Allen Wagner February 13, 2014
Boston and the greater New England venture capital ecosystem are perhaps best known for their innovations in pharmaceuticals and healthcare technology. This is exemplified by the numerous biotech IPOs the region has seen since the beginning of last year, as well as the sheer number of VC financings New England receives in the industry (often between 20%-25% of the United States’ total biotech deal count). But some startling statistics beyond what’s already known have emerged, and it’s not related to a lamentation of the state of technology companies in the region.
PitchBook data show that VC investors poured in $4.3 billion across 496 New England deals in 2013, both figures of which are stark drops compared to 2012. As seen in the chart below, the region saw steady growth in the number of VC deals and capital invested from 2009 to 2012, before declining last year, not unlike the national trend. But while deal flow may have fallen in 2013, valuations are up—way up.
The median pre-money valuation for all New England VC-backed deals in 2009 was $12.3 million. After falling to $11.9 million in 2011, the pre-money valuation for New England startups was $15 million in 2012 and $18.5 million last year. Aside from rising valuations across the VC world, what could explain this sudden, drastic shift upward, particularly considering median VC deal sizes have dropped every year from 2006-2012?
We found that a couple of potential explanations—more biotech and pharma deals in and around Boston that had higher valuations and more deals in the higher-valuation Boston area in general—didn’t hold up in the data. After all, Massachusetts comprised a shrinking share of VC deals the last three years, as Connecticut continues to make gains in attracting VC investment. And healthcare companies haven’t made any appreciable gains in New England compared to prior years, at least in terms of number of financings and capital invested (though IPOs have been hot).
What PitchBook data do show is that the number of New England seed and angel financings (which carry with them smaller valuations) dropped by 18.5% in 2013 compared to the previous year, and grew by a much smaller proportion in 2012 compared to 2011. While the median pre-money valuation for New England seed rounds did hit an all-time high of $5.34 million last year, the fact that there were fewer seed deals last year (and slower growth in 2012) means the median valuation across all venture capital financings ended up much higher the last two years. This also helps explain why the region’s median deal size increased in 2013 after several years of declines due to the seed round’s increasing popularity.
As valuations go up, the possibility for a successful exit via IPO increases. The IPO market has been scorching over the last year, particularly for the pharmaceuticals & biotechnology industry Massachusetts and New England are well-known for. There have been 19 VC-backed IPOs in the region since the beginning of 2013 (including seven so far this year). That’s up from 10 in 2012 and seven in 2011. Of those 19 public offerings, 13 were pharmaceuticals & biotechnology companies, while four were in the healthcare devices & supplies industry.
This has allowed IPOs in New England to comprise nearly 20% of VC exit flow in 2013 and close to 45% so far in 2014. While it’s still early, it’s interesting to note that there has only been one completed acquisition of a New England-based VC-backed company so far in 2014; and in 2013, acquisitions comprised the smallest share of regional VC exit flow (69%) since 2007, when they made up 66%. It’s clear that soaring valuations are providing opportunities for exit in the public markets, but might be crimping the market for acquisitions.
For more coverage on IPOs, check out PitchBook’s look in September at five biotech IPOs that led the initial boom in 2013. The PitchBook Blog also has tons of additional VC coverage on its venture capital page; and be sure to read our latest VC Valuations & Trends Report for in-depth analysis on nation-wide trends.