Analyses Made Easy

Pitchbook’s The Biotech Company Lifecycle*

*All graphs and figures are taken directly from the report itself.

The long-term gains offered by a successful biotech company, compared with the relative predictability of its funding needs, make it a prime opportunity for venture funding. This is despite the fact that a lean startup method is rarely applicable to their growth patterns. Still, investors tend to see a liquidity event before drugs even hit the market. Even if biotech companies tend to need more funding at the beginning for lab equipment, etc., they are often rewarded by a de facto first-player-advantage, which is then protected by legal frameworks in ways that startups are not.

As with startups, biotech companies have high failure rates: 90% of clinical programs fail to receive FDA approval, while 92% of biotech companies are unprofitable at any given time. This puts them squarely in the domain of high-risk venture capital, which plays out when contrasting VC participation in biotech deals with other investors' activity (see graph). VCs are involved with 65%-70% of biotech funding deals. 

That has increased across all subsets of biotech companies. The two largest areas for investment are oncology and neurodegenerative/musculoskeletal diseases, into which VC pumped $7.2B and $1.5B, respectively, so far in 2020 (see graph). VC investment in new vaccines, driven by research into COVID-19, has reached a new high of $1B so far this year and shows the greatest increase YoY.

Meanwhile, valuations are equally strong: pre-money valuations for early-stage and late-stage biotech companies come in at a median of $30M and $125M, respectively, so far in 2020 (see graph). That constitutes a particularly big jump for late-stage companies, which had a median pre-money valuation of $72.5M in 2019. Angel/seed-stage companies also saw median valuation growth from $8M to $10M between 2019 and 2020. This reflects strong step-up multiples from the angel/seed-stage to series A, which have stayed above 2x for the last seven years. 

The median time from founding to first VC funding for biotech companies in 2020 is 1.5 years. Excluding companies co-tagged as biotech, tech companies need two years to get to their first funding. That biotech companies need less time than other tech companies has remained stable for five years (see graph). The median and average time between financing rounds for biotech startups in 2020 came in 3.2 and 4.3 years, respectively. That compares favorably with the duration for tech startups at 1.3 and 1.7 years, respectively, which indicates that these companies come back for more funding more frequently. 

Finally, the healthy IPO market for biotech companies makes them prime candidates for successful offerings. Biotech startups’ median and average time from founding to IPO in 2020 is 5.8 and 6.6 years, respectively. Tech startups require a median of 9.9 and an average of 11.3 years (see graph). The median time to IPO for biotech companies has declined notably from 8.7 years in 2016 to 4.8 years in 2019, constituting a -18.2% YoY drop. IPOs tend to act as a financing event for biotech companies, rather than an exit for early investors, as companies are better able to gauge whether they will need the funding at all using reliable success/failure models for their drugs.

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