Pearl Pathways serves the start up drug and device sector happily. When we work with founders and the small management teams of start ups, it is some of the most rewarding work we do. However, it’s no secret that early stage venture funding for biotechs has fallen off dramatically in recent years. Since 2007—when venture investing in biotechs hit its all-time peak—the number of new US-based biotech start-ups per year has dropped from 120 to 80, according to Bruce Booth of Atlas Venture (source of figure below). And it’s not just that VCs are making fewer early stage investments; another problem is that the average amount invested in a company’s earliest financing round has dropped from $12M to $6M, making it very difficult for start ups hoping to survive on a diet of VC money alone. It’s worth looking into WilmerHale’s 2011 Venture Capital Report.
But there are ways for new biotechs to fill that early stage funding gap. In what has traditionally been a relatively clearly delineated process for biotechs (from friends-and-family contributions, to angel investments, then to VC funding and beyond), now the black-and-white borders of financing are beginning to blur into a slightly grayer shade.
Corporate venture activities are playing a more and more significant role in the early development of independent biotechs, as big pharma/devices generally rely less heavily on costly internal R&D efforts to drive innovation. And most recently, micro-VCs—firms making investments sized between angels (typically $50K-$100K) and more traditional VCs (typically $5M-$7M)—have emerged as a pathway for new companies to successfully secure early stage funding. According to Mark Suster of GRP Partners, Micro-VCs are giving the VC giants a real run for their money by making several smaller investments (250K-500K) in companies’ earlier stages, in the hopes that one will hit it big.
Despite some of these numbers and the ever-talked-about funding gap, there’s still money out there for early stage biotechs. It’s just coming from slightly different sources.