Venture capital funds are an important source of financing for the healthcare industry. They provide the capital that healthcare companies need to grow, either organically or through acquisitions. That’s why proactive business owners and investors should keep track of what’s going on in the VC World.
A recent report surveyed the limited partners (LPs) of VC funds. LPs are one of the main contributors to VC funds and provide the money that VC funds actually invest. They include wealthy individual, pension funds, strategic investors and insurance companies. This report found a few interesting trends that could reshape healthcare VC financing over the next few years.
Overall, venture capital funding will stay steady over the next couple years but negative headwinds are starting to develop in the long-run.
LPs plan on continuing contributions
Money going into VC funds has steadily gone up over the past few years and has returned to the peak levels from before the crash of 2008. Even with funding at such a high level, LPs still plan on adding more money into VC funds in the future. The survey found that LPs still thought the long-run return of VC funds was better compared to other investments and they want to grow their exposure. While there is some buzz about VC funds pulling back their investments, LPs still say that they want VC portfolios to continue growing. For the near future, VCs should have adequate capital to invest.
LPs have been putting in more than they receive
LPs typically contribute to VCs because they want to see a return on their money, but over the past few years, this has not been happening. Over the past 10 years, LCs invested close to $50 billion more into VC funds than they have received in distributions. At some point, LPs will need to start seeing some positive cash flow or they may start to pull back their contributions into VC.
Concerns over valuations
LPs are concerned about the valuations of VC portfolio companies and see a real risk of overvaluations. Even worse, over the next few years there is a good chance that VC funds will need to start writing down the value of their portfolios to make up for these overvalued investments.
At the same time, LPs believe that VC funds are spending their money too quickly as well, forcing them to raise funding from LPs more often. It looks like LPs are going to push their VC funds to get tougher with their investments. VC funds will need to become more selective so they can go longer between raising money and can avoid overvaluations.
LPs looking to make direct investments
One other interesting development is that more LPs are considering bypassing VC funds to make their own direct investments. They believe that they can evaluate and manage portfolio companies on their own and don’t need the support of a VC fund. Some LPs have even begun marketing this approach as they try to raise capital for themselves. This could create a new source of financing for businesses, though it would also reduce the amount of money in venture capital.
Healthcare company business owners should keep an eye on these trends especially if they are looking for VC financing the near future.