Opinion: Biotech’s Cash Crunch—Why Capital Is Down When VC Is Up

Pictured: American cash shaped into a funnel/iStock, alexfiodorov

Companies that successfully raised money in their Series A funding rounds a couple of years ago are now facing challenges in securing fresh capital. According to Silicon Valley Bank, of the more than 350 biotech companies raised Series A financings between July 2020 only 102 achieved successful Series B rounds last year.

Initial public offerings (IPOs) followed a similar trend, with an impressive 182 companies collectively raising nearly $30 billion in 2020 and 2021, according to BioPharma Dive, while 2022 saw just 47 biotech IPOs raised a total of about $4 billion and the first half of 2023 saw fewer than a dozen.

These trends illustrate the current market conditions characterized by elevated inflation, rising interest rates and the risk of losing exclusivity. The biotech industry thus is navigating a complex and challenging landscape that has led to a widespread retrenchment leading to various cost-cutting measures such as workforce layoffs, reallocation of capital and prioritization of the most promising drug candidates in their pipelines.

Despite the overall investment pullback, venture funds managed to raise an impressive $22 billion in 2022, making it the second-largest fundraising year in history. This year has shown similar promise, with fundraising in the first quarter alone reaching $6.8 billion, accounting for 40% of the total amount raised in 2020. Notably, it’s not only traditional venture funds pursuing attractive opportunities in biotech; tech investors are also chasing new deals. And tech investors possess the ability to allocate substantially more capital compared to VCs exclusively focused on biotech.

The growing interest and venture funding in the sector indicate the potential for growth and innovation in biotech. Yet, as investors began to anticipate rising interest rates along with the brutal recent market sell-off, biotech VCs have reevaluated their risk tolerance approach and decided to move toward a risk-averse profile until the macroeconomic landscape becomes less volatile. This has forced biotech companies, especially those conducing early-stage research, to explore alternative funding sources to sustain their operations and drive advancements in the field.

During 2020 and 2021, there was a massive flood of very early-stage biotech companies going public. In 2020, a record 81 companies raised $13.5 billion through IPOs. This record was surpassed in 2021, when 152 companies raised more than $25 billion. Similarly, VCs were throwing capital at these high-risk early-stage firms. During 2020, there were 194 deals in seed and series A for a total of $5.3 billion. And in 2021, the venture capital gold rush was in full swing, with investors making 315 deals for a total of $7.9 billion, a 62% increase in terms of early stage deals year over year.

With the influx of cash, these companies began recklessly committing to non-essential permanent structures, rapidly expanding personnel without careful consideration, getting entangled in costly long-term leases for excessive spaces and investing in nascent scientific ventures without waiting for their viability to be demonstrated.

Subsequently, a wave of bad clinical news and global “risk off sentiment” shaped the path for a sharp 180-degree shift in business development. By the end of 2022, 119 companies had announced layoffs in the sector. So far this year, more than 5,000 people have been laid off across dozens of biopharma companies. At the same time, IPOs have slowed to a trickle.

In the face of such changes, VCs also dropped off and shifted to a more risk-averse mindset. In the first half of this year, there were 17 seed and Series A deals in the biotech industry, with a median deal size of $35 million, down 30% from the same period last year. There were 31 Series B rounds, with a median deal size of $73 million, down 25% from 2021 1H. These investments have focused more on later-stage biotechs, or at least those with human proof-of-concepts.

This drop in VC investment has forced biotech companies to slow cash burn and adopt comprehensive cost optimization measures. A crucial lesson learned from this crisis is the necessity of adopting a capital-efficient business model that compels companies to maintain financial discipline. Some strategies involve prioritizing critical infrastructure, cautiously managing team growth and diligently assessing the feasibility of scientific projects before allocating substantial funding.

Having a flexible but disciplined approach reduces the need for continuous funding rounds, giving the companies the ability to pivot between compounds without diluting existing investors or affecting workforce stability. Adaptable models empower biotech firms to navigate market fluctuations effectively, whether during periods of ample funding or economic constraints. Flexibility paves the way for sustained growth and triumph in the ever-evolving and dynamic landscape of the biotech industry.

Maggie Urquiza is a founder of LeapCode Bio and a former biotech analyst focused on neurology, cell therapy and cardiovascular diseases. You can reach her at murquizaperez@gmail.com. Follow her on Twitter @BursatilBiotech.