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Healthcare startup investing rose in Midwest last year

Brandon Glenn

The good news for healthcare startups in the Midwest is that they raked in 10 percent more venture capital dollars in 2011 than the prior year.

The bad news is that the 2011 total ($810 million) was still less than the amount raised in every year from 2007 to 2009. Venture fundraising by Midwest healthcare startups is down 34 percent from its 2007 peak of more than $1.2 billion, according to the latest annual venture report from Cleveland-based business development group BioEnterprise.

Minnesota ($223 million), Ohio ($178 million) and Missouri ($169 million) led midwestern states in attracting investment dollars in 2011.

In terms of the healthcare industry sector, investment dollars were spread out fairly evenly in the three major categories: medical devices (36 percent), health IT and services (32 percent), and biopharmaceuticals (31 percent).

Going forward, the outlook for healthcare startups in the Midwest seeking to raise venture funding looks shaky. Mark Heesen, president of the National Venture Capital Association, last week told Xconomy that he expects venture capital deals will continue to cluster along the East and West coasts, with a hole expanding in the Central U.S., where it is becoming increasingly difficult for technology and life sciences startups to attract venture investment.

Of particular alarm nationally is a big reduction in first-time funding deals for life sciences companies, which dropped to 153 last year, a 43 percent decline from 2006.

“Life sciences VCs are increasingly focusing on later-stage opportunities that carry less risk, from a clinical and regulatory perspective,” said Jonathan Leff, a managing director at the New York-based venture-capital firm Warburg Pincus, Bloomberg News reported. “This reflects a serious breakdown in the model that has fueled the U.S. leadership in life sciences innovation.”

Still, there are bright spots nationally that suggest that rumors of healthcare venture capital’s death have been greatly exaggerated. The sector closed out 2011 in strong fashion and posted a five-quarter high in funding and recorded solid deal activity, according to the latest quarterly report from venture capital database CB Insights.

In addition, healthcare (23 percent) grew as a percentage of all venture capital deals in the quarter after three consecutive quarters in decline, according to CB Insights.

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