critical to building resilient portfolios, she added.
“Despite various headwinds, we see sustained appetite from LPs for healthcare venture exposure and we continue to take a measured approach to investing in the space,” she said.
LPs are being selective, though, and fundraising isn’t easy for venture firms, venture capitalists said. But venture investors who have raised funds say the best returns come in markets like today’s because valuations are falling and startups have to be efficient and strict about reaching milestones.
“Entrepreneurs have to do more with less,” said Lynne Chou O’Keefe, founder and managing partner of digital-health investor Define Ventures, which has raised $460 million across two new funds. “They’re much more focused, more tenacious and more clear in what they have to achieve.”
