The COVID-19 pandemic created a significant shift toward accelerated innovation in the biopharmaceutical industry. At the height of the pandemic, Moderna and BioNTech’s success with vaccine creation kicked off a surge of investments across the biotech landscape. A combination of government and private funding saturated the market – creating a booming industry hyper-focused on creating a viable solution to COVID-19. This boom was particularly prominent within academic labs and in smaller, niche biotech companies.
However, these smaller firms are more susceptible to the unpredictability of the market, and their success depends on the free flow of capital to support ideas and generate clinical benefits. As the post-pandemic world adjusts to this “new normal”, a strong environment of collaboration between the industry and investors must continue to flourish in order for innovation to prosper.
An uncertain future
By mid to late 2022, interest rates began to rise, and the myriad of small biotech companies that had emerged during the pandemic struggled to secure funding as venture capital (VC) became tighter. In Q2 2023, VC investment dropped to $29.4 billion, down from $44.4 billion in Q1 2023, a decline of 34%. In 2023, early-stage activity was less impacted than late-stage funding, with seed and Series A funding accounting for half of the VC deals in Q2. Together, these funding rounds amounted to $7.2 billion, or a quarter of total VC investment for Q2 2023.
Unlike their late-stage funding counterparts, seed valuations have shown a strong resilience to the market’s unpredictability. While seed funding did experience some fluctuations, seed-stage startups remained mostly stable from Q1 2019 to Q2 2023. Unfortunately, startups still faced a variety of challenges, including rising inflation, increased interest rates, and geopolitical instability. As of September 2023, biotech funding rounds that included private equity or venture capital investors came to just $11.21 billion, compared to the $25.26 billion that was secured for the full year of 2022, signaling that investors have significantly scaled back funding in 2023. In addition to these troubles, VCs have not seen many profitable exits recently, which has slowed down potential investments into new ventures. Fortunately for early-stage startups, this trend has impacted Series A and Series B more directly than seed stages, given the higher stakes and valuations in later-stage funding.
How the market can impact patient care
In the biotech industry, it is often difficult for startups to get past the initial seed phase and into large scale implementation, which negatively impacts the company’s growth trajectory – the most important metric for securing subsequent financing rounds. In 2023, as market uncertainty continued looming over investors, many smaller startups had to make tough decisions to stay afloat – from staff layoffs to budget reallocations – as previously secured funding dried up and new investments were harder to obtain. An often-overlooked consequence of a guarded market is the domino effect where insufficient funding directly impacts the quality of patient care. When organizations with potential lifesaving medical solutions cannot continue to foster innovation and move forward due to lack of funding, the ultimate victim is the patient, deprived of potential benefits from the company’s solution. It’s imperative that these startups have access to a steady stream of income as they work to solve tomorrow’s problems today. Governments across the world can provide much needed support in this endeavor through a variety of avenues. Some examples include offering research and development initiatives, which can bolster innovation and create partnerships between startups and established universities or research institutes. Other avenues include regulatory support – such as reducing red tape, streamlining the process to obtain necessary licenses and permits, and providing clear guidance on compliance with various regulations – and tax exemptions which can ease financial burdens while also making startups more appealing to private investors. Enhanced governmental support could mean the difference between a startup’s success or failure, and ultimately be the deciding factor between a new treatment being available to patient versus stalling in pre-clinical or clinical trials.
The new normal and beyond
As the market’s volatility begins to settle in 2024, biotech startups will need to make informed decisions as they navigate relationships with potential investors. Innovation and results backed by data will be key factors in securing funding this year and beyond. Continued funding is a must for startups working with innovative, cutting-edge technologies, as these are the companies that will transform patient care and outcomes in the foreseeable future. To find success, these companies will need:
- A strong management team with entrepreneurial and industry experience
- Innovative technology that meets a definitive market need
- A well-defined operational plan and commercial strategy with a realistic budget
Additionally, startups should prioritize a specific focus area to have the greatest chance at securing funding. Some examples include next-generation research and development that is supported by big data, predictive models, and computational approaches augmented by AI to improve success rates at each stage of the drug development cycle; patient-centric clinical trials backed by new technologies and new business models which challenge traditional approaches; and digital technologies that spotlight individualized, value-based care derived from real-world data. As startups continue to navigate the intricacies involved around securing funding in the coming years, understanding the tonality of the market can play a pivotal role between funding success or failure, and – ultimately – getting a new treatment into the hands of patients that could vastly improve that patient’s healthcare experience and overall quality of life.
