The Biotech Startup Class of 2013: Don’t Worry, It’s a Short List

11/18/13Follow @xconomy

[Updated: 12:45 pm PT 12/13/13] We’ve heard a lot this year about the IPO boom for biotech companies. Even after a few high-profile blowups (Ariad, Sarepta), the public biotech stock indexes are still outperforming the Nasdaq Composite Index and S&P 500. Some biotechs have been acquired for megabucks (Onyx, ViroPharma). We’ve heard about another biotech bubble in the making.

Normally, you’d expect all that wealth creation and associated excitement to ripple across the biotech industry and stimulate all kinds of exciting new biotech startups. You’d think lots of venture capitalists, flush from the latest happy trip to the Nasdaq casino, would be itching to throw the house money into the best new crop of biotech startups.

But you would be wrong.

The data aren’t final yet for this year, but it’s safe to say we are living in the stingiest funding cycle for first-time biotech financings in almost two decades. There were only 102 first-time financings of life sciences companies through the first nine months of 2013, the lowest amount since 1996, according to data from Thomson Reuters that’s used for the MoneyTree Report from PricewaterhouseCoopers and the National Venture Capital Association. If you subtract out one big private equity deal for a life sciences service provider—a $150 million investment in Bethesda, MD-based Precision for Medicine—then just $467 million went into first-time biotech financings through the first nine months of the year.

This trend, of course, has been visible for a few years now, as the biotech venture capital business goes through a historic shrinkage. Even with the emergence of crowdfunding, corporate venture capital, and a new breed of businesslike philanthropies, there’s still a glaring lack of truly exciting, newsworthy, swing-for-the-fence biotech startups being created today.

As I did last year, I spent some time this week reviewing databases and asking a dozen VCs from the U.S. and Europe to come up with a list of the important biotech startups of 2013. For the purpose of this exercise, I defined a “newsworthy” biotech startup as one that has a big idea, a credible management team, and one that got at least $5 million from a first-time financing in 2013. I set $5 million as the cutoff, because it weeds out a lot of poseurs, yet it sets a pretty low bar for inclusion. It takes at least $5 million to do an even halfway substantive manufacturing run for a new protein drug candidate to begin clinical trials. It’s not much money.

Why should anyone care about these little companies that no one has ever heard of? Because biotech needs to keep churning out new companies every year. Players disappear all the time, whether it’s because of failure or success (acquisition). New startups are often the ones free to take on the daring ideas, the ones that can truly advance medicine. Whenever someone e-mails me with “Hey, here’s a new company with star scientific entrepreneur XYZ that just raised a $30 million Series A to do the next big thing in cancer/Alzheimer’s/genomic tools/whatever,” that usually makes me drop what I’m doing to stop and listen. If the industry can barely pop out a handful of these kind of companies each year, then we’re all going to have to start looking to Big Pharma/Big Biotech again as the source for innovation—even though they’ve been hoping little biotech would solve the innovation problem the past 15 years.

So why is this happening? There are fewer active VC firms now than there were five years ago, as many have failed to raise new funds to keep going. Many big institutional investors feel that the rewards of biotech (which aren’t as big as an investment in the next Facebook of Twitter) don’t justify the risk. Yet, if you talk to scientists, pharma leaders, and venture capitalists, they almost all agree that there’s never been a better moment to invest in biotech.

Bruce Booth. Photos by KeithSpiro, courtesy of Kendall PRess.

Bruce Booth. Photos by KeithSpiro, courtesy of Kendall PRess.

Last week, I shared my (short) list of newsworthy biotechs from 2013 with Bruce Booth, a partner at Atlas Venture, and asked him why he thinks so few big-time biotech startups are being created. Here’s what he said via e-mail.

At its peak in the mid-2000′s, 120-150 new biotechs were being formed each year. Now it’s closer to 80-100. What’s the “right” number to support a healthy ecosystem? Is there really one transformational idea every two days around which to create a new biotech? Part of the decline is a reduction in the number of ‘spec pharm’ reformulation plays. We see far fewer of those. Your list underpins that point – many of these are biotechs working on innovative new therapies not incrementalist innovations. That’s the silver lining on the shorter list. One can argue on both sides about what the right number is to support a sustainable biotech industry, but we certainly believe now is a fantastic time to be starting new companies: the supply of high impact ideas – the substrate that powers up new startups – is as strong as ever, and the demand for new, novel medicines from both Pharma, and surprisingly the public markets, continues to outstrip the supply. This dynamic bodes well for future returns in early stage venture creation going forward.

