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Biotech Fundraising Challenges


Fundraising has never been easy for biotech entrepreneurs.

In addition to the common hurdles every startup faces, biotech entrepreneurs often have deeply technical and scientific knowledge that they have to convey to potential investors. And the pool of investors who consider biotech startups is merely a niche within the larger investor pool.

Further, according to a piece by Bruce Booth on CNN Money, the vast majority of biotech deals require more than $15M in venture capital before they reach an exit (and the average is closer to $60M).

This often requires founders to raise funds from multiple investors, leading to syndicates of three VCs or more—making a founders’ task even more difficult.

Then, when The Great Recession hit, biotech companies were further impacted, causing analysts to make dire predictions about their chances. Most predicted it would be years before the industry got back on its feet.

Yet the forecast is finally taking a turn for the better. The NASDAQ Biotech Index (NBI) hit its all time high during the week of March 22, 2013, up 49% since January 2012—and it has climbed higher yet since.

A Closer Look At Trends in Biotech Financing

In addition to writing for CNN Money, Bruce Booth is a partner at Atlas Venture and writer of the blog Life Sci VC. He convinced the folks behind the Cooley Venture Financing Report, which analyzes data on all venture rounds, to break out biotech-specific data so he could dissect on his blog what overall VC-industry optimism means for new biotech ventures.

His analysis was mostly good news—on most dimensions he found that deal terms were improving for biotech startups, even reverting back to pre-2009 financial crisis levels. This included a decrease in recapitalizations, as well as a decrease in tranching of capital. Further, two-thirds of all life science financings were “up-rounds,” the highest level in 5 years.

However, some deal term components did not see such favorable changes. In particular Booth noted that median pre-money valuations are flat or down, at least according to the Cooley data. Preferred stock issuance also continues to rise, which heavily favors investors.

The Impact of Today’s Biotech Trends On Bio-Entrepreneurs

For entrepreneurs looking to launch new biotech companies or raise new funding this year, that’s a fairly rosy outlook. However, in truth the level of difficulty founders will face is largely based on which of those two camps they fall into—whether they are looking for their first round of funding or just their latest, says Rachel King, CEO of GlycoMimetics.

During a talk hosted by the University of Maryland BioPark as part of its Business of Bio speaker series late last year, King said, “There is a challenge today with respect to the risk level that a venture capitalist is willing to take. Investments are going towards later-stage programs. That’s not to say early deals don’t get done – but they are harder to secure.”

As a bio-entrepreneur herself, she said there were three questions in particular biotech CEOs must address if they wish to be successful long-term:
1. How can they finance their company for the longer term?
2. How can they advance programs to the point of value creation?
3. If they partner, how can they preserve enough value in the company so that investors will see sufficient return on investment to continue supporting the company?

For those who figure out the answers to these questions and take advantage of the positive deal components, Booth mentions, the future looks strong; for those who fail in either regard, the future is a lot less promising.