Biotech companies with novel molecules in clinical development require substantial sums of cash to finance that research. While venture capital firms continue to raise new funds to deploy across such investments, many companies that successfully landed financing a few years ago find it harder to raise money now.
Chris Garabedian, chairman and CEO of Xontogeny and venture portfolio manager of the Perceptive Advisors Xontogeny Ventures Fund, remembers that bullish time for biotech investing — he had a hand in some of those financing rounds. He acknowledges that startups have had more challenges raising money the past two years, but he says that’s been good for some venture capitalists.
“It’s allowed us to be more disciplined, more discerning,” Garabedian said, speaking on a capital markets panel Tuesday during the World Medical Innovation Forum. “We’re not quick to invest in new companies and seed and Series A, and we’re more likely to tend to our current portfolio to make sure that the things that are working get the level of private investment that’s needed.”
To be clear, Garabedian wants to invest in new companies. But the way that he and other venture capital firms go about investing has changed. The days of easy money, from private rounds and IPOs, are gone. Fellow panelist Arjun Goyal, co-founder and managing director of Vida Ventures, remembers that from 2019 through 2021, many companies could go public simply with a story, a narrative, particularly in drug modalities that offer potential cures. Those narratives were not backed up by much data. While Goyal said he sees the IPO window starting to open, the type of company that can go public has changed.
“A platform company with maybe some preclinical data in the right space, a good story, those companies were going public literally every second week if not every week,” he said of the bullish years. “Today’s market is very different. Today’s market is more around clinical data, large markets, a validated team, i.e. a team that has had success.”
One outcome of the challenging fundraising conditions is an uptick in collaborations with big pharma companies. But these deals are about more than money. In addition to the capital, strategic investment from big pharma venture arms brings expertise and insight.
“Many corporate venture groups have evolved their model such that they can offer a very important perspective to the portfolio company around R&D, around what’s a good target, around how to run the study in the right way,” Goyal said. “We have found that to be helpful.”
For a biotech company, the recipe for successfully landing investment includes having the right clinical data for the right target, Goyal said. Next, a company must go after a sizable indication, a large total addressable market (TAM). The third ingredient is an executive team that resonates with public market investors, meaning they have a track record, such as successful exits or M&A deals.
One feature of the current market is that several therapeutic indications have become very crowded, Garabedian said, offering obesity as well as immunology and inflammation as examples. To stand out in these crowded spaces, companies must show how they’re differentiated. Keeping with the recipe analogy, Garabedian said differentiation is the icing on the cake that attracts investors.
Many people ask VCs about their areas of investment interest. For Garabedian, those areas change, and those changes are strongly influenced by big pharma. While Garabedian said he looks at a company’s technology and its team, his firm also has to think about the exit — typically an IPO or an acquisition. That means the decision whether to invest in a biotech company also depends on who the natural acquirers of that company might be. As an example, Garabedian said if there aren’t many natural acquirers in infectious disease, that reduces his fund’s capacity and interest in investing in infectious disease.
Garabedian sees the pharma industry returning to a more balanced view of its therapeutic areas of interest. Cancer once dominated but immunology now appears to be taking over. There’s also growing interest in central nervous system disorder therapies, he said. Cardiometabolic disease drugs are another hot area as companies try to improve upon current GLP-1 metabolic disorder drugs.
“So for venture investors, we’re seeing that there are a lot of therapeutic areas that have natural acquirers and that means we can really look across a broader landscape of opportunities for investing early stage,” Garabedian said.
Photo by the World Medical Innovation Forum
