VCs Tell Biotechs: Hunker Down, Manage Your Cash Carefully
The message from venture capital investors to biotechnology companies is mixed.
“Companies active in the fight against COVID-19 will have plenty of funding, and those targeting severe unmet needs will weather the storm better than others. But, for the rest, it will be rough for the next 12 months,” Otello Stampacchia, founder of Omega Funds, told attendees at Bio-Europe Spring last week.
How rough is anybody’s guess. President Trump signed the Coronavirus Aid, Relief and Economic Security Act (CARE) Friday as the stock market closed. On Monday, the NASDAQ climbed fairly steadily, closing up 3.37%, and the NASDAQ Biotech Index climbed 4.14% from Friday’s close.
That’s good news for public companies, but for those relying on private funding, stock market gyrations are largely irrelevant unless they’re planning an IPO.
Among pre-commercial companies, what matters most is data. With stay-at-home mandates in place throughout the world, their ability to continue in-house lab work and conduct clinical trials is jeopardized. Subsequent funding, therefore, is at risk.
“The investment environment for VCs has changed substantially,” said Todd Thomson, chief operating and financial officer at Kairos Ventures. “These are very uncertain times for business models and are challenging for fundraising. VCs need to re-evaluate everything in this context.”
Thomson continued with a prediction.
“Customer revenues likely will be slower to ramp up, follow-on investments will be harder to obtain and will take longer to accomplish and exits – whether through mergers and acquisitions or IPOs – will be delayed,” Thomson said. “Therefore, all companies need to husband their cash and hunker down to manage during this crisis.”
To hone that point, CBI Insights expects first quarter 2020 seed funding for all industries to decline 22% from Q1 2019 activity. In reporting global trends Monday, CBI noted that private market funding for Q1 2020 is down more than 16% from the previous quarter, and down nearly 12% compared to one year ago.
Biopharma and healthcare companies probably will fare better than most, though.
The biopharma industry, by developing diagnostics, vaccines and therapeutics, is building a path out of this pandemic. Companies active in the COVID-19 space, therefore, are more likely to be funded by investors eager to end this healthcare crisis.
“Initially, investors in the public markets were shell-shocked by COVID-19, so the response was quite delayed,” Stampacchia said. “When the response happened, it paralleled the reactions we saw during the Great Depression (1929 through the late 1930s). There was incredible volatility.”
“The private market – like venture capital and family foundations – is very different from the public market, however,” Stampacchia said.
Yet, VC and private fund investors will be hurt because of the denominator effect. They have a certain percentage of funds allocated and, once public markets decline 25 to 30% – which is where we are now – the private markets will hurt.”
None-the-less, venture funds are protecting their prior investments.
“Our first priority is to support our existing portfolio of companies,” Thomson told BioSpace. That means “new investments have a high bar to be approved.”
Companies engaged in the COVID-19 fight have an edge. Kairos just funded three COVID-19-related companies. Of those, one features a point-of-service diagnostic device that delivers test results in 15 minutes, and another is developing a repurposed chloroquine derivative.
Other VCs are still funding, too.
At the end of March, OneThree Biotech raised a $2.5 million seed round for its AI-based drug development platform, led by Primary Venture Partners and Meridian Street Capital. SutroVax raised $110 million in Series D funding to develop antibody-free vaccines, led by TRA Capital Management and Janus Henderson Investors. Redpin Therapeutics raised $15.5 million in Series A funding, led by 4BIO Capital and Arkin Bio Ventures, to advance programs in chronic pain and refractory epilepsy.
Mid-month, Kymera Therapeutics closed a $102 million Series C financing to develop protein degrader medicines. Biotechnology Value Fund (BVF) and Redmile Group led the financing.
“The VCs and young companies that adapt most rapidly to this new environment will be the ones most likely to emerge successfully as we emerge from this crisis,” Thomson said. “For VCs and companies focused on scientific discoveries, these times also provide opportunities to develop solutions to the issues the world currently faces: testing, therapies, protection, etc.”
For biopharma companies, “The single most import thing to do now is to talk to their investor base and make sure they can weather the storm,” Stampacchia said.