top ten expert tips to attract investors as biotech funding cools down
Making strategic financial decisions in the early years is crucial for getting your molecule to market.
What a difference a year makes. Biotech investing has cooled off dramatically from a record-smashing 2021, when venture capital (VC) firms poured $34 billion into the sector. But as of this past June, only 23 biotechs globally had gone public this year, compared with 68 in the same period of 2021. Fewer than 5% of biotech firms listed last year in the U.S. were trading above their initial price. Greater investor risk, it turns out, spells trouble for biotech founders.
“Investors are increasingly focusing on investing at early stages or in companies nearing pivotal late-stage milestones,” said Ronak Savla, director of strategic ventures at Catalent Pharma Solutions. As the private equity environment becomes less company-friendly, competition for funding is fierce, and emerging biotechs must learn how to stand out.
The 10- to 15-year journey from molecule to market can be daunting: It takes about $1 billion to develop a successful drug, which must account for the cost of clinical trial failures, since roughly 90% of candidates prove unsuccessful.
With stakes so high, it’s as important as ever for emerging biotechs to plan strategically, especially in the year or two from inception to the investigational new drug (IND) application. In those early stages, decisions “come fast and furious,” said Brent Moody, Catalent’s principal scientist for science and technology. “Some of them may seem small at the time, but if they put you on the wrong track, that can have huge consequences later.”
With that in mind, here’s an overview of the financial keys to success for securing cautious investors and strengthening your emerging biotech, with expert advice to help you along the way.
THE LONG GAME
Founders are often preoccupied with science challenges and less experienced with business matters, but a startup should always be mindful of its exit strategy. “Think about your business plan,” Live Oak Pharmaceutical Consulting owner James Bernstein explained. “Are you taking this to market? Or is the goal to find a buyer soon, perhaps during clinical trials?”
DEVELOP STRONG IP
An emerging biotech “is nothing without IP,” said Andrew Strong, a partner at Hogan Lovells who previously was president and CEO of biotech startup Kalon Biotherapeutics. A strong IP position is extremely attractive to investors, demonstrating that a company can commercialize its investment and avoid the risk of copycat competitors for a fixed time period. That differentiator is even more valuable as investors grow more judicious.
RAISE FUNDS CAREFULLY
Selecting investors is crucial to the success of a company, and the most valuable investors bring more than just capital. It is important to be aligned with investors on goals and timelines. Ideal investors provide guidance and mentoring. They are also willing to leverage their networks to connect companies with expertise that may not reside in-house, such as drug formulation, development and manufacturing.
RIGHT INVESTOR, RIGHT TIME
A 2021 survey of people who work in biotech, conducted by studioID on behalf of Catalent, found that 62% of respondents said they were likely to pursue Venture Capital (VC) funding, 42% said they were likely to pursue angel investors and 39% were inclined to seek public grants. Despite the appeal of raising money from multiple sources, a biotech should know the phases of doing so. If spun out of a university, a biotech might start with support from its institution or small business innovation research grants. That money can fund research and development, applying for intellectual property and setting up a corporate structure. Moving on to angel investing and then VC funding — and giving up equity, in turn — is wise when that’s necessary to maintain adequate cash on hand. (Generally, two to three years’ worth is advisable.) Series A fundraising is often initiated roughly within a year of the IND, but the timing and size of each funding round is company-specific.
WHAT VENTURE CAPITAL WANTS
Investors assess a startup’s management team, looking to see whether they have a track record of shepherding viable products. An emerging biotech, in turn, should evaluate potential investors to understand their areas of expertise and whether they tend to take on a passive or active management role. It's useful to have a business-savvy board member capable of helping you answer questions from a VC about cap tables, term sheets and nonbinding term sheets. When courting investors, Allyson Tighe, co-founder at Amplitude Ventures, advised, biotechs should “be very candid and upfront about the pros and cons of what it is that you’re working on. Especially the cons.” Many founders are tempted to overpromise, but it’s essential to set realistic expectations. “Over the past two or three years,” Tighe added, “we saw a lot of technology investors coming into drug development and discovery, expecting the speed of a tech venture.” In science, of course, revenue might be many years away.
THE VALUE OF PARTNERSHIPS
At the outset, investors reward emerging biotechs with a great internal team. As time progresses, successful companies recognize the value of partnering with multiple support systems, such as contract development manufacturing companies (CDMOs) and contract research organizations (CROs). CDMOs usually assist with drug development, manufacturing and distribution, while CROs typically help with finding patients for their indication and managing trials across different locations. CDMO partners bring invaluable know-how and resources around cell-line development, viral vector manufacturing and bioavailability-enhancing formulation. Many of these services, such as expanding a biotech’s potential global reach, are extremely appealing to investors.
ACADEMIC PERKS
For early-stage companies spun out of universities or research institutes, Tighe encourages founders to develop their science in those research settings for as long as possible before seeking institutional investors. “Can you move at the speed of a biotech within your academic institution?” Tighe said. “Often, the answer is no.” However, those settings can reduce barriers to entry, such as providing specialized equipment that might otherwise cost you millions of dollars. Incubators are a great resource for simplifying the startup process, and some are associated with universities. Incubators provide resources to fledgling companies such as low-cost office space, pre-negotiated rates with suppliers and procurement. Another benefit: Incubators are often well connected with investors.
PLATFORMS, RECONSIDERED
Until recently, VCs often preferred biotech startups with cutting-edge platforms, which provide a technological base on which other therapies can be developed. Of the $52 billion that VCs invested from 2019 to 2021 in therapeutic-based biotechs, two-thirds went to startups with advanced platform technologies. Developing platforms tends to be expensive and time-consuming. The current macro-environment has caused a shift in focus to companies developing therapeutic assets. Among the 500-plus biotechs that went public since 2010, seven of the top 10 underperformers were platform-based companies. “A new platform may be needed to enable development of modalities, such as cell and gene therapies. This is where companies can benefit from having strategic collaborations to help de-risk and accelerate innovation,” Savla said.
TAKE FULL ADVANTAGE
Biotechs should take advantage of every tool at their disposal. For example, before submitting an IND application, a trial sponsor is entitled to a meeting with the regulatory agency. “It’s a very useful way to get feedback” on clinical and safety questions, Bernstein said, “and it’s something you’re granted.” CDMOs can be a great resource for helping biotechs prepare for interactions with regulators.
EYE ON THE PRIZE
The short-term goal of development is to reach human trials to establish safety, efficacy and dose response. Long term, of course, the goal is to win approval and treat patients. On this long, complicated journey, it’s essential to bring in subject-matter experts who can use their distinct perspectives and backgrounds to solve problems. With so many technical challenges involved in bringing a molecule to market, “it can lead us to be a bit single-minded,” said Lisa Caralli, senior director of science and technology, Pharmaceutics at Catalent Pharma Solutions. “We get so focused on the chemistry, we forget about why we’re all in the pharmaceutical industry to begin with: the patient.”
