The rapid demise of Silicon Valley Bank put an unwelcome spotlight on the financial position of many small biotechnology companies that relied on the storied lender.
But to the people who form and build startups, SVB’s collapse is a sidebar to a longer-brewing threat: a tightening cash crunch for a generation of young drugmakers.
Over the last two years, a market downturn has made venture firms more wary, posing a challenge for the biotech startups that raised Series A funding in 2021. As they come back for their second major financing round, companies are having to get creative to secure new investment. Some are topping off existing funding rounds, while others are budging on their valuation to pull in fresh capital.
“These companies are running out of money,” said Chris Miller, a partner with Troutman Pepper who works on private funding deals. “That’s a much bigger issue in biotech right now” than SVB, he added.
Prior to its sudden implosion in March, SVB, a key lending partner to emerging drug companies and a record-keeper of sorts for the biotech sector, helped put the situation in context. The bank, known for publishing widely cited data on startup and venture funding activity, discussed its findings with BioPharma Dive.
What SVB found, according to one of its managing directors, Jon Norris, is that many biotech startups are staring down what he termed a “Series A cliff.” The bank’s data show that, while 356 biotech companies raised Series A financings between July 1, 2020 and Dec. 31, 2021, only 102 drug companies announced a Series B in 2022.
That gap suggests a growing struggle by startups to raise new rounds as investors turn from biotech or grow more discerning. Many want to see drug programs nearing or already in human testing before they’re willing to put money in, according to Norris.
“A lot of those companies are really early-stage platform companies where they have this really interesting science, good investors and a good team around it, but they don't have anything in the clinic yet,” Norris said. “And Series B investors seem to be focused on that.”
The problem is not investors’ lack of capital — venture firms raised a record of about $163 billion in 2022, according to the latest annual report from the National Venture Capital Association.
Instead, it’s a matter of caution. Over the past decade, Series B rounds typically functioned as a “crossover round” between venture fundraising and the initial public offerings that could quickly make money for the funds that participated. Then, investors were laser focused on how they could get in on a biotech's Wall Street entry, drawing more investors to life sciences, Norris said.
The result was a record number of IPOs and, along with it, a rise in the values of private biotechs. But the sector’s market reversal in the last two years has led to a disconnect between how companies were valued in 2021 and what investors believe their valuations should be in 2023. The shift has become a source of friction in Series B rounds, said Jorge Conde, a general partner at Andreessen Horowitz.
"At a very, very high level, investment in biotech is essentially an exercise of ‘can I generate belief, and can I discharge risk?’” Conde said.
Striking the right balance has become more challenging in the current climate. Many of the crossover and generalist investors that fueled the sector’s run have backed off, leaving biotechs reliant on their original funders.
Those investors are more experienced in life sciences investing and more likely to hone in on the company’s valuation. Financings over $100 million — what SVB labels as likely to crossover into an IPO — dropped more than 25% in 2022. In recent months, young startups like Faze Medicines and Ambys Medicines have shut down before raising Series B rounds.
“There's less capital that's been put to work — not that’s ‘available,’ but that people have been actively deploying,” said Clare Ozawa, a managing director at Versant Ventures. “So it is taking longer to sort out who's actually going to come into something.”
Some firms are still having success. Earlier this week, for instance, Third Rock Ventures startup Flare Therapeutics raised a $123 million Series B round with the help of some new backers. Others trying to pull in new venture firms are getting creative, such as adding debt to their Series B. That’s what Colorado biotech Enveda Biosciences announced in December as part of a $68 million financing.
None of its programs are in Phase 1 trials yet, but what drew investors, said Enveda CEO Viswa Colluru, was that the company hit the milestones it set when it raised a $51 million Series A round in 2021.
"We had set ourselves a certain number of candidates as one- to two-year goals and we're beating them," Colluru said.
Others have turned to intermediate financing rounds. Strand Therapeutics CEO and co-founder Jake Becraft knew the company had the capital to last into 2023, but likely not enough to move fully into clinical testing. Its first research program targeting solid tumors would need more cash.
Last November, the Boston-based mRNA drug startup announced a $45 million Series A1 round with new investors, adding to the $52 million it raised a year earlier.
“We’ve had to make calls about, ‘Do we do a Series B?’ because we know the macro environment is going to make things tougher for us to get things done,” said Becraft, adding in a follow-up comment that the A1 round offered a way to save time.
“You could make an argument that in 2021, if we had done a $160 million Series A, we'd have all this other cash right now,” Becraft said. “But I also think that when you have all that extra cash, sometimes you become very undisciplined.”
Those changes are reverberating through how new biotech companies are formed, too. In seed and Series A financings, companies are being built to weather the dry spell, use cash more efficiently and focus on their most promising programs, investors have said.
The impact is now being felt by those needing to raise their next round. Industry watchers are anticipating the cliff SVB has observed to get steeper this year, as venture firms spend their time shoring up their own portfolios, leaving less funding for new opportunities.
“Finding new investors, or significant chunks of new capital, is very difficult,” said Miller. “That is still the big concern.”
Ben Fidler contributed reporting.
Correction: This story has been updated to clarify that Strand raised a Series A1 round, not a Series A extension, and include additional context.