In the biotech industry, there is a quote by that is often used to emphasize the importance of data in decision making: “In God we trust; all others must bring data.” The quote comes from W. Edwards Deming, who had a background in statistics that he used extensively in his teachings about management. While data is important, the analysis of the data is critical to guide decision making. I have noticed this issue lately in the reporting on venture capital funding in the US and wonder if an alternative view of the data would lead to different choices in how companies raise private equity.
Perhaps the largest source of data on venture capital (VC) is the PWC Money Tree Reports, which provides break outs by industry and geography as well as overall numbers. However, reports on VC activity don’t generally break out the funding by source, specifically distinguishing between traditional VC and other forms of private equity financing. While often used interchangeably, these terms are not the same. Looking through the definitions used in the PWC Money Tree Reports, qualifying angel and corporate investments are also included in VC figures.
In numbers from the Money Tree Report and the National VC Association, $112M in VC was invested in Wisconsin in 2010, which was an astonishing increase compared to the $23.9M in 2009. While the data supports a significant increase in private equity raised, a closer look at the numbers suggests that the bump isn’t due to traditional VC.
In 2010, two Wisconsin companies, Virent Energy and Cellular Dynamics, raised a total of $87M.
- Virent Energy Systems is focused on producing sustainable biofuels and raised $46.4M in June 2010, largely from Shell, Cargill Ventures and Honda, that were existing partners/investors. While the press release indicates participation by all existing shareholders, only one investor is a traditional VC, the seed and early stage fund Venture Investors. Started in 2002, Virent has raised $124M to date.
- Cellular Dynamics is striving to lead the pack in production of functional human cells for research using induced pluripotent stem (iPS) cells. In April 2010, Cellular Dynamics raised $40.6M in private capital, large individual investors and families that invest through private equity organizations. Tactics II Stem Cell Ventures, whose founder and principal is also CEO at Cellular Dynamics, led the investment. Other investors named were Sam Zell’s Equity Group Investments and Sixth Floor Investors LP.
Following the money,approximately $25M of private equity was invested in Wisconsin in 2010 beyond these two deals for an increase relative to 2009 funding is less than 5%. (I did not analyze the 2009 transactions for a breakdown of funding sources.)
The importance of the distinction between private equity and VC can also be seen beyond the Wisconsin borders. Recently BioWorld posted about an increase in biotech seed and series A funding as a percent of the overall private funding so far this year relative to 2010. The analysis of the two biggest financings to date in 2011, totaling $300M, revealed that the source of equity wasn’t traditional VC but big biotech as well as private individuals (or entities representing them).
As we anecdotally see the sources of equity financing expand, data should be collected and analyzed to understand these trends. My goal isn’t to project trends in the composition of financing entities going forward but from a company perspective the data underscores the need to be flexible in sources of private equity funding for innovation.
(While I have written about equity funding and gaps in funding, I don’t intend to address Angel vs. Super Angel vs. MicroVC vs. VC because to me these issues relate to size rather than a structure. Mark Suster recently started a series of three posts that covers these issues in the software space.)