Panel Explores Changing VC Environment

Life science industry professionals had much to discuss as they gathered at Biocom California’s annual Global Life Science Partnering & Investor Conference.

The sold-out, three-day event, held Feb. 28-March 2 at The Lodge at Torrey Pines, brought together a mix of professionals from biotech startups, large pharmaceutical companies and venture capital firms for networking and exploring the current state of life sciences.

In a panel discussion on “Today’s VC Environment,” Canaan Partners General Partner Nina Kjellson, Avalon BioVentures Managing Director Jay Lichter and Venrock Partner Camille Samuels explored how the changing economic environment has affected venture funding for biotech startups. The discussion was moderated by Jim Krenn, partner at Morrison & Foerster.

“It’s been a challenging end to 2022 and starting into 2023 for life science venture. Much has already been discussed at the conference here about the current state of the market, but it’s not all doom and gloom,” Krenn said, before prompting a discussion on what life science venture investors are excited about and looking forward to in 2023.

“I’m most excited about seeing us finding our creativity again,” Samuels said, explaining that slow economic environments forces industry to find ways to deal with fewer resources. “The saying is not that luxury is not the mother of invention, it’s necessity.”

The necessity of doing more with less capital force startups to be creative in raising funds by doing things like pursue more grants rather than equity dollars, she added.

Lichter pointed out that even though deployment of venture capital has slowed dramatically over the last six months, “there is still a lot of money in the system that is sort of sitting on the sidelines.”

That capital is now looking for “A to A-plus companies” to finance compared to three years ago when “A-minus and B-plus companies” would also get financed.

“The opportunities for great companies to raise a lot of money is still there,” he said, adding that when venture funds are raised, they need to be deployed within a certain timeframe. “We have to put that money to work. The challenge is, bring us great companies. As you think about starting a company and entering into the marketplace, whether it’s early stage or later stage, you got figure out how to differentiate yourself.”

Kjellson also pointed out that the vast amounts of capital raised for U.S. healthcare innovations over the last five years – with a large share going to life science startups – has created “significant silver linings” for the industry as it faces its current down trend in investing.

While new companies will now face “more scrutiny” as they seek funding, she said, venture funds do still have resources to back them when they are ready.

Investor Focus Shifting

Another silver lining for the coming year, Kjellson said, is that the “10-year bull run” in life science investing created “a tremendous number of companies.”

“There are five to tenfold more entrepreneurs currently than when the last market crash happened,” she said, adding that it is an exciting time to work with the plethora of existing companies as both funds and startups “adjust to a different type of capital scarcity.”

Kjellson said she is spending more time helping her portfolio companies manage “a tighter business plan” as they look to lower their burn rates – a difficult task as life science has high externalized costs, high labor costs and high real estate costs because many companies are locked into lease agreements signed when competition for lab space was fierce.

“This is what venture firms should be doing and now, getting back to basics,” she said.

Samuels said she also is spending more time helping her companies “not need to raise money soon.”

“I worked really hard on my existing portfolio last year and spent less time deploying capital,” she said, adding that the extra time VC firms have to devote to portfolio startups is a result of venture funds taking longer to deploy right now.

“Some funds have deep pockets, short arms right now,” she said. “They’re hesitant to deploy money and engaging a lot more and watching what everybody else is doing.”

Another shift in venture funding for startups is the level of milestones startups need to reach before raising funding rounds, Samuels said.

“It used to be you could talk about a company getting to IND filing and getting a big Series A,” she said, adding that business plan “spent a lot of time developing the technology before it was applying the technology. Now, there’s an expectation of companies getting the human data coming out of VC seed, then doing Series A.”

For life science startups looking to stand out to venture capital firms, Samuels said she looks for companies with “the steak and the sizzle” – new technologies that are exciting, but also focused with strong medical need indications that are backed up with real data. Founders also need to show how much money they need, and how long will it take to get to the “value inflection point.”

“The last thing is the strategic context of whatever you are,” she said, and pointed to the example of knowing “hot” areas being invested in like RNA technologies. “And if you’re in an area that’s not hot, then you need to articulate why you’re going to solve the problems that caused it to be in a period of disillusionment.”

To stand out to investors, Lichter said startup founders need to “think about presentation” and tell a “crisp story.”

“Think about how to express what the deal is quickly, and then think about how to describe the narrative in your deck that is easy to follow when it is read,” he said, emphasizing that investors also want to see presentations “clear milestones.”

Kjellson added that because VC firms review between 400 and 500 deal proposals a year, founders need to “do homework” and present their companies to investors contextualized within the “competitive landscape.”

“We may have seen most of the things in any modality or target space or in any therapeutic area,” she said, and suggested founders include competitor profiles in their proposals and information on how their tech differentiates from them.

Kjellson also advised life science founders take advantage of networking opportunities like the Global Life Science Partnering & Investor Conference and ask pharmaceutical companies for advice on things like experiments and clinical trial designs that work within the kind of budget pharma would require for a deal.

“You’re not going to come to us with that deal in hand, but you’ll be able to point that you’ve vetted the validity of your hypothesis,” she said.

Biocom California

Founded: 1995
CEO: Joe Panetta
Headquarters: San Diego
Business: Member organization advocating for life science industry
Revenue: $9,400,000 (2020)
Members: Over 1,600
Website:   https://www.biocom.org/
Notable: Biocom is the state’s most powerful advocate for life sciences with offices in San Diego, San Francisco, Los Angeles and Sacramento, and satellite offices in Washington D.C. and Tokyo.