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Most readers in Q1 2024 will be well aware that 2023 was a rough year for biotech funding. Before we discuss the 2024–2025 funding outlook, it is instructive to review how we got here. The following discussion is a compilation of analyst reports from 2020 to 2023 from Silicon Valley Bank and Pitchbook.
With the full onset of the COVID-19 pandemic in 2020, the promise and potential of biotechnology was front and center in the global conversation. The sudden spotlight, combined with interest rates near 0%, drew record capital and record new investors (who Pitchbook delightfully dubbed “tourist investors”) from many industries into both the private and public biotech sectors (Figures 1, Figure 2, Figure 3).1,2 The first dramatic impact of biotech investing was seen in the public markets, where biotech stocks rose quickly to new records, even as the rest of the world was experiencing an economic shutdown(Figure 4).3 At this same time, some late-stage biotech companies that were previously planning acquisitions by big pharma found they could achieve a higher exit on the public market or earlier exit with less data (,). 2020 saw the largest number and value of biotech IPOs in history. During this time, a large influx of private investment drew record total dollars, total investments, and record high valuations over 2020–2021 (, ). From the perspective of an observer in early 2024, many of these investments were overvalued and overfunded for the quality of data and stage of the company.
Figure 5
Figure 6
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Figure 2
Figure 7
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Fast-forward to the beginning of 2022, when the IPO class of 2020 began running short of cash and their market caps began to fall (Figure 4).3 In May 2022, Pitchbook’s VC IPO index indicated the recently IPO’d firms were 75% below their 52-week high, which further supports the suggestion that the firms went to the public markets on an inflated valuation (Figure 8).13 By this time, many big pharma had accumulated a windfall of capital from COVID-19 vaccine sales, among other pandemic-related anomalies. As they watched the valuation come down for the technology they had missed the opportunity to acquire in 2020, they began waiting for the opportune time to buy. 2022–2023 was a singular time in biotech investing, in that pharma had record amounts of capital available for acquisitions, but total acquisition dollars spend was the lowest it had been in several years.4
The life cycle of a biotech firm is fed by venture and private equity investment dollars. When pharma paused acquisitions, the late-stage companies (often phase I–II, Series C) who were planning an exit in 2022–2023 now found themselves without a buyer. Their investors suddenly needed to reallocate their capital to plan for additional unplanned rounds and began holding off on investments into new portfolio companies. The follow-on effect was a shortage of funding into mid-stage companies, especially Series B rounds that were intended to fund first-in-human manufacturing batches, IND-enabling studies, and some small phase I trials. This first real crunch of investment dollars was felt most heavily starting in 2H 2022, when total deals began to slow (Figure 2). By Q2 2023, the $55 billion overcapitalization of 2021 had turned into a deficit, and the portion of downrounds spiked to 15%, most heavily occurring in later-stage companies.1
For a time in 2023, Seed and Series A firms who were raising their first funding rounds saw valuations and total funding dollars hold steady, as investors into this stage are more often high net worth individuals or smaller venture funds that count a large number of such individuals among their limited partners (LPs). This kept the pipeline of new firms flowing temporarily, only to be halted as this class of firms needed institutional funding for Series B to continue development. The 2020–2021 spike in investments also exhausted the capital sources of this pool of LPs for funding in 2022–2023.1 The good news, however, is that as of Q1 2024, Seed and Pre-Seed valuations are holding steady, if not up from 2021 (Figure 9).2
Parallel to this series of unfortunate events, interest rates climbed to levels not seen since the 2008–2009 financial meltdown (Figure 10). High interest rates typically reduce venture investing, especially among the high net worth individuals and institutions that typically invest in smaller amounts of capital. This trend was confirmed in 2023. While high interest rates exacerbated the factors depressing later-stage funding, it also created fresh pressure on the early-stage companies that initially looked to be spared the brunt of the downturn. While 2023 saw Seed/Series A valuations hold steady, the total number of deals was low (Figure 2). One serial biotech entrepreneur looking to raise the first institutional round for her fifth startup said this was the hardest time she’s ever had fundraising –– including her time raising money during the 2008 financial meltdown.
The depressed funding into biotech startups led to depressed spending on discovery services, contract research, outsourced testing, and manufacturing services. While larger, more established firms had capital to weather the downturn, smaller service providers needed to either look to loans, venture debt, or other financial resources. 2023 saw the largest round of venture debt (into service providers and therapeutic drug/device startups) ever recorded. Therapeutic device and drug companies shed pipelines and assets in an effort to conserve cash. One large biotech venture firm described this effect as “trimming the fat.”
So where do we stand, and what is the outlook for 2024? Analysts consider the bottleneck to be pharma acquisitions, so this is where we must look for forecasting the return of capital to the biotech markets. As of February, 2024 the public market looks to be at a nadir. If pharma views the market similarly to industry analysts, we should expect to see an uptick in pharma acquisitions in 2024. After the best technology has been purchased at rock-bottom prices from the public markets, pharma should again begin buying technology from the private markets and allowing the longsuffering late-stage firms to exit. The exit valuations will depend heavily on the level of financial distress of individual companies. Once pharma has purchased their priority late-stage (and therefore de-risked) companies, this influx of capital should loosen the markets, enabling venture investors to return to fresh capital into earlier-stage companies on the private markets.
In summary, we can say the light has turned green at the stoplight, but there is a very long backlog of traffic. We predict late-stage acquisitions will pick up in 2024, followed by mid-stage institutional venture investing. The total number of Seed and Series A funding may not pick up until interest rates either come down or start on a downward trend, although the valuations appear to continue holding steady.
Figure 1. SVB — Record total investment dollars in 2020 and 2021.
Figure 2 : SVB — record total investment deals in 2020 and 2021.
Figure 3. Rise of the tourist investors (non-traditional investors, NTI).
Figure 4. NASDAQ Biotech Index — new records in 2020–2021. Crashed in 2022.
Figure 5. Record IPOs (and acquisitions) in 2020–2021. Down in 2022.
Figure 6. IPOs skyrocketed in 2020–2021.
Figure 7. Inflated valuations, beginning in 2021.
Figure 8. Pitchbook VC-backed IPO Index — the 2020–2021 class was down by Q1 2022.
Figure 9. As of 2023, Seed/Series A valuations are relatively constant, but the total number of deals is low.
