Editor's note: This is the first of a two-part series on the flow of venture capital money into and through the biotechnology industry.

Venture capital investment in the global biotechnology industry hit $2.1 billion in the first quarter of 2007, according to data from BioWorld Financial Watch and BioWorld Snapshots. That's almost double the $1.2 billion raised in the first quarter of 2006 and a sharp spike up from the steady $1.3 billion raised in each of the second, third and fourth quarters last year.

"There's a lot of money available," said James Thomas, partner and co-founder of Thomas, McNerney & Partners. That money is coming both from newer players in the space, such as hedge funds, and from established biotech venture capitalists whose companies from "two funds ago" have reached their exit, freeing up the bandwidth to manage new funds, he said.

At the same time, some investors are feeling pressure to fully invest funds that are nearing the middle of their investment horizon, said Bertrand Liang, vice chairman of Paramount BioSciences LLC. "As a fund gets later and later, you have pressure to spend the money and get the returns," he said.

Thomas added that optimism also was a key factor behind the first quarter investment activity. Some of that optimism is attributable to pharma's apparently insatiable appetite for acquisitions, but Thomas also pointed to "an unusually high quality of deals in the marketplace," many of which started fund raising at the JPMorgan conference in January and closed in the first quarter.

Yet venture capitalists don't expect the frenetic pace to continue. And indeed, the $513.7 million raised by private biotechs in April represents a decline from the $798.7 million raised in March, the $763.5 million raised in February and even the $518.7 million raised in January.

Robert More, partner with Domain Associates, noted that biotech "ebbs and flows with cash from quarter to quarter" and that "there are always a few big deals that can swing it."

There were certainly a few whoppers in the first quarter, like the $300 million round raised by Ikaria Holdings for its gas-based critical care drugs and the $175 million round pulled in by specialty pharmaceutical company EUSA Pharma Inc. (See BioWorld Today, Feb. 23, 2007, and March 2, 2007.)

A similar situation occurred in the first quarter of 2004, when a $250 million round from Jazz Pharmaceuticals Inc. boosted the quarterly total to $1.6 billion, more than double the 2005 first quarter figure of $793.6 million. Yet the rate of venture capital investment evened out over the rest of the year, ending at $4.9 billion.

Beyond fluctuations caused by megadeals, "the question is what drives supply and what drives demand," said Christian Cortis, senior associate with Advanced Technology Ventures. Unless there is a "significant change in the IPO market," the demand for acquisitions may remain the primary driver of investor optimism, he said.

Investors seem to agree that the appetite for biotech acquisitions shows no signs of abating. On the supply side of the equation, however, Thomas maintains that there are "not enough deals" to warrant the current pace continuing. "Also, people are busy," he added. "After you do two deals, the third looks less attractive."

Liang noted that newer investment funds are raising less money, which also may slow the pace of venture capital activity. "My guess is you'll start to see investment size going down," he predicted, adding that it's easier to get the desired return on a smaller investment.

A slowdown in the venture capital market might not necessarily be a bad thing.

"There's more money out there than great teams and great ideas," said Bryan Roberts, managing general partner with Venrock Associates.

"The 'too much money chasing too few deals' argument is absolutely true; we're very concerned about that," said John Taylor, vice president of research with the National Venture Capital Association (NVCA). Looking beyond just the biotech industry, a recent report from PricewaterhouseCoopers and the NVCA, based on data from Thomson Financial, found that VCs poured $7.1 billion into U.S. companies in the first quarter, the highest quarterly dollar amount since the fourth quarter of 2001.

Yet Taylor noted that the first quarter numbers were "still a far cry from the height of the bubble" and that they happened for "very good reasons." Specifically, the overall venture capital figure was driven by strong performance in the life science and CleanTech sectors as well as a more attractive IPO market. But if subsequent quarters continue at that level without good reason, it is a "cause for concern," he said.

Last fall, the abundance of venture capital available prompted Sevin Rosen Funds to take drastic measures. According to a New York Times article, the firm canceled a fund and returned the money collected to its investors. Yet many other VCs have speculated that the decision stemmed more from Sevin Rosen's own internal troubles than from the traditional venture model being "broken," as the firm told the Times.

"The venture industry, globally, has never been a terrific asset class; only the top quartile funds have been terrific investments," said More, who called Sevin Rosen's indictment of the entire venture capital industry "somewhat offensive."

According to Thomas, the venture capital model cannot be broken because there has never been a model that works. "We are not investing in a business, we are investing in serendipity and science," he said.

Yet as the science evolves, so does the way in which it is developed and funded. "The market has matured; investors are more sophisticated; there is more competition - the biggest challenge is to move with the times," Liang said.

He pointed to the newly vintaged smaller funds as an evolution of the megafunds of the past, adding that "more strategic, smaller investments with a higher return are a good thing for the industry."

Cortis noted that while "the essence of VC investing hasn't really changed," the "type of company that is favored is evolving, as is the financing strategy for the companies."

Wednesday: A closer look at who's getting funded.