Studies

Venture Capitalists Made Fewer Bets on Philly in 2017

The region saw a big drop in investment activity this year, but it's not all bad news.

Philadelphia skyline. preeterv | iStock

If you talk to almost any entrepreneur in Philadelphia about what the region’s innovation ecosystem lacks, chances are the word “capital” will be among their top answers. The quest to get more investment dollars flowing through the Philadelphia region is chronic, and a new report from the Philadelphia Alliance for Capital and Technologies (PACT) shows that while Philly hit a three-year streak in growing investment activity, 2017 killed the trend.

More:

The region saw around $842 million in investments in 2014, about $882 million in 2015, and a peak of $1,010 billion in 2016. For 2017, that number dropped steeply to about $529 million. The drop is certainly palpable as the number of deals also decreased from 196 in 2014 to just 121 in 2017. While the report explains that the decline is consistent with a national trend, and that Philly’s venture capital activity has in fact grown rapidly over the past decade, there’s ample room to galvanize VC activity here. And how? To start, Philly simply needs more capital at all stages (so not just early-stage dollars, for example), and even more pressing should be Philly’s push to expand its local base of investors.

Here are 10 other crucial takeaways from PACT’s 2017 Philadelphia Venture report:

1. Philadelphia’s healthcare sector is still king.
The largest areas of VC investments for the region were made into the healthcare industry, which includes the region’s research universities, hospitals and big pharmaceutical corporations. More than 40 percent of completed VC rounds this year have been made into healthcare. And in terms of deal value, health care investments represented nearly 80 percent of the $529.6 million in deal value that Philadelphia saw in 2017. So naturally the five largest financings completed this year have been by healthcare firms.

2. Philly’s proximity to New York, DC, and Boston is a blessing for local VC activity.
Philly’s close location to these other East Coast hubs allows for outside investor participation. For example, Philly’s largest VC deal of the year was Complexa’s $62 million Series C in July. Not one of the investors in that deal was headquartered in the Philadelphia area. And overall, most of Philly’s deals this year came from investors located outside. Of the 136 unique investors that made at least one deal here this year, a whopping 110 are headquartered outside of the metro area.

3. But the proximity is also a curse.
Because the VCs are not in or exactly around Philly, entrepreneurs are often tempted to relocate to be near the capital. Because we want homegrown entrepreneurs to stay here, the report suggests that the city better market itself as a flourishing ecosystem to its. Initiatives like the city’s StartupPHL have fostered this “domestic entrepreneurship” and even have the ability to attract entrepreneurs outside.

4. Philly companies are now older when they raise funds.
For 2017, Philadelphia startups marked a median age of 2.3 years when raising angel and seed rounds. That’s a small drop from 2.7 years in 2016, but about a decade ago in 2009, the median age was just one year.

5. Philadelphia is seeing way more angel and seed rounds.
Though there’s been a drop in the number of angel and seed round since 2014, a big proportion of the growth in Philly’s volume of deals can be traced to an increasing number of angel and seed rounds. In 2016, the region had 85 angel and seed deals, compared to 60 early VC deals and 33 late VC deals. The gaps narrow in 2017, with 49 seed and angel rounds, 48 early-stage VCs rounds, and 24 late-stage VC rounds. Another fun comparison to illustrate the point is with the University of Pennsylvania. Between 2006 and 2011, just 10 companies out of the school received angel or seed financing deals in Philly. But since the beginning of 2012, almost 30 have gotten an angel or seed round.

6. Corporate VC is thankfully on the rise.
In Philly, we often lament the lack of connection between large corporations and startups, but the report shows that we’re making progress here. Corporate VC activity this year continued its recent growth. 2017 almost matched the decade high for number of deals with corporate participation (the high is 16 in 2016), and corporate VC is on track to surpass the deal value record, which is $277.1 billion in 2012. But unfortunately, much of the corporate VC participation comes from corporations headquartered outside the Philly region. Exactly eight of the top 10 corporate VC’s for the region are headquartered outside of it. The top six most active corporate investors in Philly since 2010 include Novo, Pfizer, and Novartis.

7. Philly just might make a name for itself with impact investing.
This type of investing involves backing enterprises that focus on creating positive social change, and also returns. One top example of an impact investment program in the region is ImpactPHL. Due to programs like ImpactPHL, impact investing in the region has grown by more than six times since 2008. In 2016, 37 investments were completed in 2016 for a total investment of more than $150 million.

8. Fundraising is really, really holding Philly back.
Since the beginning of 2015, there has been $534 million in commitments made to 12 VC funds. The figure is paltry compared to larger VC hubs. According to the report, the low number of funds makes it difficult for startups to raise local cash at certain development points, particularly at late stages. Late stage funding rounds can help companies continue growth through to an exit and ultimately recycle more capital and talent. And as mentioned before, the lack of funds is simply driving entrepreneurs out.

9. Not enough exits in Philly. (Do we sound like a broken record here?)
This is another point that’s consistently at the core of Philly’s venture woes. Just 151 companies have completed an exit since 2010, for an average of about 20 per year. And while more than $7 billion in exit value has been realized, nearly 30 percent of that is represented in just three exists. $783 million in exit value has been created since the beginning of 2016, including $430 million in the third quarter of 2017.

10. There’s mounting opportunity for Philly’s VC activity to balloon.
As the industrial makeup of Philly’s economy changes, VCs will see greater opportunities to invest. Philly has traditionally been rooted in manufacturing and health care, so as manufacturing moves toward automation and as Philly’s healthcare sector becomes more innovative via tech, VCs will have more room to explore, the report says.