Dec 8, 2022
Venture Capital

An In Depth Guide to Investing in BioTech Startups

Walter Winslow

ver the years, biotechnology has become more prominent in the healthcare industry. And as such, more venture capitalists have shifted their attention to biotechnology companies. However, the biotechnology sector has specific qualities that make its investment ecosystem significantly different from traditional investment. 

Thus, if you’re an investor looking to break into the biotechnology industry, you must have enough knowledge to evade mistakes and losses. This article will guide you on the intricacies of biotechnology investment and capital considerations.

What Is Biotechnology?

Biotechnology basically refers to technology that leverages biological systems and living organisms to create products or solve problems. Biotechnology has historically been used in seemingly mundane sectors like baking (with yeast, a living organism). However, the context of biotechnology has since been widened to accommodate more sophisticated technological deployments.

How Biotech Is Revolutionizing Healthcare

In many ways, the biotech industry has been a key catalyst for modern healthcare innovation. This has been demonstrated in the level of progress achieved for the treatment of Alzheimer’s disease and cancer. Similarly, the COVID-19 pandemic showed just how valuable biotech could be for public health.

Here are some of the key ways the biotech sector has been or could potentially be disruptive for the healthcare industry. 

First, biotech has been an important industry for the advancement of preventive medicine. In particular, the development of vaccines benefits greatly from biotech. The conventional approach to vaccines is introducing a deactivated piece of a particular bacteria or virus to the body to trigger an immune response. However, biotech enabled the development of DNA vaccines that use a molecule (mRNA) to mimic the viral protein. This new approach was integral to the speed of the COVID-19 vaccine development. 

Furthermore, biotech significantly improves diagnostics, particularly with respect to identifying the genetic predisposition of individuals to certain conditions such as breast and ovarian cancers. This could be key to early detection of diseases. This biotech competency also makes for more personalized and effective healthcare. For instance, biotech-derived diagnostics could predict adverse reactions to drugs as well as efficacy based on genetic variables. 

Another exciting field in biotech is next-generation gene therapies. Gene therapies have been critical to revolutionizing treatment for persons with genetic disorders. However, certain obstacles still exist such as the limited range of the CRISPR-Cas9 gene editing. To solve this problem, biotech companies are exploring innovative strategies such as RNA-editing tools. 

Biotech has also played and continues to play a significant role in the progress of stem cell research. Stem cell therapy, which has the potential to revolutionize regenerative medicine, is greatly improved with the application of biotech in helping researchers identify the unique profile of cells. 

Finally, biotech companies are increasingly leveraging Artificial Intelligence (AI/ML) to predict molecular behavior, and consequently, accelerate drug discovery and development. For instance, ML is currently applied for phenotypic screening, with ML being leveraged to identify disease-relevant targets in entire genomes.

Major Investment Considerations For Venture Capitalists In The Biotechnology Industry

Venture Capital is undoubtedly a primary funding source for many biotech startups. However, a significant challenge for venture capitalists is identifying viable biotechnology startups to invest in.

The following are important considerations for venture capitalists when making investment decisions for biotech startups. 

  1. Investment Strategy: Every Venture Capital (VC) company has an investment strategy hinged on specific industries, the startup’s development stage, and capital requirements. These qualities guide the investment decisions of VCs. It also creates a streamlined investment focus. Thus, a primary consideration for VCs seeking to invest in biotechnology startups is whether the startup fits into the overall investment strategy.
  1. Market Size: Market size is a primary consideration for VCs seeking to invest. Of course, it goes without saying that a large and profitable market size increases the chances of profitability. Apart from market size, VCs also consider ease of market entry. If a large market has significant entry barriers, the probability of financial upside might be relatively lower. Hence, market size and profitability are major concerns for VCs in the biotechnology industry.
  1. Legal Considerations: For many biotechnology startups, the company's value is hinged on the developed technology. While it is true that the technology must be viable enough to thrive in the market, VCs also consider legal concerns before investing. These legal concerns are mostly hinged on whether the technology has been adequately patented. 

They also consider the technology's vulnerability to possible lawsuits or legal disputes from competitors. These legal considerations are particularly vital because they can pose significant compliance risks. More so, legal disputes could potentially halt specific commercial activities in the startup.

  1. Financial Viability: This is undoubtedly the most important consideration for VCs. The primary determinant for investment is often whether the biotechnology startup can turn in enough profit. Another consideration is the VC's eventual ability to profitably exit the investment through acquisition or an IPO.
  1. Startup’s Management: A startup’s management is also a major consideration for VCs. This is because management often determines a company's overall success. For biotechnology companies, the management needs to have sound knowledge of the product and its technology. Apart from a considerable understanding of the science behind the product, a startup’s management also needs to be skilled at selling the product when it gets into the market.

Notable Biotechnology Startups

  1. EQRx Inc (ticker symbol: EQRX) raised a total of $1.9 billion following its IPO in December 2021. The startup, founded in 2019, majorly focuses on developing drugs and therapies for late-stage cancer. The startup’s primary aim is to make drugs and treatments more affordable. 
  1. Ginkgo Bioworks focuses on producing custom micro-organisms for use in numerous industries. So far, the company has raised about $800 million. It also recently announced plans to sell $100 million of its stock in a public offering.
  1. Orna Therapeutics raised $221 million in its last funding round (Series B). Altogether, Orna has raised $321 million. The company’s business model is hinged on developing a new class of RNA medicines. The startup’s products are primarily fully engineered circular RNA therapeutics to combat diseases. 
  1. Cellarity recently closed its Series C financing with a $121 million funding. Founded in 2017, the company has raised $274 million to date. Its business model is hinged on developing drugs targeted at cell behavior.

Capital Considerations For Biotech Startups

The biotech startup ecosystem is a unique one. These startups generally constitute a risky investment as they require lots of capital and have a long development process. Similarly, there are a number of risks that bedevil the biotech industry, from political risks to health concerns regarding products. As a result, non-VC-founded biotech startups may have a hard time securing investment from VC and angel investors, especially if there is no hard data backing their product. 

While Venture Capital (VC) remains an important source of funding for the biotech industry, many biotech startups may have to explore alternative funding sources in the initial phase. Grants and public funding are one such source. There are a number of research grants available for biotech startups, with varying requirements for eligibility. However, research-oriented startups, as many biotech startups are, have a good chance of raising funds through this means.

Since many biotech startups are spin-offs that originate from university research, university funds could be an alternative to consider. A number of universities have university innovation programs or academic incubators that can provide financing options. 

In addition, biotech startups may also have to look into raising capital through loans. There are certain loans that can be leveraged, depending on the stage of the startup. Some options include self-collateralizing loans and equipment financing. Personal loans can also be explored, if the founder has a good credit score. 

Loans with more flexible terms can also be considered, depending on the state. For instance, startups in California could check out installment loans California. The problem with loans in the biotech startup context, however, is that they might not be sufficient to cover the huge initial investments these startups generally require. Nevertheless, they can be helpful in financing the purchase of gear, machinery and equipment as well as get the business started.

Final Thoughts

There is no doubt that the biotechnology sector has strong investment potential. However, prospective investors must understand the primary considerations for identifying potentially profitable startups. This way, there are lower probabilities of investment losses. 

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