Changes in Biotech Series A and B Venture Capital

In the last ten years, there have been significant changes in Life science funding trends including a sudden surge in the number of biotech start-ups and newer investors/capital sources. The trends of the shifts in the funding of life science companies companies can be compared to the trends in internet and software companies from 1995-2000.  It is likely that the trends that evolved there, will parallel what happens with life science funding over time.   For example, there was a tendency for investors to prefer experienced CEO’s to take over for founders of software companies in the B or C round.  That trend has evolved into more founder friendly investors who prefer to support the founding CEO all the way to exit.    Andreessen-Horowitz came up with the concept of being founder friendly and just recently  went back to market less than than three years after closing its $450 million fund in 2017. The firm’s first, $200 million life sciences fund closed in 2015.  

Here is what the firm wrote in its announcement of the new fund:

Bio is not the “next new thing”—it’s becoming everything. Software is now affecting not just how we do not just one thing—cloning DNA, or engineering genes—but how we do it all across the board, blurring lines, breaking down traditional silos, changing our processes and business models. In other words, technology today is enhancing all our existing tools and data, affecting every decision we make, from research to development to deployment—and how we access, pay for, and experience healthcare.

And it’s not just software. What is technology really? It’s principles and process. It’s a shift to an engineering mindset for relentless iteration and constant improvement; modular components that can be remixed and reused, and improvements that accrue and compound over time. Tech gives us tools beyond just software—continuous data streams to describe our health, circuits to program cells, scalpels to edit DNA, and the ability to create programmable, living medicines. Our focus is not just on the groundbreaking outputs of this shift, from novel gene and cell therapies to digital therapeutics and virtual care models, but on the underlying approach and drivers that created those breakthroughs. This is why it doesn’t work to simply tack on AI, or just insert tech into an established company. In order to re-program entire systems and re-imagine new approaches to massive challenges, whether those are biological, or man-made, you need to rethink the process from the ground up.

Past trends in Biotech Start-up Funding

In the early stages, the venture creation model involved VC firms pooling out their money to invest in a biotech company. The VCs would prefer to fund companies with a founding team with executive experience and expertise/infrastructure (like a lab) in the company along with IP and pre-clinical data.  This resulted in very high upfront costs required to build a full-fledged infrastructure for the biotech companies.   This also means that high upfront costs meant that early experimental pre-clinical failures were very expensive.  However, since the recession of 2008, there has been a striking shift in the landscape of life science start-up funding.

Current scenario – The Ease of Seed Funding Has shifted the entire landscape of biotech start-ups

Since the recession of 2008, there has been a striking shift in the landscape of life science start-up funding. In silico software and more outsourced contract research organizations have enabled founders to invest less money in early investigations and lowered costs to perform these experiments.  In addition, the emergence of the life science crossover funds emerged at the later stage and several new models of institutional seed-funding/incubation with outsourced CRO business models emerged. This resulted in a sudden upsurge in the number of biotech start-ups.  The balance of power also shifted to scientific co-founders/CEO who were amenable to driving scientific process through an outsourced CRO.   This led to a rise in younger founders who would have to learn how to manage these emerging enterprises.  With dramatic reductions in the costs to setup a new company, you could make meaningful progress to de-risk a new clinical intervention with less than $100,000.  This  is enough to start a new company, run a lean business model process to find product market fit and perform in vitro modelling.  With more affordable and equipment lease, labs, supplies has meant less capital needed in follow-on rounds as well, which means higher returns on earlier invested capital.

Future Predictions – Countless Opportunities

What is apparent is that although there is no blueprint or one-size-fits-all path for capital formation, funding options available to businesses have evolved dramatically over the past decade, and biotech and life sciences companies have potential access to a wider than ever variety of funding options. It appears this trend will continue in the next decade. For example, the US Securities and Exchange Commission (SEC) recently announced a proposed amendment to the definition of accredited investor that will significantly expand the range of individual and entity investors that will be able to participate in Regulation D offerings (the SEC’s primary “private placement” exemption).