In one venture investment category, New England holds its own with Silicon Valley: life sciences, a sector that, nationally, is surpassing IT in dollar volume as an investment category.

Every VC sector has seen its share of multimillion-dollar investments turned into smoking holes in the ground. But most investors acknowledge that health care is riskier than most. With regulation on the upswing, and Medicare and Medicaid reimbursements headed in the opposite direction, investors now face a more challenging environment than ever. We spoke with two Boston VCs known for not being shy of risk, and asked each where they’re applying a higher level of scrutiny before investing and what categories they’re avoiding like the plague.

Perhaps it’s counterintuitive, but in this environment, both agreed that the smart money is in a big bet on a novel treatment or device. Incremental developments may take less capital, but the risk of failure has become too great to bear.


James Garvey | Chairman, SV Life Sciences

Garvey joined SVLS in 1995, following executive roles at several life sciences companies. In 2009, his firm was one of a few in Boston to increase its investment activity over the prior year, doubling down on portfolio investments when other firms in its syndicates dropped out.

Dangerous area #1: Health-care reform

I think the big elephant in the room right now is still the health-care legislation that was passed, and how it’s going to be interpreted and/or where it’s headed relative to some political challenges. You neither want to ignore it, nor should you overreact to it.

Dangerous area #2: Incremental improvements

The FDA is not interested anymore in things that might have fewer side effects, or one pill a day versus three. There’s just much more pressure coming out now on drug approvals and trial requirements, which increases the time and money.

Dangerous area #3: Late and early phases

We continue to be pushed toward products that are either already in Phase 1, or right near Investigational New Drug (IND) status, and to avoid any products that are more than one year away from the clinic, that are really still in research, and on the opposite end of the pole, the Phase 3 projects, which are going to take even longer and more cash to get approved.

Dangerous area #4: Oncology

Oncology drugs almost always now require a prolonged and intense Phase 3 study, probably even a Phase 4 follow-up. Once you go over $100 million, as soon as you get into something that’s more expensive than that, you’re just out of the range of even three or four venture funds coming in to fund it. I think it’s bad news for drug development in general. It’s particularly bad news for oncology drugs — the class that gets more affected than any.

Dangerous area #5: Medtech

I think there’s going to be a lot more regulatory and reimbursement pressure on the medtech side too. The more sophisticated device, unless it’s truly creating a new class of product, is just going to be a lot tougher to get approved and sell. I think there’s a couple hundred companies in that space in Mass. I think you’ll see fewer of them in the future.

Dangerous area #6: Opthalmology

I think you’ll see a little flash in opthalmology, but then you’ll see too many things funded in that area. Unless you’re really established with the best in the field, I think you’ll see too many opthalmology companies started and then a substantive portion of them fail. We won’t avoid the category. It’s been our most successful niche. But it’s like the old disk drive case with VC when there were 47 disk drive companies. How many does the world need?

Dangerous area #7: Neurostimulation

Neurostimulation has been a hot topic. There’s probably too many companies out there now. I think you’ll see a wash-out in that area. Even though the population demographics are increasing, there are reimbursement and the regulatory issues. We’ve seen a number of companies where the FDA has missed statutory response dates and required more information than they have in the past.


Daphne Zohar | Founder, managing partner, PureTech Ventures

A serial biotech CEO and founder, Zohar founded PureTech in 2001 with Robert Langer and John Zabriskie, and began investing in very early life sciences companies at a time when other venture firms had dialed down early-stage activity.


Dangerous area #1: Incremental improvements

The (U.S. Food and Drug Administration) is scrutinizing incremental improvements much more and putting a higher bar on them for approval. It has to do partly from the payer’s perspective. The bar is higher. If something is already out there and works, or to some extent is perceived as working, to bring a new drug with new risks involved, they want to make sure that if you’re going to bring in something, it’s really a big step above the things that are already out there.

Dangerous area #2: Cardiovascular

It’s an area that’s becoming more challenging. That’s probably due to a higher FDA bar. Larger clinical studies are required. There’s a lot of noise and a lot of competition, and it’s hard to convince people to pay extra for innovation. In that space, there’s a lot of incremental innovation.

Dangerous area #3: Stents

There is innovation, but I think there’s a lot of noise and a lot of components people have to pay for. There’s a problem of intellectual property and freedom to operate. Crowding has a greater impact in a device market. Orthopedics is another example. If you’re doing an element of that procedure differently, you still run into all the other IP you need to perform that procedure, so there’s cost issues.

Dangerous area #4: Sepsis

I tend to not be in the camp of folks who say we’d never do a specific therapeutic area. Some of the ones that are also the most challenging are also the ones where there’s the greatest unmet need. The bar is higher in those areas, maybe. But at the same time, there’s a huge unmet need, and there would be a lot of value there. Sepsis is one example of that. It’s a medical condition where the whole body has an inflammatory response. It usually happens in hospital intensive care. If you ask people in biotech or pharma, it’s one that’s really challenging. There’s been a lot of failures in the past. I wouldn’t say we’d never do it. We just would look at it with a little more skepticism.