Overall US venture capital funding was up 61% on a value basis in 2014 with life sciences investment up 29%, making 2014 the highest level of life sciences venture capital funding since 2008.

The flow of venture capital funding is one important measure of the financial health of the biopharmaceutical industry as emerging to small biopharmaceutical companies are an important source of product innovation and potential business for contract service providers. A recent analysis by PwC and the National Venture Capital Association shows renewed investor confidence overall, including for the life-science sector. So what did 2014 hold? DCAT Value Chain Insights (VCI) examines the highs and lows of venture capital funding in 2014 and what may be expected for 2015.

Venture capital funding shows strong gains
Venture capitalists invested $48.3 billion in 4,356 deals in 2014, an increase of 61% in dollars and a 4% increase in deals over the prior year, according to the MoneyTree Report by PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association, based on data from Thomson Reuters. In the fourth quarter 2014, $14.8 billion went into 1,109 deals.

The software industry maintained its status as the single largest investment sector for the year, with dollars rising 77% over 2013 to $19.8 billion, which was invested into 1,799 deals, a 10% rise in volume over the prior year. Software remained the number one sector in the fourth quarter 2014 for both dollars invested and number of deals with $5.8 billion going into 461 deals, nearly four times the number of deals than the second highest volume sector, media and entertainment. Software has held the number one spot in terms of dollars invested for 21 straight quarters.

Biotechnology investment dollars rose 29% while volume decreased 4% in 2014 to $6.0 billion going into 470 deals, placing it as the second largest investment sector for the year in terms of dollars invested. The media and entertainment sector accounted for the second largest number of deals in 2014 at 481; however, it was third largest in terms of dollars invested with an annual total of $5.7 billion.

Overall, investments in 2014 in the life sciences sector (biotechnology and medical devices combined) rose to the highest level since 2008 with $8.6 billion invested into 789 deals, a 29% increase in dollars but a 3% drop in deals compared to 2013. In the fourth quarter 2014, the life sciences sector captured $2.8 billion going into 202 deals, a 62% increase in dollars invested while deal volume remained relatively flat compared to the third quarter 2014. Dollars invested into life sciences companies accounted for 18% of total venture capital investments in 2014.

“2014 has been an exciting year for venture capital investing,” noted Mark McCaffrey, global software leader and technology partner at PwC, in a PwC press release. “For the first time in MoneyTree history, we saw two deals exceed one billion dollars and more than 40 megadeals—which are investments exceeding $100 million. In addition, there’s been an influx of private equity investors at a level we’ve not seen previously. As a result, entrepreneurial companies are capable of disrupting entire industries and leveraging investment dollars to expand to the global markets. With the continued economic conditions, we would expect venture capital investing to be positioned to continue strong levels of investing in 2015.”

Allocating the VC pie in 2014 
Overall, for US venture capital funding, expansion-stage investments captured the most investment dollars in 2014, increasing 102% to $19.8 billion which flowed into 1,156 deals, a 13% increase compared to the prior year. In the fourth quarter, 297 expansion-stage companies captured $6.2 billion. Expansion-stage companies attracted 41% of dollars and 27% of deals in 2014 compared to 33% of dollars and 24% of deals in 2013. The average expansion-stage deal in 2014 was $17.1 million compared to $9.6 million in 2013.

Investments in early-stage companies accounted for the most deals during 2014 with 2,165 deals capturing $15.8 billion. While the number of deals remained relatively flat in 2014 compared to the prior year, the dollars invested rose 54% over the same time period. In the fourth quarter, $5.6 billion flowed into 576 early-stage deals. Early-stage companies attracted 33% of the dollars and 50% of the deals in 2014 compared to 34% of dollars and 51% of deals in 2013. The average early-stage deal in 2014 was $7.3 million, up notably from $4.8 million in 2013.

Seed-stage investments fell 29% in terms of dollars and 18% in deals with $719 million going into 192 companies in 2014, the lowest number of seed deals since 2002. In the fourth quarter, venture capitalists invested $176 million into 39 seed-stage deals. Seed-stage companies attracted 1% of the dollars and 4% of the deals in 2014 compared to 3% of the dollars and 6% of the deals in 2013. The average seed-stage round in 2014 was $3.7 million, down from $4.3 million in 2013.

In 2014, $12.0 billion was invested into 843 later-stage deals, a 35% increase in dollars and a 6% increase in deals for the year. In the fourth quarter, $2.7 billion went into 197 deals. Later-stage companies attracted 25% of the dollars and 19% of the deals in 2014 compared to 30% of the dollars and 19% of the deals in 2013. The average size of a later-stage deal rose from $11.2 million in 2013 to $14.3 million in 2014.

First-time financings in 2014 rose 47% in dollars while the number of deals was flat compared to 2013, with $7.4 billion going into 1,409 companies. Investments into companies receiving venture capital for the first time in the fourth quarter increased 57% in dollars and 8% in deals when compared to the prior quarter. First-time financings accounted for 15% of the dollars and 32% of the deals in 2014 compared to 17% of the dollars and 33% of the deals in 2013.

Industries that captured the highest total of first-time dollars and deals in 2014 were software, media and entertainment, and biotechnology. Sixty-eight percent of first-time deals in 2014 were in the early stage of development, followed by the expansion stage of development at 14%, Seed-stage companies at 11% and Later-stage companies at 7%.