In regards to capturing venture capital investment, 2020 has been a phenomenal year for biotechnology startups, only if you were the right kind. Startups that had previously received investments prior to the COVID-19 pandemic obtained the most investment. In contrast, startups that launched without prior investment were largely ignored by venture capitalists. Here, we briefly describe on why in 2020 venture capitalists emphasized investments on versatile startups, which have put emerging and importantly, yet proven, startups in danger of failing.
Venture Capitalists Focused Investment on Startups with Two Main Attributes
COVID-19 related research was an obvious attractive investment area however, technologies that demonstrated value outside of COVID-19 captured the largest investments. Versatility in research usage was the key factor in 2020. Versatility signifies the number of different ways that the research can be applied to other scientific disciplines. In discussion with MedCity News, Daniel Haders (managing director of healthcare for Nex Cubed and operating partner for Sway Ventures) spoke about what he and other investors are looking for when investing in future companies. He insisted that “people will be looking for companies that can impact the pandemic today and become market leaders tomorrow as we emerge from [the COVID-19 pandemic].” 1 Venture capitalist Elise Miller Hoffman (a principal at Cultivation Capital) agreed, adding “we’re really interested in connecting with companies that have a relevant and meaningful COVID-19 use…but are well-positioned for success after the pandemic subsides”.2 Bluntly, venture capitalists are unwilling to invest in startups that will help eliminate the pandemic if they are unable to demonstrate value once the pandemic is over. Most venture capitalists expect to receive a return on their investment within five to seven years at an annualized rate of return of 20% to 40%.3 Startups with no value outside COVID-19-related activities do not meet their outlook criteria.
If you were a startup lucky enough to had obtained investment prior to the pandemic, you were further rewarded by venture capitalists. Of no surprise, venture capitalists focused on startups they personally invested in, in the past. Elise Miller Hoffman explained that they “took some time to pause and evaluate the dynamic market conditions. Especially during the early weeks and months of the pandemic, we were in regular contact with our portfolio companies.” This was due to the companies needing to navigate paycheck protection program applications, cost efficiency initiatives, and risk mitigation efforts.2 Though investing has gone up since then, seed funding has seen a significant decrease. “There were 316 completed seed financings in the [2nd] quarter which is down from an average of 650 deals” according to Elise Miller Hoffman.2 This number alludes to the fact that venture capitalist firms are being split in two, where one portion of them have to keep supporting their portfolio companies, and another is investing in new ones. This statistic demonstrates that venture capitalists were unlikely to support early startups searching for their initial investment support and were looking into supporting startups with a history of investments as these companies have a lower rate of failure. In this economic situation, venture capitalists could not afford to lose money, as this would have caused them not to be able to support the companies that were already dependent on them.
Quarantine-induced delays in basic and clinical studies are major concerns
Due to the pandemic, clinical trials have been impacted. Many clinical trials have had to slow down or pause patient enrollment. As a consequence, significant time and money is lost. These losses and mitigating strategies are key parameters whether or not venture capitalists choose to invest.
Another challenge as Julie Grant (a general partner with Canaan partners) explained in an interview with MedCity News that “[they] want to be able to understand whether or not the CROs [contract research organizations], vendors, and manufacturers that you are working with have people typically working in those buildings on your project. [They] have to understand the full value and supply chain of all aspects of these businesses. So [they] are doing a lot of granular work to make sure the company is not stuck at a standstill.”2
Looking ahead to 2021
With venture capitalists limiting their investments to certain companies, it is no wonder that 2020 has become one of the most challenging years for funding to date for some biotechnology startups. Although vaccines are soon to be approved in the U.S. and patients could be administered these vaccines very soon, it difficult to forecast how soon daily life will return to normal. As a result, venture capitalists have yet to decide on what their investment strategies will look like in 2021. Conservatively, their strategies will most likely mirror 2020.
Bioinsider is hosting an informal Friday Roundtable Event on Friday, Jan. 29 covering “How COVID-19 is Driving Venture Investments in Healthcare Innovation” from 11:45 AM EST to 1:00 PM. Sign up and join this discussion here.
About the author:
Nicole Ludwiak is enthusiastic about emerging cancer therapeutics and the potential of technology to advance medical research.
- Omada Health. (2020, March 30). How are healthcare VCs in every sector handling Covid-19? MedCity News. https://medcitynews.com/2020/03/how-are-healthcare-vcs-in-every-sector-handling-covid-19/?rf=1
- Omada Health. (2020b, July 19). Five VCs share how the pandemic has changed investing. MedCity News. https://medcitynews.com/2020/07/five-vcs-share-how-the-pandemic-has-changed-investing/?rf=1
- Start on Purpose Corporation. (2020). What rate of return do investors expect? | Start on Purpose. https://startonpurpose.com/Article/what-rate-of-return-do-investors-expect
- Venture capital found its footing in biotech. Then came the virus. (2020, May 26). BioPharma Dive. https://www.biopharmadive.com/news/venture-capital-biotech-coronavirus/577644/