Evolving biotech funding trends: VCs lead new series B deals, but early-stage deals require insider support

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Biotech VC firms

With biotech funding trends always evolving, HSBC Innovation Banking’s inaugural Venture Healthcare Report lays out the trends seen in the first half (1H) of 2023, where valuations underwent a necessary reset, and venture capitalists emerged from their cautious stance, eventually embarking on a fresh wave of investments. However, an overall decline in investment was still seen compared to last year.

The report, written by HSBC Innovation Banking’s Life Science & Healthcare team, covers the four main sectors in healthcare – biopharma, healthtech, med device, and dx/tools – providing an overview of investment activity, valuations, and step-ups for venture-backed healthcare companies.

Overall, the report shows that there was a decline in investment across all four sectors compared to last year, with healthtech and dx/tools suffering the largest decline (down by about 35% compared with 2022), and med device being the most stable (only down by about 15%). 

But, in this article, we specifically take a look at what the report concluded regarding biotech funding trends within the biopharma sector (which was down by about 30% compared with last year), with three particularly significant findings. 

Biopharma investment was actually quite stable in 1H 2023 compared to the second half (2H) of 2022, but annualized dollars were significantly lower compared to the previous few years. 

The first significant biotech funding trend of 1H 2023 was the fact that VCs returned to leading new Series B deals. This was seen as a highlight for biopharma investment, as it showed a significant difference from the softness in 2H 2022.

“In 2022, many Series A companies needed to secure insider rounds from existing investors, as new investors were either too focused on their own portfolio to consider new investments, or were demanding more clinical data. Series B meant ‘B’ in the clinic,” explained Jonathan Norris, managing director at HSBC Innovation Banking, and lead author of the report. 

“However, in 2023 many of those companies who secured insider rounds in 2022 were able to secure a new Series B deal in 2023. Additionally, in 1H 2023, the paralysis of investors has thawed, as both their existing portfolios and valuations overall have stabilized.” 

But, the report stated that these new Series B financings were smaller in both size and valuation compared with pre-IPO crossover deals in 2020-2021. 

Crossover investors have largely departed the biopharma scene 

The second significant biotech funding trend of the HSBC report was that crossover investors – which are usually hedge fund or large publicly-focused institutional players – mostly departed the biopharma scene in 1H 2023. 

“These investors were the ones leading high-priced Series B and C rounds in 2018-2021. Most of these rounds were for early stage pre-clinical deals. These rounds were called mezzanine or pre-IPO rounds, and were large in size (typically $80-$150 million), and valuation ($200-$400 million post), and usually went public within six to nine months of funding,” said Norris.  

But, he continued to explain, because of the decline in the IPO market, crossover investors have now largely moved to the sidelines. They have gone back to the public market, as PIPE’s appear to be the new mezz round for them. 

“Thus, overall investment in the biopharma sector is down as Series B and C deals are being led by traditional venture investors at smaller deal sizes and valuations as the focus has shifted to clinical progress instead of bolstering the balance sheet for an IPO,” concluded Norris.

Early-stage deals still require insider support

Finally, the third most significant biotech funding trend was that early-stage investment suffered a heavy drop compared to the previous three years. The report stated that 40% to 50% of early-stage deals needed more insider support, a BD deal with big pharma, or consolidation or M&A. 

Norris explained the reason behind the significant drop: “…New investors are demanding different value inflection milestones than in the 2019-2021 heyday. In the previous cycle, pre-clinical companies could raise large up-rounds with continued pre-clinical development, and getting into the clinic could unlock the next financing.”

According to Norris, that was because there were many pre-clinical IPOs happening during that time; in fact, in 2020-2021, almost 50% of the venture-backed IPOs were for pre-clinical or phase 1 companies. 

“Now, new investors often demand clinical data, and are pushing hard on valuation. Thus, these companies need to raise insider money and look to possibly cut staff or re-prioritize asset development in order to get to clinical data,” said Norris.

“The next round financings of these companies will be interesting to watch, as we think many will need to have significant down-rounds in valuation to raise a new investor-led round.”

So, what does the report say we can expect from the second half of 2023?

Well, fortunately, in general, a deal and dollar upswing is anticipated to occur, as companies that closed 2022 insider rounds flood the market alongside regular scheduled fundraises.

However, while there is a record amount of dedicated venture capital in the market, and VCs are actually beginning to invest once again, it is still expected that there will be a significant number of companies unable to raise new capital, leaving them to contemplate consolidation or M&A. 

And, focusing back specifically on the biopharma sector, the report said that we will probably see more VCs lead or co-lead later-stage deals, which had previously been funded by crossovers. 

Plus, opportunistic IPOs are also expected, and it is anticipated that private M&A will bounce back within the sector, approaching double digit deals, perhaps leaving a lot more to look forward to in 2H 2023 than in 1H 2023.

Explore other topics: FundingIPOVenture capital

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