Venture capital outlook is better for 2011

The outlook for venture-capital investment sounds similar to the prognostications for the rest of the economy in 2011: better than 2010.

However, the recent survey by the National Venture Capital Association contains one worrisome sign for the Philadelphia region. Life sciences may no longer be ascendant.

Attach your favorite reason for why that may be. The Food and Drug Administration is approving fewer new drugs than in the past. There is continuing uncertainty over how health-care reform will affect reimbursement for drugs and diagnostic tests. And quite frankly, the few life-sciences companies that did go public in 2010 saw their share prices sink.

There is no getting around that less investment flowing into life sciences would hamper an active corner of the region's start-up community.

Because of the strong presence of the pharmaceutical industry, top medical schools, and research centers here, the Philadelphia area's life-sciences sector tends to account for most of the deal flow and venture dollars each year. In 2009, $272 million of the $424 million invested in the Philadelphia area were committed to life-sciences firms.

Nationally, 34 percent of the $17.7 billion invested went to life-sciences firms in 2009. However, the NVCA survey shows that investors are evenly split over whether investment in medical devices and biopharmaceuticals would increase, decrease, or remain the same in 2011.

The trade association asked more than 330 venture investors and 180 CEOs of venture-backed companies for their views on where the money will flow in 2011.

The clear winners were companies in the information-technology sector, specifically "consumer Internet and digital media." The frenzy associated with those sectors swirls around Silicon Valley and New York's Silicon Alley, primarily. And given a choice between those two geographic areas, Silicon Valley is expected to remain a money magnet, with venture capitalists preferring it by a more than 3-1 margin and CEOs by more than 2-1.

The Mid-Atlantic region, which includes the Philadelphia area, ranks sixth among areas that venture capitalists say will be poised for growth in 2011. I just told you the two most popular. New England, Southern California, and the Rocky Mountain region also outpointed the Mid-Atlantic.

Some might say that less investment in life sciences would mean more dough for the Philadelphia area's Internet-related firms. However, venture investment in our region's web-oriented community totaled just $49.6 million in 2009, far behind the $3.2 billion thrown around Silicon Valley and the $786 million that sloshed into the New York area.

More money would be great and so would more jobs. I always believe actions mean more than words, but it was encouraging to read that 82 percent of the CEOs surveyed predict headcount at their firms will increase in 2011, while only 3 percent expect to cut back.

Finally, displaying a sense of humor, the National Venture Capital Association asked for headline predictions for 2011 from the venture world. Most were submitted anonymously. Here are a few gems:

"Groupon should have taken the money and run" (referring to its spurning of Google Inc.'s $6 billion offer)

"Facebook IPO causes high-end home prices in Silicon Valley to stabilize"

And my personal fav: "Cleveland OH becomes known as the Midwest's entrepreneurial hot spot!"