An earlier research brief we’d issued highlighted that Silicon Valley dominates the list of top 50 VC-backed tech exits. The post generated a fair amount of chatter including some comments calling us arrogant Silicon Valley’ites (we’re based in NYC).
Among the more constructive comments were several from healthcare VCs who wondered if the data would be similar for the healthcare sector. The prevailing hypothesis was that Silicon Valley’s dominance wouldn’t translate to healthcare (or perhaps not as much). Note: our healthcare classification includes companies ranging from medical devices to biotech to pharma.
Among the 50 VC-backed healthcare exits with the largest valuations since 2012, it is clear that the sector is very different than tech as healthcare VCs indicated. In the case of healthcare, Massachusetts is the leader – not Silicon Valley, and both markets combined account for over half of the top 50 exits in terms of quantity and almost half of the value based on company exit valuations.
Overall, the top 50 healthcare exits are spread across a more diverse array of states than we’d observed in tech. The value creation metric we’d calculated (valuation at time of exit / amount raised) in the initial tech post is also calculated for healthcare exits and is, not surprisingly, less than tech. Interestingly, on this ratio, Massachusetts and Silicon Valley lose out to regions like New York and SoCal (see below).
Below is a chart highlighting the aggregate exit valuations and number of exits per region of the 50 largest VC-backed healthcare exits since 2012. Unlike tech, in which exits are concentrated in a few well-known venture hubs, top exit activity in healthcare is spread out across more states. Massachusetts leads the country in terms of exit valuation of VC-backed healthcare exits, closely followed by Silicon Valley. The two regions are tied on exit count.
Both Mass. And Silicon Valley each took 26% of the 50 largest exits since 2012, together accounting for more than half of the exits on the list. Following Mass. and the Valley is SoCal, which accounts for another 18% of the top 50 exits driven largely by companies in San Diego. Trailing behind these top three regions are other states including Virginia, Pennsylvania, New Jersey, and New York to name a few. With only a 4% share of the top 50 healthcare exits, New York – a major tech VC hub – is easily overshadowed by other states when it comes to healthcare. As we’ve highlighted before, the sentiment for NY is extremely high on the tech front (internet, mobile, software) and this has been evidenced in the deal and funding tallies to tech, but otherwise, the state remains a one-trick pony. It has seen some uptick in clean tech activity but at present, tech continues to dominate.While Massachusetts and Silicon Valley are on par when it comes to number of exits, Mass. leads when it comes to aggregate exit valuation. The state accounted for 27% of the aggregate valuation of the top 50 healthcare exits. Silicon Valley and SoCal followed closely with 22% and 19% of the aggregate valuation, respectively. Interestingly, the largest exit came from neither Mass. nor Silicon Valley but from Virginia where Third Security-backed biotech company Intrexon went public earlier this year with a valuation of $1.5B.
To measure the “value creation” from an investor’s perspective, we also looked at the average exit valuation generated in each region per dollar invested. The total funding versus the exit valuation for the top 50 healthcare exits since 2012 are plotted on the chart below. Interestingly, most of the desirable outliers, that is, companies towards the higher end of the valuation spectrum, do not belong to the top healthcare VC hubs (namely Mass. and Silicon Valley).
Since a trend is not easily discernible on the scatterplot, we highlighted the value creation ratio for each region in the following table. (Note: The ratio is defined as average exit valuation per exit in the region divided by average funding raised by a company prior to exit.) As is evident by the table, healthcare is a much less explosive industry than tech – healthcare’s top value creation ratio of 4.7 is closest to the lowest contender on the tech list which is Illinois at only 4.2. All the major venture hubs see a value creation ratio of 10 or greater in tech versus 5 or less in healthcare. Again, while Massachusetts and Silicon Valley lead in terms of share of exits and aggregate valuation, their value creation ratios are not the highest. New York and SoCal have led to the highest returns per dollar invested, with ratios of 4.7 and 4.3 respectively. However, with a value creation ratio of 3.8, Massachusetts is still a better bet for healthcare VCs than Silicon Valley at 2.6.