Dr. Leen Kawas, an experienced biotech innovator and entrepreneur, highlights industry changes propelling biotech venture capital firms.

As 21^st-century biotechnology advancements continue, they are fueling innovation in the healthcare, agricultural, marine, and industrial sectors, among others. Healthcare-related biotech discoveries receive the most visibility, as they often focus on new drug development and other therapies. Patients across the globe can potentially benefit from these treatments.

Funding biotechnology innovations is typically an expensive proposition. A United States drug development cycle averages 12 years. This longer-term undertaking involves multi-stage clinical trials and regulatory compliance exercises. Ideally, the biotech drug developer will be well-capitalized throughout the cycle. However, new biotech companies often lack sufficient financial resources to carry them through this laborious process. Venture capital firms often provide a solution.

Leen Kawas, Ph. D. is Propel Bio Partners’ Managing General Partner. This Los Angeles venture capital firm partners with start-up and early-stage biotech businesses. Dr. Kawas previously served as biotech company Athira’s Chief Executive Officer (or CEO). While there, she successfully managed several drug development cycles. Dr. Kawas detailed biotech venture capital firms’ recent evolution.

How Venture Capital Can Help Ensure Startup Biotechs’ Survival

A biotech company’s research and development activities require a steady flow of funding. Startup and early-stage biotech businesses, often without a credible track record, are too risky for many investors. Fortunately, biotech-focused venture capital firms (such as Propel Bio Partners) have stepped into the void.

Biotech venture capital investors seek funding candidates that demonstrate growth potential. Selected companies also receive access to technical support, managerial guidance, and networking assistance. The investors’ contribution buys them a percentage of company equity along with a respected voice in the biotech’s business decisions.

How Biologics Led to Biotech Venture Capital’s Growth

Venture capital firms’ interest in the biotech industry is several decades old. During the early 20^th century, pharmaceutical manufacturers developed small-molecule drugs via medical chemistry methodologies. Decades later, 1980s-era molecular biology innovation drove the emergence of biologics.

Biologics’ ultra-high production costs, combined with low pre-clinical drug discovery success rates and long drug development pipelines, caused many pharmaceutical firms to reevaluate their options. To justify biologics’ risks, the pharmaceutical companies acquired venture capital-backed biotech startups.

How the COVID-19 Pandemic Affected Biotech Companies

During the recent COVID-19 pandemic, many biotech companies benefited from the development of targeted vaccines and related antiviral treatments. In 2021, investors focused on good returns channeled an exceptional amount of money into biotech. Although still elevated from pre-pandemic levels, 2022 investment dollars fell slightly.

Since the pandemic wound down, however, lower revenues and elevated interest rates have made biotech investment financing more difficult and expensive. This has caused many established investment partners to reconsider their investment strategies.

Post-Pandemic Biotech Venture Capital Investment Trends

Uncertain economic conditions, changing biotech industry dynamics, and higher interest rates have led to a revamped biotech industry venture capital environment. Dr. Leen Kawas puts the industry’s evolving funding situation into perspective.

Decreased Biotech Funding and Dealmaking in 2023

In January 2024, venture capital analysis firm Pitchbook and the National Venture Capital Association reported on 2023 biotech venture capital investments. These aggregate investment dollars dropped 25 percent from 2022.

For perspective, in 2023 venture capital firms completed 481 deals with a $18.4 billion total investment. In 2022, the firms completed 559 deals with a $24.5 billion total investment. The numbers show that venture capital firms made fewer deals (but higher-dollar deals) in 2023.

In 2023, venture capital firms increased investments in later-stage pharmaceutical companies. For perspective, these investments accounted for approximately 40 percent of the 2023 deals. This later-stage funding indicates that venture capitalists are staying on the sidelines unless a drug developer has a current or upcoming clinical trial on the books.

Therefore, early-stage biotechs appeared to be at a fundraising disadvantage during 2023. Should they choose an initial public offering (or IPO), obtaining the needed funds seemed to be more difficult than in the 2020 to 2021 timeframe.

Venture Capital Firms’ Revamped Priorities in 2024

In June 2024, United States biotechs’ venture capital investment returned to pre-COVID levels. Today, venture capital firms are also actively soliciting investment dollars from well-heeled entities. Similar to 2023, however, venture capitalists have continued to decrease investment in pre-clinical biotechs. As these startup and early-stage companies see fewer investment dollars, they’re less likely to complete an initial public offering.

Biotechs that successfully complete an IPO are typically at the clinical trial stage or later. In addition, the firms’ management-level team members are often seasoned biotech industry luminaries.

Finally, some biotech investors’ long-term roadmaps may now favor mergers and acquisitions or pharmaceutical partnerships. For now, IPOs have fallen out of favor as investors rethink their options in a challenging economic environment.

With uncertainty around current high interest rates, investors may be waiting for signals about the Federal Reserve Board’s upcoming plans. The investors may also be awaiting the outcome of the 2024 presidential election.

Dr. Leen Kawas Highlights Biotech Venture Capital Firm Investment Requirements

Although some biotech investors may be changing their investment strategies, Dr. Leen Kawas emphasized that Propel Bio Partners remains open to pitches from candidates with innovative biotech solutions. Dr. Kawas especially encourages women and minorities to reach out.

As Propel Bio Partners’ Managing General Partner and a former “hands-on” biotech CEO, Dr. Kawas is well-versed in the firm’s requirements for successful candidates. “Again, we’re not going into areas where it’s very busy, it’s product Number 10. No, it has to be first-in-class or best-in-class.

“Sometimes, you could have a product that is so clear, and from the outside, it could appear that this is an indication, that this is a product that is de-risked. [That said], you’re not only approving the product and the mechanism of action of how the product is working. You’re also evaluating the clinical strategy, clinical development, and execution. Do you believe that this management can execute?” Dr. Kawas asked.

Investment Partners Receive Multifaceted Support

Finally, Dr. Leen Kawas emphasized that selected biotech investment candidates will receive multiple types of support. Besides the financial investment, these start-up and early-stage biotech companies will benefit from Propel Bio Partners’ operational and scientific guidance.

For reference, the Propel Bio Partners team has extensive prior experience in every area of life science business operations. This enables them to effectively implement de-risking strategies while completing cost-effective product development on a stepped-up schedule.

Dr. Leen Kawas described this well-rounded approach. “If a company needs our input on an operational or regulatory strategy, we provide experienced advice but more importantly are able to bring the right expert to support our portfolio companies.” Dr. Kawas noted that educating biotech founders on applicable techniques would substantially improve the entrepreneurs’ chances of positive outcomes.