venture capital is hard to come by for biotech

If you look back a little over two years to early 2021, putting money into biotech companies seemed like a pretty safe bet. However, the COVID-19 pandemic has cast a positive light on the biopharmaceutical industry, and initial public offerings (IPOs) are booming.

But in the past two years, venture capital and overall funding in the industry have dried up due to the economic crisis, which has had a major impact on many biotech companies.

In fact, financing for biotech companies fell by 48.6% compared to 2021, and in 2022, the IPO market plummeted, with market volatility and uncertainty. lower IPO yield by 93%.

In addition, this year saw the collapse of Silicon Valley Bank. This sent shock waves throughout the biotech industry and added fuel to the fire for the many small biotech companies that rely on banks, which play a large role in financing early-stage life sciences and healthcare companies.

Venture capital is drying up

With economic uncertainty comes additional risk, and, of course, because of that, venture capital firms have become more selective around which companies, and how many companies, they invest in.

“The overall unfavorable and dismal economic landscape has made the appetite for deal-making in the biotech and life sciences industries dry up. Meanwhile, venture capital firms are depending on their cash to survive and cover operating costs for their current portfolio companies while weathering the storm,” said Carl Foster, chief business officer at Standigm, an artificial intelligence (AI) drug discovery company.

Foster noted that the drop in demand for drugs and treatments for COVID-19 since the pandemic subsided has also acted as a “sharp return to baseline” for many industry players.

And, according to Garri Zmudze, co-founder and managing partner of LongeVC, perhaps another reason for the recent decline in venture capital is that the “hype” cycle around biotech breakthroughs during COVID-19 – such as mRNA technology – has now been pulled into a natural shutdown.

“There is significant ‘hype’ around new technologies that promise to transform health. Not all investors who join the space during its peak have the expertise to evaluate scientific soundness. Early companies often raise the rating round by significantly overestimating pre-clinical level hypotheses alone, without any accompanying data,” said Zmudze.

He gives gene therapy as an example of another “hype cycle” investors go through before certain failures lead to more cautious investments being made.

“Enthusiastic investment led to an overvaluation that did not reach the anticipated potential. Failure to deliver the promised value and pre-clinical/clinical results results in the investor writing off a large portion of their invested capital. They have either slowed down biotech investment or prioritized deep scientific due diligence, causing valuations to fall and requirements for investment to increase,” he said.

The overall effect on the biotech industry

“Biotech companies and venture capital firms were hesitant to make big deals, and because of this, the biotech consolidations and acquisitions that occurred were dramatically undercut from their previous highs. There is a real dearth of deals compared to previous years,” said Foster.

Meanwhile, Kristofer Mussar, chief operating officer (COO) of VectorBuilder, said that large pharmaceuticals are also being forced to significantly reduce R&D spending, which of course has a consequential impact on biotech companies.

“It’s these huge R&D budgets that companies like mine and other small to medium-sized biotechs rely on to grow. If the big players start tightening their belts, this immediately trickles down to the rest of the industry that depends on contracts with these major players. Without the promise of a major strategic partnership with a giant in our field has raised doubts among investors, ”he explained.

In times of economic uncertainty, companies need to try and find ways to ensure their survival, namely by saving cash and optimizing their financial situation as much as possible.

Some companies were lucky enough to raise a lot of money before the crisis. “Often biotech companies oversubscribe their rounds when they can. For example, if the market is positive, it makes sense to raise more and suffer from additional dilution but ensure a minimum two year runway by doing so. Given the typically high burn rates, we see some lucky companies able to raise ‘a bit more’ in good markets and now have an additional buffer,” said Sergey Jakimov, who is also co-founder and managing partner of LongeVC with Zmudze.

This means that those companies that were lucky enough to raise a good amount of money before the economic downturn, now have the opportunity to save their money and use it wisely.

For example, according to Jakimov, instead of spending too much on several clinical programs running concurrently, they could simply focus on primary disease indications and not spend too much on their R&D.

Some companies are also considering other strategic options, such as selling key assets, licensing their key assets across multiple territories, and M&A.

Additionally, perhaps one of the biggest trends of recent times has been a wave of layoffs in the biotech industry. This is one of the main ways in which companies are trying to stay afloat during the crisis, with more than 5,000 employees estimated to have been laid off from biotech and pharmaceutical companies this year, according to data published in April from BioPharma Dive.

Is the situation really as bad as it seems?

The current situation for biotech funding may sound dire, but Simeon George, chief executive officer (CEO) and managing partner of venture capital firm SR One thinks that perhaps the situation isn’t as bad as it seems, noting that, despite the headwinds, the capital is there.

“From our point of view, all the key ingredients are and will continue to be. I think what’s challenging is that obviously there are some external headwinds – inflation and public markets – but I would argue that there is no better time than now to invest in biotech, to build companies,” he commented.

For example, he says that SR One was actually able to raise $600 million in new funding, allowing venture capital firms to invest in early-stage life sciences innovation startups in the US and UK.

Meanwhile, in what may be a positive outcome for the industry, Zmudze and Jakimov point out that a “biotech winter” has played a cleaning role, weeding out the industry’s “lemon” and making room for scientifically sound ventures, such as venture capital firms. now more focus on due diligence to avoid future accidents.

A hopeful future for venture capital

While there may be some disagreement as to how bad the current situation is regarding venture capital, what is certain is that it will start to improve at some point in the future, given the fluctuating nature of the economy.

But when that will happen is uncertain. Expectations will improve in the year ahead, and Zmudze said that activity in the sector has picked up compared to January.

“In other industries such as fintech, the slower period usually lasts around a year before a significant acquisition or technological advance changes the narrative. In biotech, one of the major forces restoring investor confidence in the sector is undoubtedly the M&A activity of major pharmaceuticals and other stakeholders. We are starting to see it happening now – look at Eli Lilly closing a lot of deals recently.”

Meanwhile, the general consensus among experts is that the use of AI in the life sciences will be a game changer, attracting investors once again. This could be especially true after recent developments, where AI helped discover new antibiotics, and was the first fully AI-generated drug to enter clinical trials in humans.

And, according to Zmudze and Jakimov, quality will always shine through in the end: “A start with the right team, good clinical data and a strong roadmap will always be funded.”