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Scale Venture Partners ends healthcare investing

by David Holley | Published November 8, 2011 at 2:13 PM

Scale Venture Partners is no longer making new investments in healthcare companies, the Foster City, Calif., firm announced Tuesday, Nov. 8, citing regulatory uncertainty and onerous capital requirements as the primary factors.

While venture capital firms and life sciences companies have long bemoaned the risk in garnering Food and Drug Administration product approval, the consequence has primarily been limited to VC firms investing in later-stage companies with more reliable, more proven products, rather than stemming new healthcare investments altogether.

Though Scale's decision could be a sign of a dramatic shift away from healthcare venture capital, there are firms still quite dedicated to the sector.

Sofinnova Ventures, for example, announced in mid-October that it raised a $440 million fund that would be entirely dedicated to life sciences companies, particularly late-stage drug developers. The Menlo Park, Calif.-based fund has a similar focus to many venture capital firms in life sciences: Beyond investing in drugs and medical devices, Sofinnova also targets information technology.

Now that Scale is cutting off any new healthcare venture capital, it will focus entirely on technology companies (excluding two managing directors who will remain focused on Scale's existing healthcare portfolio).

"The partners believe that the vagaries of the FDA and the resulting increase in time and capital needed to take these companies through to a real exit doesn't fit our mid-stage fund strategy any longer," managing director Kate Mitchell wrote in a blog post on Scale's website. "We are heartened by the dialog that is beginning to take place between our industry and the regulators. We will continue to be active in that conversation but think that the timing of a resolution that benefits emerging companies tackling important healthcare issues will be beyond our investing horizon."

Scale has funded a few successes in healthcare, such as Seattle Genetics Inc., which had its cancer drug Adcetris approved in August. Though the product has had some sales, Adcetris has been somewhat limited by a costly price tag.

Scale was also part of a group of venture investors that helped Horizon Pharma Inc. become one of the few life sciences companies to successfully price an initial public offering earlier this year, when Horizon sold 5.5 million shares for $9 apiece, earning $49.5 million.

Though it's not as telling a sign of the shaky healthcare venture capital environment, two other venture firms announced they would combine and spin off their healthcare investment divisions. Forbes first reported that Menlo Park-based Morgenthaler Ventures and Advanced Technology Ventures, of Waltham, Mass., will merge the divisions next year, citing a source.

One her blog, Mitchell wrote that she thinks ending new healthcare investments is not a sign of things to come. She said there is still promising innovation and demand for healthcare companies, but the decision makes sense for the fund and its limited partners.

"While healthcare investing is not the best course for ScaleVP, we want to recognize and support the dozens of excellent venture firms and friends that continue to invest in healthcare," Mitchell wrote.

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