As U.S. Venture Capitalists Shy Away from Early Stage Deals, European VCs Reap Benefit

The early-stage investment landscape in life science companies is pretty bleak, and has been so for the past few years.

Stung by a slow, uncertain regulatory process that forces VC firms to keep pouring millions of dollars into portfolio companies before they see pay day, U.S. venture capitalists have beaten a hasty retreat from early stage medtech start-ups. They have sought refuge instead in less risky investments in digital health and health IT companies that do not require lengthy and expensive clinical trials before the products can be sold. Or they have chosen to invest in later stage med-tech companies that are closer to winning FDA clearance for their products thereby reducing the holding period to the VC firm, through better prospects for an M&A deal.

Some well-known venture capital firms have simply stopped investing or raising new funds - this includes Three Arch Partners, some of whose general partners have left to form new venture companies.

The vacuum left by U.S. venture capitalists has proved to be a boon for VCs across the Atlantic. That’s the opinion of Antoine Papiernik, managing partner of Sofinnova Partners, a healthcare VC firm based in Paris that invests in early stage companies.

“Because the U.S. market has been depleted from players that are no longer there - some of the blue-chip medtech VCs are no longer there - this has left a vacuum for innovative technologies that normally would have picked up immediately by a venture guy,” Papiernik said in a recent interview. “[As a result] we are seeing dealflow today that we would have never had five years ago.”

But it’s not just the volume of the early-stage opportunities that are now coming the European VC’s way. It’s also the quality. Papiernik explained that Sofinnova is getting investment opportunities from start-ups started by seasoned medtech professionals, serial entrepreneurs, and in general a more mature management team.

“If you think about the Bay Area, Stanford and Minneapolis and other hubs of medtech, we are getting great deals with entrepreneurs who have been there before, who have done it. While in Europe we are used to first-time entrepreneurs where you take a risk on whether they actually know how to do things.”

He hastened to note, however, that getting great dealflow doesn’t necessarily mean that Sofinnova does a deal. Still, they have an opportunity to consider it, unlike in the past, when the U.S. venture capitalists were more active in the early stage arena.

The company recently closed a deal - Papiernik won’t identify the start-up because announcements haven’t been made - in the Bay Area with a mature management team in the cardiovascular space. This was also a deal that Sofinnova would never previously - before US VCs became reticent to invest in riskier, early stage companies - have an opportunity to consider.

The company has also invested in Menlo Park-based ReCor Medical, a renal denervation firm that uses ultrasound to manage resistant hypertension instead of RF energy used by Medtronic and other competing renal denervation firms.

While Papiernik is excited by the prospect of new investment opportunities emerging from the U.S., he cautioned against expecting a lot of actual investments from European VCs will do with U.S. firms.

“It will increase but don't expect hordes of European VCs to the U.S. That is not going to happen,” he said. “The distance is just too great.”

As European VCs get a piece of the medtech start-up landscape, not all of their U.S. counterparts are waiting on the sidelines.  Versant Ventures, a Palo Alto, California-based venture capital firm is raising its fifth fund worth $250 million. 

-- By Arundhati Parmar, Senior Editor, MD+DI
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