Big-name venture capital firms are raising billions again, though funding a small number of de-risked companies. Meanwhile, smaller VC firms are catching the less flashy companies they think could be future pillars of the sector.
The biotech industry’s largest venture capital firms are reloading with billion-dollar funds for the next generation of biotechs, a welcome sign of good times ahead. But that high-profile cash is largely earmarked for clinical-stage companies with well-known executives and data to show.
Sara Choi, a partner with Wing Venture Capital, said when a billion-dollar VC fund is announced it’s important to “double click” on what they’re focused on. If they incubate their own companies, the major raise is likely going to just a handful of splashy companies.
Think Flagship Pioneering, the “venture creation” firm that does just that, incubating innovative companies and pumping hundreds of millions into early raises. Flagship raised $3.6 billion in July, which will be used to support 25 new companies. Another is ARCH Venture Partners, a familiar name in some of the buzziest biotech raises of the past year including Metsera and Xaira Therapeutics. ARCH raised $3 billion recently to found and invest in early-stage companies, with a particular focus on companies working with AI and data-driven biology.
Those new funds are good news for the biotech sector, said Cain McClary, managing partner and founder of KdT Ventures. “It’s good for us that those larger companies exist. They’re taking big swings.”
But venture capitalists who spoke with BioSpace pointed out that these huge new funds do not provide a full picture of companies outside of that orbit that may be smaller with preclinical or more experimental science. That’s where smaller VC firms like Choi’s or McClary’s come in. Both say they’ve been plenty busy funding early-stage companies, even if their work has a lower profile.
“A lot of dollars are being raised. Where they’re going to really matters,” Choi said. “I would like to see more funding at the pure-play series B stage, because to me, that’s where the drop off is happening.”
Setting the Table
Jakob Dupont, executive partner with Sofinnova Investments, said that small companies need to do their research before approaching a VC firm. That’s always been important but has become more so given the market’s current preference for de-risked, late-stage assets.
“It’s important to recognize that all funds are not created equal,” he told BioSpace.
Sofinnova, a veteran life sciences investment firm that’s been around since the 1970s, lives between the smaller funds and the billion-dollar raisers. The firm is currently on the back-half of its 11th fund, according to Dupont, which was $510 million. Sofinnova targets clinical-stage private companies and the fund has so far contributed to 10 investments. It’s latest was Seaport Therapeutics, the neuroscience biotech from the former leaders of Karuna Therapeutics, which just raised $255 million in a quick Series B after emerging from stealth in April.
Other VC firms may be focused on seed funding, angel investing or early Series A rounds. They may be looking for more platform companies or singleassets. Are they oncology experts or into cell therapy? All of these specifics are need-to-knows before going out to investors in this market to ensure you’re not wasting anyone’s time, Dupont said.
The market is full of biotechs with proven leadership teams and existing investor syndicates to tap into right now, Dupont pointed out. In addition to Seaport, BioAge is another good example in Sofinnova’s portfolio.
“If you’re a relatively unproven management team, then maybe think that the table is not going to be set for you in the same way,” he said. “What’s happening to a degree now is that we’re still in a somewhat conservative space where we’re more interested in investing in proven management teams [and] de-risked clinical data.”
Dupont hopes that will change and preclinical, riskier bets will rise again. But for now, companies need to hit the books and do their research to find the right investors.
A Return to Normal, Whatever That Is
While the larger market stays on the conservative side, smaller VC firms like Wing and KdT that target earlier-stage biotechs are more than willing to take some bets on new science.
Wing’s portfolio companies include Cartography Biosciences, which launched in July 2022 with $57 million and a focus on developing immunotherapies using computational technology to identify targets. Another is Veo Therapeutics, which also launched in 2022 with $12 million to find drugs using an in vivo data generation platform.
Over at KdT, the portfolio includes Rejuvenate Bio, which is developing a gene therapy to treat multiple age-related diseases that will initially be tested in dogs to assess its ability to extend lifespan. The biotech launched in 2022 with $10 million. Another biotech that KdT has supported, generative AI–focused Terray Therapeutics, announced a multi-target small molecule discovery agreement with Bristol Myers Squibb in December 2023.
Seed and series A funding is definitely still happening, according to Choi, but biotechs are facing a higher burden of proof than companies that started out in the post-pandemic frenzy of 2021. During that time, megarounds were everyday occurrences for early-stage companies. There was plenty of money to go around for riskier bets, plus interest from outside investors. Now, fundraises pushing $100 million or more require a bit more convincing.
“There has been a—quote, unquote—return to normalcy or correction when it comes to valuations,” Choi said. “On the front lines, things haven’t really slowed down.”
McClary said smaller VC firms are a great proving ground for early biotech leaders, and that’s what he hopes to be a part of with KdT. He started the firm in 2017, riding through the pandemic when cash for biotechs was easy to come by.
“Folks have moved the goalpost on earlier stage companies and are requiring clinical data and are requiring you to go longer with less,” McClary said. That has required KdT’s companies to be extremely judicious with resources and carefully prioritize their pipelines. These companies have to work harder in this earlier stage to make it to the late-stage when larger firms will take notice, he added.
Just like its larger peers, KdT has recently reloaded, collecting $100 million in its fourth fund. That brings the firm’s total assets under management to $250 million. KdT made a point of keeping the fund small, although it was up on the $80 million raised in the last round. McClary said KdT actually turned down some money, aiming to keep the fund small.
“We’re willing to sacrifice the upfront, the fee flow that a lot of these larger funds have to stay myopically focused on that zero to one stage,” McClary explained. “Not having unlimited capital for these early-stage checks forces a much more thoughtful process in underwriting these early-stage opportunities.”
KdT has also pointed companies toward government dollars to additionally bolster cash reserves when possible, McClary said.
“We’ve actually done quite a bit of work in trying to build relationships and bridges with different governmental entities to make sure that we have access to any and all capital, and not just equity capital for our companies,” he said.
Dupont said larger firms want to see discipline as companies transition into the later stage. Instead of the heady days of the pandemic when a slate of pipeline projects showed depth, investors want to see one or two of the strongest assets. They also want to know that clinical trials are well designed, the FDA has been engaged and the potential patient population and unmet need has been studied.
Being careful with the capital you have is also key when thinking about future investment needs. That means keeping the staff and executive team as small as possible, according to Dupont.
“Just keep it small, keep it lean,” he said. “Really protect that money that you have, because it is still a bit of an uncertain fundraising environment.”
