Year off to healthy start for medical startups
For the first quarter of 2018, the sector sees a big increase in venture capital funding
When locally based medical device company Procyrion announced a $16 million venture capital deal in January, it marked a milestone not just for the startup but for Houston as well.
Venture capital funding in Houston largely went to health care companies in the first quarter of 2018, with the Procyrion deal ranked as the second-largest investment, a new report by the PricewaterhouseCooper and CB Insights firms shows.
Houston companies claimed a total of $47.8 million in venture funds in the first quarter, a 47 percent increase from the same period a year earlier. There were a nine local deals in each of those two quarters.
The results are in line with national trends where the dollar amount of deals has grown across the U.S. even if the number of deals themselves has declined.
Procyrion president and CEO Benjamin Hertzog said he was surprised to learn health care companies led the way in terms of top deals for Houston in 2018.
The medical device investor base is thinning out these days, Hertzog said. Getting significant funding from major players in the industry is becoming harder as device makers compete with pharmaceutical companies that are able to provide faster returns on in-
vestment.
Still, he said, Houston remains a key destination for medical entrepreneurs looking for innovative ideas found at the Texas Medical Center.
A quarter of medical startup applications to work at the TMC Innovation Institute’s accelerator program come from companies in Silicon Valley, institute director Eric Halvorsen said.
Addressing the need for more funds in Houston, the institute created a venture fund in November aimed at financing at least five to seven local companies, Halvorsen said.
He added that the institute and Texas Medical Center as a whole are working to ensure health care companies continue to play a dominant role in making the biggest venture deals in Houston.
“There’s a lot of deals to be had,” Halvorsen said. “The capital landscape is shifting.”
Traditionally, energy and utility companies have driven Houston’s investments, said Caroline Gagliardi, a PwC partner based in Dallas. These fields require higher capital and as a result have accounted for larger deals.
In Houston’s second quarter of 2017, for instance, two deals in energy and utilities accounted for more than 90 percent of the quarter’s total.
Yet as the start of 2018 indicates, other fields such as health care and internet software are claiming a bigger chunk of the venture fund stream, Gagliardi said.
CS Disco, a legal technology company, scored the top deal in Houston for the first quarter of 2018 and was ranked among the top Texas deals for the period.
The $20 million investment from existing partners will fund new personnel, chief marketing officer Neil Etheridge said.
The fact that the deal ranked so high in both Houston and Texas is a testament to what Etheridge sees a trend of more software companies settling down in Houston and scoring big budget deals.
“Houston has a lot of potential, and we’re proof of that potential,” he said.
Overall, Houston’s 2017 total investments were the highest the city has seen since 2014, Gagliardi said. That’s including a dip in the fourth quarter that could be attributed to a pause on venture activity in the wake of Hurricane Harvey.
Most of Houston’s investments in 2017, and those reported so far this year, have been later-stage deals. It follows the national trend of funding going to more developed companies since the dot-com bubble burst nearly two decades ago. In Houston, for instance, the number of deals in 2001 totaled 62. A year later it scored four, all in later stages.
Yet as the number of deals decline nationally, megadeals, or investments of more than $100 million, are on the rise. In first quarter of 2018 there were 34 megadeals accounting for 34 percent of total investments across the U.S.
Texas, which typically only gets one megadeal a year, kicked off 2018 with one in Austin.
“It’s nice to start the year with a megadeal,” Gagliardi said.