The biotech industry’s biggest venture capital firms are repackaging billions of dollars for the next generation of biotechs, a welcome sign of better times ahead. But that high-profile funding is primarily going to clinical-stage companies with prominent management and data.
Sara Choi, a partner at Wing Venture Capital, said when a billion-dollar VC fund is announced, it’s important to “double-click” on what they’re focusing on. Even if they started their own companies, the big raises would probably go to a handful of fancy companies.
Flagship Pioneering is a “venture creation” company that does just that, incubating innovative companies and pouring hundreds of millions of dollars into early stage funding. Flagship raised $3.6 billion in July, which will be used to support 25 new companies. The other company is ARCH Venture Partners, a well-known name for some of the most talked-about biotech funding of the past year, including Metsera and Xaira Therapeutics. ARCH recently raised $3 billion to build and invest in early-stage companies, with a particular focus on companies working on AI and data-driven biology.
Cain McClary, managing partner and founder of KdT Ventures, said these new funds are good news for the biotech sector. “It’s good for us to have these big companies. They’re making big changes.”
But venture capitalists who spoke with BioSpace say these huge new funds are offering a broader picture of companies outside of that orbit, which may be smaller and deal with preclinical or more experimental science. I pointed out that there isn’t. That’s where smaller venture capital firms like Choi’s and McClary’s come into play. Both companies said they were busy funding early-stage companies, even if their work was less well-known.
“There’s a lot of money coming in. Where they go is really important,” Choi said. “I would like to see more funding in the pure play Series B stage because for me that is where it falls down.”
table setting
Jakob Dupont, executive partner at Sofinnova Investments, said small businesses need to do their research before approaching VC firms. This has always been important, but it has become even more important given the market’s current preference for risk-free late-stage assets.
“It’s important to recognize that not all funds are created equal,” he told BioSpace.
Sofinova is a veteran life sciences investment firm dating back to the 1970s that sits between small funds and multi-billion dollar raisers. According to DuPont, the company is currently in the second half of its 11th $510 million fund. Sofinova targets clinical-stage private companies, and the fund has contributed to 10 investments to date. The latest is Seaport Therapeutics, a neuroscience biotech from the former leader of Karuna Therapeutics that just raised a short-lived $255 million Series B after coming out of stealth in April.
Other VC firms may focus on seed funding, angel investments, or early Series A rounds. They may be looking for more platform companies or single assets. Are they an oncology expert or are they interested in cell therapy? DuPont says all of these details should be considered before consulting with investors in this market to avoid wasting anyone’s time. It’s something you should know.
DuPont noted that the market is full of biotech companies with proven leadership teams and existing investor syndicates that are ready to tap. In addition to Seaport, BioAge is also a great example of Sofinnova’s portfolio.
“If you’re a relatively unproven executive, you might think the table won’t be set in the same way,” he says. “What’s happening now is that there’s a certain degree of conservatism and an interest in investing in proven management teams (and) risk-free clinical data.”
DuPont is hopeful that the landscape will change and that high-risk bets in preclinical medicine will be revived. But for now, companies need to do some serious research to find the right investors.
A return to normalcy, whatever it is
While the larger market remains conservative, smaller VC firms like Wing and KdT, which target early-stage biotechs, are betting aggressively on new science.
Wing’s portfolio companies include Cartography Biosciences, which was founded in July 2022 for $57 million and focuses on developing immunotherapies using computer technology to identify targets; The other company is Veo Therapeutics, also founded in 2022 with a $12 million investment to discover drugs using an in-vivo data generation platform.
KdT’s portfolio includes Rejuvenate Bio, which is developing gene therapies to treat multiple age-related diseases, which will initially be tested in dogs to assess their ability to extend lifespan. The biotech was launched in 2022 with $10 million. Another KdT-backed biotech, generative AI-focused Terray Therapeutics, announced a multi-target small molecule discovery agreement with Bristol-Myers Squibb in December 2023.
Seed and Series A funding is definitely still happening, Choi said, but biotech companies face a higher burden of proof than companies that started during the post-pandemic frenzy of 2021. It is said that there is. At the time, mega-rounds were commonplace for early-stage companies. . There was plenty of money available for riskier bets, as well as interest from outside investors. Now, raising more than $100 million takes a little more convincing.
“In terms of valuations, there has been some normalization or correction, whether quoted or not,” Choi said. “On the front, things haven’t slowed down much.”
McCrary said small venture capital firms are great testing grounds for early-stage biotech leaders, and that’s what he hopes to be a part of at KdT. He founded the company in 2017 and weathered the pandemic when cash for biotech was easy to come by.
“People are changing the goals of early-stage companies, requiring clinical data, and requiring them to work with less volume and longer,” McCrary said. As a result, KdT companies had to be very careful with their resources and prioritize their pipelines carefully. These companies need to work harder at this early stage to reach the later stages, where larger companies will take notice, he added.
Like its larger peers, KdT recently reloaded, raising $100 million for its fourth fund. This brings the company’s total assets under management to $250 million. KdT sought to keep the fund small, even with the $80 million raised in the previous round. McCrary said KdT actually turned down some funding in an effort to keep the fund small.
“We’re going to sacrifice the upfront fees and fee streams that many of these large funds require to remain myopically focused on the zero-to-one stage,” McCrary explained. “The lack of unlimited capital in these early-stage checks requires a more deliberate process when underwriting these early-stage opportunities.”
McCrary said KdT is also directing companies to use government funds to further shore up their cash reserves if possible.
“We’ve actually put a lot of effort into building relationships and bridges with various government agencies to make sure that we have access to all kinds of capital, not just corporate equity capital,” he said.
DuPont said large companies will seek discipline as they move into later stages. Instead of the hectic days of the pandemic, when a series of pipeline projects showed depth, investors want to focus on one or two of the strongest assets. They also want to know that clinical trials are well designed, involve the FDA, and study potential patient populations and unmet needs.
When thinking about your future investment needs, it’s also important to be aware of the capital you have. That means keeping the staff and management team as small as possible, DuPont said.
“Just keep it small and lean,” he said. “The funding environment is still a little uncertain, so be sure to protect the money you have.”
