Healthcare Venture Capital

Venture Capital Investing: Micro vs. Macro-Economics

In healthcare on August 1, 2010 at 3:09 pm

The economic headlines these days are bad….and getting worse.  GDP growth net of inventory replenishment is a feeble 1% per annumSmall businesses and average workers are suffering. Banks are shutting down at record levels not seen since the Great Depression. Housing and commercial real estate markets are stuck. Deficits are ballooning. And the world is facing a deflationary cycle that will likely be toxic to investment in all asset classes.

Yet, while having slowed down quite a bit since the heady days of 2007, one corner of the world of start-up investing seems to be largely immune, or perhaps oblivious, to the broader economic slowdown.

Out here on Sand Hill Road, investment in consumer internet companies is fast and furious. It’s almost as if the 20 and 30-somethings who start these companies and the super-angels and VCs who fund them are living in a totally different world than the average American.  To witness this firsthand, I attended the CrunchUp conference put on by TechCrunch last Friday in Palo Alto. The buzz in the standing room only auditorium was totally infectious.

These start-ups seem to be living and thriving at the micro-level and totally ignoring the macro-economic picture.  How else could you explain the logic of starting a consumer-facing business in 2010 amidst all of the pain the economy is going through today? Or the fact that multiple term sheets and bid up pre-money valuations are the norm right now in the consumer internet hallways of the Valley.

The answer is that, while unemployment has been stuck near 10% for months and threatens to become long term and structural in nature, and the average American is struggling with a mountain of credit card debt and little prospect for higher paying work, consumers seem to still be spending money in one area: their digital lives.

People’s wallets are closed tightly for big purchases in their “real lives” like houses, cars, and major appliances.  Those same wallets are wide open for buying FarmVille credits and $100 per month cell phone data plans and shiny new iPads and flash sale sites and Groupons etc etc.  And this trend is being validated by big acquisitions like Disney’s purchase of Playdom last week for $560M upfront.

In healthcare venture, we live in an exactly opposite universe that has everything to do with the macro-economic picture, especially when it comes to liquidity and the funding of our portfolio companies:

-The FDA or health reform threaten big incumbents or start-up development cycles: kiss M&A goodbye
-The VIX (measure of public market volatility) is over 30, no chance for healthcare IPOs

And yet the limited partners of VC funds actually live squarely in the macro since they usually hold large diversified portfolios across a variety of asset classes.

So as long as the macro picture is bad, average venture fund-sizes will continue to shrink, which some argue can actually be good in the internet world.

Yet sectors that require major venture capital infusions before liquidity (ie, healthcare and cleantech) will continue suffer.

How else to explain the fact that only 5 new Series A medical device companies were funded in the Bay Area in 1H:2010, a record low for the last 12 years…It cant be that innovation has actually stopped or all unmet medical needs have have been solved.

OK I admit it: If it sounds like I am jealous of internet investors at this moment in time, I am…

What I don’t know yet is if the economy is going through a major structural change in the way consumers spend money (ie, the updated version of the dreaded “new economy” of 10 years ago) or if we are all just blissfully driving off a cliff together while we tweet about it and check-in on FourSquare from the edge of that cliff.

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  1. [...] healthcare reform, the gloom index is at an all-time high. Bijan Salehizadeh of Highland Capital blogged recently of shrinking fund sizes and fewer med-tech deals closed. In July, Mark Heesen, president of the [...]

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