Big year for venture capital

Venture-capital investing in 2007 reached a six-year high of $661.8 million in the Philadelphia area and $29.4 billion nationally, led by strong interest in life sciences, so-called clean technology and Internet-related businesses.

An Audubon firm, Globus Medical Inc., attracted $110 million of venture capital in 2007, tying with a San Diego firm, CardioNet Inc., for the year's biggest venture investment, according to a quarterly industry analysis. Globus develops spinal-implant devices that improve mobility for people with back problems.

The venture haul for Philadelphia firms was the biggest since 2001, the year after the tech-stock bubble burst, but fell short of the peak in 2000, when investors poured $2 billion into local companies, according to the MoneyTree survey by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Financial. Venture investment peaked nationally at $105 billion in 2000.

"Steady funding in Internet-related and life sciences companies, along with healthy growth in the clean-tech sector, are all good signs that there are interesting deals to be found across many sectors," said Tracy Lefteroff, global managing partner of venture capital at PricewaterhouseCoopers.

A Fort Washington company, Topaz Pharmaceuticals L.L.C., was the Philadelphia region's top magnet for venture capital in the fourth quarter, raising $20 million.

Topaz is developing a topical treatment for head lice in children. The company is reformulating an existing, older generic drug in the "same family" as a Merck & Co. medicine currently used to treat river blindness, a parasitic disease transmitted by small black flies that breed near fast-flowing streams and rivers.

"Ours is not necessarily the same drug, but it's definitely the same idea," said Nicholas Spring, a Merck executive for 25 years who cofounded Topaz in 2005 to develop pediatric medicines. "As we talked to pediatricians, they kept mentioning they were seeing more children with head lice."

The current prescription medicines available are chemical insecticides, Lindane and Malathion, which have resistance problems and unpleasant side effects. Topaz is preparing to begin late-stage clinical trials on its product.

Nationally, venture capitalists invested $7 billion in 963 deals in the three months ended Dec. 21. It was the fourth straight quarter with investments totaling more than $7 billion, a phenomenon not seen since 2001, the quarterly MoneyTree survey said.

Locally, the fourth quarter of 2007 was the slowest in both deals and dollars since mid 2005, said Al Piscopo, head of the venture-capital practice at PricewaterhouseCoopers in Philadelphia.

Venture capitalists invested $67.6 million in 12 Philadelphia-area companies in the fourth quarter ended Dec. 31, down from 16 deals and $96.8 million in the fourth quarter 2006.

"It was a slow fourth quarter," Piscopo said. "Could the credit crunch affect venture capital? Maybe people are just a little bit more cautious before making a deal? I think it remains to be seen whether it was just a blip or a bigger trend. I think it was just timing."

Nationwide, fourth-quarter venture funding was higher than in 2006.

Life-sciences firms dominated the Philadelphia-area list of those getting venture capital in the latest quarter.

Vitae Pharmaceuticals Inc., Fort Washington, raised $15 million and is developing medicines for diabetes and cardiovascular disease, and treatments for Alzheimer's, cancer, inflammation and hepatitis C.

Yaupon Therapeutics Inc., Radnor, raised $14.5 million to continue development of medicines for lymphoma, methamphetamine addiction and pain.

Promedior Inc., Malvern, received $3.5 million to develop treatments to reduce or eliminate scar formation caused by disease, trauma or infection in tissues and organs.

Viriome Inc., West Chester, raised $1 million and is using peptides to develop antiviral treatments for hepatitis C and HIV.

Seed and early-stage investments were up 18 percent, to $6.3 billion in 2007, while investments in later-stage deals jumped 24 percent over 2006, to $12.2 billion.

On the technology side, "there's a lot going on in the digital-media and Internet space," Deepak Kamra, of the Canaan Partners venture-capital firm, said on a conference call to discuss the 2007 and fourth-quarter numbers.

In the "clean" technology sector, which includes alternative energy, power supplies, recycling and conservation, investors poured $2.2 billion into 202 companies last year, up 47 percent over 2006. The interest in clean tech "is not just a U.S. phenomenon," Kamra said. "There is a lot of international demand. The price of oil is not going back down to $20."

In 2007, U.S. venture capitalists invested $1.1 billion in 91 deals in India and $1.4 billion in 133 deals in China, which were all-time highs for U.S. investments in those countries, the MoneyTree survey said.

Nationally, the biggest gains came in the biotechnology and medical-device industries, where $9.1 billion was invested in 862 deals compared with $7.6 billion in 786 deals in 2006.

Sherrill Neff, partner in Quaker BioVentures, a Philadelphia life sciences venture-capital firm, said the record level of investment in life sciences was "gratifying" and "completely rational and sustainable."

"Most of the spending in our industry is tied directly to the state of one's health," he said. "We don't see huge swings based on macroeconomic conditions."

Neff said venture investors in life sciences were now planning to fund young companies "much longer in the development cycle. And we no longer count on the public markets to be there for our liquidity."

Neff said there was a "deepening symbiosis" between small biotechs and big pharma, with the large pharmaceutical companies relying more upon - and wanting - the promising products of smaller companies. "We believe we'll see much more acquisition activity as time goes on."

Looking ahead to a slowing economy, and possible recession, venture capitalists said they expected spending would continue to rise.

"There's nothing to suggest we are going to fall off a cliff," Neff said. "There is still a strong flow into venture funds, which suggests that there will be a steady flow from venture funds into companies."

Kamra, a partner at Canaan Partners of Menlo Park, Calif., said the current investing climate "is not like 2001, where we had the excesses of 1999 and 2000." Instead, venture investing "has grown at a very measured pace in 2007, and I think it will continue to do so in 2008."

Kamra added: "Venture firms are much more careful about keeping reserves in place for their investments. We look out and say, 'What if there is no IPO market for the next few years?' We make sure we have enough set aside for future rounds."