Navigating Biotech Funding Dynamics: Shifts in Public and Private Finance
Today, we are living through what many believe is the most exciting era in the biotech industry, an era characterized by an accelerated pace of innovation where disruptive technological and scientific advancements are enabling the discovery and development of disruptive therapies to solve high unmet needs. However, over the past nine months, if we look at how the funding environment has changed, one can’t help but notice that there is a serious impedance mismatch between innovation and financing across both the public and the private sectors.
When we compare the financing environment today with the one we witnessed between 2017 and 2021, we notice stark differences; pressure on valuations that started in the public markets and are currently impacting growth stage private companies, reduced funding activity, especially for crossover companies, and pressure on founders and entrepreneurs to tighten the belts and expand runways for at least 3 years.
Last week, we hosted an intimate panel featuring leading biotech investors and entrepreneurs to candidly discuss the current dynamics facing the biotech industry and how investors and entrepreneurs can navigate this changing landscape. I am grateful to have a job that every day teaches me and inspires me, and I want to thank my co-panelists for their participation: Alexis Borisy, Founder and Executive Chairman, EQRx; Robert (Bob) Nelsen, Co-founder and Managing Director, ARCH Venture Partners; Jim Tananbaum, Founder and CEO, Foresite Capital and Michael Gaito, Global Head of Healthcare Investment Banking, JPM.
Below are a few highlights from the discussion, which we hope can help founders and investors alike catalyze a shift in the coming months.
Perspectives on the biotech public market and impact on private finance
Many stakeholders are calling the current cycle one of the largest crashes in biotech markets. But that is not entirely accurate. The truth is that the S&P Biotech Select Industry Index, otherwise known as XBI, has only been around for about 15 years, so using it as a key indicator of the industry is short-sighted. Compared to earlier downturns, what we are witnessing today is an abundance of available quantity and scale of capital. It is the investment strategies and tactics that are evolving.
Capital is abundant, activity for company formation and early stage is still strong while crossover and public focused capital is sitting on the side lines at the moment . The panelists believe that capital will be released as soon as investors have a line of sight on macro-stability, which will lead to what could be a rather fast recovery in the biotech sector.
The implication of the current financing environment has pushed early-stage investors to think differently about syndicate formation. Today, most early-stage investors are seeking strong syndicate partners at the early innings of company formation, allowing them to build a diverse syndicate that can support the company throughout its life cycle. Previously these same investors would lead rounds, often alone, to maximize ownership.
One thing remain consistent; one of the scarcest resources, as my co-panelists agreed, is actually “human capital.” Investors are now even more selective in seeking opportunities to back executives and team members focused on scientific fundamentals along with long-term management and organizational principles. The need for human capital will always be there and it is more important than ever to back experienced strong management teams.
At Mubadala Capital, we continue to believe that our investment ethos of backing founders early and supporting them throughout their journey; whether through the private or public sectors. We will continue to look for breakthrough science, strong management teams and trusted syndicate partners that we can back early and support as they execute towards their vision.
Advice for early stage and growth biotech founders
How should founders think about cash preservation? What operational strategies can companies employ when seeking pharma partners or finding opportunities to boost near-term revenue for long-term product development?
There are three areas where founders can focus to help navigate these changing funding dynamics.
1. Focus on fundamentals
Staying disciplined on the science and clinical opportunities and understanding the demand from patients and life science stakeholders will ensure value creation. While tactics may change and markets continue to cycle, strong scientific fundamentals will attract the right partners.
2. Identify which core assets will create the most value
In the past, companies were spreading capital across multiple assets in their pipeline. Today, founders need to understand that the cost of capital has gone up, and they cannot waste funding in areas with no value. Focus on the core products that will lead to notable returns and splurge less on assets with little to no upside potential.
3. Seek investors aligned with your vision
When building a company, leadership teams need to find investors who are all-in on the company’s vision for the long haul. Those investors who are aligned with what you are fundamentally building and designing are important instruments to a company’s long-term success.
The future of innovation and venture capital
Fundamentals in the biotech sector remain strong. Life sciences innovation is at the highest level we’ve ever seen in the last decade and will grow exponentially with the discovery of new life science tools and therapeutic modalities. Experienced investors are doubling-down on high-quality companies with groundbreaking products that are set to revolutionize the healthcare industry. With large amounts of venture capital still available, there is an appetite for pioneering platforms and companies focused on the fundamentals.
While the biotech funding cycles continue to evolve, the long-term investors continue to support portfolio companies and founders through all the challenges they face. Life-cycle investors like us provide founders with mentoring and guidance so that they can focus on the science and develop innovative products and technologies that will transform health systems.
Whether you are a founder in our portfolio, an entrepreneur with an idea or investor wanting to collaborate, please reach out to us. We would love to hear from you and discuss novel ways we can shape healthcare and improve patient outcomes.
