Aug 12, 2022

Redeem now Biotech investors are prioritizing revenue-making startups during the market downturn. In the past, VCs were willing to take a chance on companies that had unproven concepts. Now they're turning to biotechs that are selling services to other companies to bring in revenue. Biotech investors are adjusting their priorities during a long market downturn , prioritizing startups with a quicker path to generating revenue. The growing interest in near-term revenue contrasts with the classic biotech startup that burns through hundreds of millions of dollars over several years to try to produce a single approved drug. Several venture capitalists told Insider that biotechs that are making money — or that are close to that point — are more recession-proof. That's a major shift from the bull market of a year ago, when biotechs with unproven technology could fetch high valuations. Investors bought into the notion that if these companies' technology worked, they could produce more drugs at a lower cost. Some of these companies, like Sana Biotechnology and Lyell Immunopharma , raised hundreds of millions and went public in 2021 before their therapies had started initial human testing. But the market downturn — the SPDR S&P Biotech ETF, a leading biotech index, is down 25% over the past year — has investors shifting away from cool science projects and toward businesses grounded in actual products and revenue. "The pendulum is swinging," Chris Garabedian, a venture-portfolio manager at Perceptive Advisors, told Insider in July. VCs look for early startups with multiple paths to success Chris Garabedian worked at biotech companies for decades before investing in them. Perceptive Advisors One example of a startup that's attractive to VCs like Garabedian right now is A-Alpha Bio , a Seattle company selling its machine-learning technology to other drugmakers. Its technology runs millions of tests to see how an experimental drug interacts with a range of proteins, which can uncover whether it might work, as well as any toxicities. The startup, spun out of the University of Washington, is already generating revenue, though the company declined to disclose an exact figure. It has partnered with other biotechs, including Kymera Therapeutics and Twist Bioscience. A-Alpha is "not reliant on the old, binary nature of a drug-development program," Garabedian said last month, referring to the long and expensive process of bringing an experimental drug through clinical studies. "We're investing more in companies that can generate revenue and that can do partnerships. A-Alpha hits that perfectly." Surf Bio is another startup pitching a quicker path to cash, said Garabedian, who recently invested in the firm. The California startup raised a $16 million seed round this April to advance its technology designed to improve the performance of existing drugs. While it's working on its own project, a fast-acting insulin, it's also looking to sell its technology to other drug companies, Garabedian said. Rod Wong, a managing partner at RTW Investments, told Insider in July that with the downturn, he now goes into an investment with the "conservative assumption" that RTW might be the primary capital provider for some time. That assumption guides some of the firm's investments, he said, adding that it's easier to back companies that already have a drug on the commercial market. Revenue from those sales can lessen capital needs. "It makes it easier to underwrite or invest in those companies," Wong said at the time. "We are finding probably a bit more opportunity in those kinds of companies than we did before." Jeff Huber, cofounder and general partner of Triatomic Capital Triatomic Capital Jeff Huber, a cofounder and general partner of Triatomic Capital, told Insider last month that he looks for multiple paths to success in each investment. His firm led a $40 million Series A round in July for Manifold Bio , a Boston startup developing a barcoding platform to improve animal drug research. Huber said the company is developing its own drugs but has also seen "strong interest" from other drugmakers wanting to use its technology. "Even if their therapeutic pipeline didn't pan out, there's still a good and strong platform business providing that as a service to other biopharma companies," he told Insider. Deborah Palestrant, a partner at 5AM Ventures, also said in July that investment dollars had shifted toward more surefire companies that can hit milestones over the next few years that would move the company forward. Investors today, she said, aren't as prone to saying: "Hey, this is a cool idea. I'm just going to give it some money and let it go." Sign up for notifications from Insider! Stay up to date with what you want to know. Subscribe to push notifications