It should be noted that a few of these companies in the list below may have been operating on shoestring grants here or there before this year, but appear to have gotten their first financing to pursue their goals at full throttle in 2013. Some of these companies are trying to remain in stealth mode, so I’ve done my best to describe what they do in simple blurbs from the Thomson Reuters dataset, the company websites, or from our own Xconomy reporting. Some companies crowed about large financing amounts in press releases, but appear to have raised … Next Page »

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  • Barbara Nelsen

    Interesting article, but as you point out early-funding is now the domain of alternative investors, philanthropics, non-profits and super-angels. The list of exciting new biopharma companies is long, if you look to who has raised greater than $5M outside of VCs. In 2012, angels invested a total of $1.1 billion in 783 deals (primarily in “first fundings”), with 27% of that invested in the healthcare/life sciences sector.
    National chapters, larger investment pools, sophisticated investment
    strategies, syndications with other angel funds, and an integrated
    single-source application has made it significantly easier for angels to provide funding at higher levels than historically done, and through multiple rounds of financing. In addition, they are syndicating other investor categories. It’s time to rethink how we access the landscape of new and noteworthy biotechs.

  • Carlos Danger

    I think the title of the article should more aptly be “The Biotech Startup Class of 2013: Worry, it’s a short list”.

  • http://www.xconomy.com/ Luke Timmerman

    Carlos — I do think it’s a concern that so few high-impact startups are getting started. I hope it’s just a down cycle, because if it’s a long-term trend, then the whole industry will be in bigger trouble than it already is.

    Barbara — many of these companies listed above have gotten money from angels as well as VCs. Can you share some of the exciting first-time biotech financings of $5m+ in 2013 that I’ve overlooked? I’m happy to update the list if you have more names to add.

  • @ben_lack

    You do realize your annualized rate is well (136) is well within the peak range, right?

  • http://www.xconomy.com/ Luke Timmerman

    Ben — No, the annualized number of first-time financings is not even close to the peak range. The numbers from NVCA/Thomson Reuters show we are on track to see about half as many first time financings as in the peak years of 2006-2007. Those peak years saw 270-275 first time life science financings, and we are on track for roughly 130 first-time financings this year.

  • http://www.raybiotech.com/ www.raybiotech.com

    This dynamic bodes well for future returns in early stage venture creation going forward.

  • Muni

    You Said “As I did last year, I spent some time this week reviewing databases and asking a dozen VCs from the U.S. and Europe to come up with a list of the important biotech startups of 2013. For the purpose of this exercise, I defined a “newsworthy” biotech startup as one that has a big idea, a credible management team, and one that got at least $5 million from a first-time financing in 2013. I set $5 million as the cutoff, because it weeds out a lot of poseurs, yet it sets a pretty low bar for inclusion. It takes at least $5 million to do an even halfway substantive manufacturing run for a new protein drug candidate to begin clinical trials. It’s not much money”.

    ——————————————
    My reply
    “What you define “Newsworthy” seems to me not at all that worthy. If you have that much money, there would be millions of start ups in Biotech or any other field. The most notorious problem with starting a business of any kind is money, and that is even more harder for Biotechnology because one needs a lot more money. To start a BioTech with $5 Million in hand is pretty lame and unrealistic, who will have that much money. Most banks are run by thugs and they do even lend small amount like $100-250K, you are talking about 5 Million. I can guarantee you that most of those so called drug companies started with small amount and with their hard work and steady build up brought in more money. What is news worthy is a solid plan and good people behind the idea, the rest can be worked in a timely fashion, if money is your criteria for a small business/start up or a Biotech start up, there would be no new companies for another 100 years.

    I can guarantee you that with 1 Million, I can bring up one of the finest Biotech companies that could grow into challenge a larger multi million companies……that would be more news worthy. Writer like you must project realistic and optimistic views, and write to those thuggish banks like Wells Fargo, Chase and others to lend to talented people, things will change and our nation can improve from this economic and other disabilities that is facing now”.

    • Muni

      I meant “they do not even lend”
      (not do lend)