Home Get Funding 'We're not going to follow the hype': Biotech VCs are concerned by the staggering size of early-stage startup funding

'We're not going to follow the hype': Biotech VCs are concerned by the staggering size of early-stage startup funding

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A
scientist working at Zai Lab’s drug-development facility in
Shanghai on October 18.
Reuters

  • 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
    meant for the private biotech industry.
  • Some were excited for the science while concerned about
    the expectations that come along with this greater funding, but
    others are finding ways to look past the hype.

Over the past few years, biotech startups have been successful at
raising large amounts of capital just as they’re starting out. It
has led to a lot of
unicorns
, with multibillion-dollar-valued companies having
raised hundreds of millions in their series A or B rounds.

But it prompts the question: Is all this money flowing into
biotech at such early stages 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 mixed with concern
that expectations may be set too high.

“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 Insider.

“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 that it’s taking
longer to get to the point where investors are willing to provide
companies with additional funding. Instead of getting funding
after, say, bringing a drug into animal trials, companies now
need to get to the point where the treatment is tested in humans.

“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 may 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 said.

Jon Norris, the managing director for Silicon Valley Bank’s
healthcare practice, told Business Insider that while the round
number may often look quite large, the deals are tranched,
meaning the round may be for $75 million, but initially the
company may get a fraction of that. As the company progresses
through development, it may start to get more.

Betting on more multibillion-dollar biotechs

Alexis Borisy, a partner at Third Rock Ventures, said the reason
some companies were raising larger funding rounds early on may
have more to do with those companies’ goals.

“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. But the same is true for the number of
billion-dollar exits he’s seen. That suggests the increase in
early-stage funding isn’t leading to more lucrative results for
investors.

“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.”

Avoiding hype

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 use their
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, the president of Johnson & Johnson 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,”
Gallagher said.

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