Money is flowing into biotech startups, with companies
more and more frequently raising more than $100 million in
early-stage funding rounds.
We asked venture capitalists what all this capital
means for the private biotech industry.
Some were excited for the science, while concerned
about the expectations that come along with this greater
funding, while others are finding ways to look past the
Over the past few years, biotech startups have been successful at
raising large amounts of capital just as they’re starting out.
It’s led to a lot of unicorns,
with multi-billion-dollar valued companies having raised hundreds
of millions in their series A or B rounds.
But it begs the question: Is all this money flowing into biotech
so early on a good thing?
On a recent trip to San Francisco, Business Insider posed this
question to venture capitalists. For the most part, there was a
sense of excitement about the money itself flowing into the
industry, mixed with concern that expectations might be set too
“I think we are in a situation, which for companies is
seemingly positive, where we have a lot of capital being put to
work and a lot of capital sources coming into the U,” Carol
Gallagher, a partner at New Enterprise Associates, told Business
“I think history would tell us that at some point there can be
too much capital and it’s not really discerning, and so then what
happens is companies get funded and maybe take longer, or don’t
actually have the right team or right science and get funded
anyway, and there’s a disappointment.”
A new inflection point
One reason startups could be raising more money earlier in their
existence, according to Gallagher, could be because it’s taking
longer to get to the point where investors are willing to fund
the company even more. Instead of getting funding after, say,
bringing a drug into animal trials, companies now need to get to
the point where the treatment’s tested in humans in order to get
more funding needed to run those trials.
“The larger size of the series A is coming more from this
realization that there just really isn’t a value inflection
that’s very significant ahead of the actual clinical proof of
concept,” Gallagher said. That’s because at an earlier stage
where the treatment is being tested in animals, there’s still a
good chance that the treatment might not work in humans.
“I think that one of the biggest challenges for our industry will
be that we just aren’t that good at being predictive,” she
Jon Norris, managing director for Silicon Valley Bank’s
healthcare practice, told Business Insider that oftentimes while
the round number might look quite large, the deals are tranched,
meaning that the round may be for $75 million, but initially the
company may get a fraction of that. As the company progresses
through development, they may start to get more.
Betting on more multi-billion dollar biotechs
Alexis Borisy, a partner at Third Rock Ventures, said that the
reason some companies are raising larger funding rounds early on
may have more to do with what the company is trying to develop.
“I think the question is more, ‘What is the company trying to
build? What is the fundamental innovation?’ and ‘What’s the right
amount of capital to assemble the right team, build the right
culture, go deploy what you’re doing in that field of science and
medicine to the point where you are really going to be doing
something?'” Borisy said.
The number of biotech startups he sees launch in any given year
hasn’t grown, he said. The same is true for the number of
billion-dollar exits he’s seen that would validate a large amount
of funding so early on. For the amount of funding going in at an
early stage to pan out, there would need to be more
multi-billion-dollar companies resulting from it for it to
“There’s a lot of capital in this space, which is great I think
for patients,” Borisy said. “I think it’s great returns for
society. As far as, will all that money have great financial
returns, the general math would suggest that it’s probably not
going to be true.”
In some cases, certain startups have just been overhyped to their
sky-high valuations. In those instances, venture
capitalists, including those in corporate venture arms, have to
pass their own judgment.
“Are we going to try to compete with those? Probably not, because
we’re not going to believe the valuations, we’ll do our own
calculations, because if we’re going to overpay for the valuation
then we know we will have to take a P&L hit,” Tom Heyman,
president of J&J’s Development Corporation, the oldest life
sciences corporate venture fund, told Business Insider.
That requires some restraint to wait on the sidelines.
“There’s a discipline that says we’re not going to be a momentum
players, we’re not going to follow the hype of celebrity,”