The biotech industry is one of the most promising areas for investment, with numerous opportunities for growth and innovation. Among those opportunities are biotech startups, which may be paving the way for innovative new applications in pharma, therapeutics, and other healthcare sectors.
Biotech investments, however, are not for the faint of heart: they are a high-risk, high reward proposition. The biotech product development process is typically long and expensive and can be derailed by mistaken hypotheses, laboratory mistakes, faster competition, and cybercrime.
On the upside, biotech investments can also be wildly rewarding. For example, biotech startup Moderna developed one of the leading COVID-19 vaccines and saw its stock price increase more than 1,000 percent over its initial 2018 IPO value.
Investment Landscape for Biotech Startups
The biotech industry has seen significant growth over the past decade. In 2020, the global biotech market was valued at $499.6 billion and is expected to reach $727.1 billion by 2025, growing at a compound annual growth rate (CAGR) of 7.8 percent.
Despite these rosy projections, biotech’s more recent record is more sobering. In 2022, biotech stocks trailed the general market in the first half of 2022, with the NBI losing 30 percent of its value in the first half of the year but recovered in the second half to end the year down just ten percent, which was in line with the fall in the Dow Jones index of industrial stocks.
Biotech startups felt the pinch – 2022 biotech initial public offerings (IPOs) raised less than one-eighth of the money they did in 2021. Despite a drop in IPOs, venture capital (VC) investments in biotech were strong, raising some $35 billion across the industry. While that amount was far less than the $52.8 billion raised in 2021, it did supply the cash for continued product development at a rate that exceeded pre-pandemic levels.
The collapse of Silicon Valley Bank (SVB) in March 2023 created another challenge for startups. SVB was the bank of choice for hundreds of biotech and technology companies, as well as for the venture capital and private equity firms that serve them. While some aspects of SVB’s fall may be attributed to self-inflicted wounds, the bank’s collapse and takeover by the FDIC cast a pall over funding for startups.
In response, startups may need to rein in any blue-sky calculations, and focus on rigorous due diligence to justify their valuations. They may also look to different financing avenues, such as special purpose acquisition companies (SPACs). SPACs are shell companies that raise funds through an IPO with the stated goal of acquiring another company. In the biotech industry, SPACs have become a popular way for startups to go public, bypassing some of the traditional hurdles of an IPO.
Biotech Startup Investment Needs
One area where biotech startups have seen significant success is in the development of new drugs. According to a report by PhRMA, biopharmaceutical companies currently have over 7,000 drugs in development, with over 70 percent for diseases for which there are no or inadequate treatment options.
These startups need significant investments. The long development process generally requires collaboration among multiple companies – clinical labs, research and testing centers, scientists and data analysts, and manufacturers, specialists, experts in regulatory governance. The process is expensive: estimates put the cost of bringing a new drug to market at over $2.6 billion.
In addition to development costs, biotech startups often face significant challenges when it comes to navigating regulatory hurdles and ensuring the confidentiality of their research and findings. Today’s cybercriminals are sophisticated and understand all aspects of the biotech product development process, including a startup’s most likely development partners.
Cybercriminals use AI-enhanced attacks to monitor every phase of development, seeking access. Less-than-secure document security at any point in the process can lead to the introduction of malware, with serious consequences: not only the potential costs of ransom for the return of data and documents and control over the company’s operating system, but also potential penalties from regulatory parties and litigants. Biotech startups and all life sciences companies must adhere to Federal Drug Administration (FDA) and Health Insurance Portability and Accountability Act (HIPAA) regulations, and the FDA now holds development and manufacturing companies accountable for security-related problems.
Tips for Investing in Biotech Startups
Investing in biotech startups can be challenging, but investors who follow best practices are much more likely to achieve success. Here are some tips:
Do your Research: Before investing in a biotech startup, thoroughly research the target company, its management team, and its product or services. Have on hand experts in the startup’s biotech field to advise on how the startup compares to its competition and what are its most likely manufacturing and distribution channel partners.
If your investment is for a significant ownership position, your research can include access to the candidate company’s due diligence process. Be prepared to review company performance financials, debt, assets, and liabilities, partner and vendor agreements, Intellectual Property licenses, court filings and records, personnel profiles of senior executives and directors, employee data and policies. The review process will provide a detailed evaluation of the startup’s valuation – as well as any potential red flags.
Work with a Professional Team: Investing in biotech startups can be complex, and it's important to work with professionals with experience in the industry. Have on hand legal and technology experts who can parse the startup’s documents to uncover potential warning signs, including regulatory hurdles the company may face.
Maintain a Diversified Portfolio: Simply stated, biotech startup investments can be high-risk. For most investors, a diversified portfolio is the best way to mitigate risk.
Invest for the Long Term: As noted, a startup with even the most promising new product faces a long development process, competition, the potential for leaks and cybercrime, and other hurdles. An investor seeing the highest returns must be patient and be in the investment game for the long haul.
ShareVault: Keep your Biotech Investments Safe
For the investor in biotech, confidentiality is critical, not only for your target biotech company, but also to protect the confidentiality of your personal and business financial records. The best way to achieve that goal is to use an ultra-secure online repository for financial records and collaborations with your team of advisors: a ShareVault virtual data room (VDR). You and your advisory team have two-factor password access to records and enjoy fully encrypted document sharing from any browser or device, at any time, from anywhere, including those in remote locations. You, the gatekeeper and administrator of the VDR, can specify each participant’s rights to view, print, save, or copy. Rights can be limited with an expiration date/time and documents can be remotely “shredded” even files that have already been downloaded.
To lighten your document administrative load, ShareVault’s built-in software includes document management tools like drag-and-drop uploads, a powerful full-text search engine, inter-document hyperlinking, and easy integration with DocuSign and other file-sharing apps.
At the appropriate time, you can invite members of the startup team to enter your ShareVault protected environment. By following the same security protocols, members of your startup’s team can enjoy fully protected document sharing.
It is likely that your biotech startup is already using ShareVault’s document sharing protections - ShareVault is named as a preferred platform by the Biotechnology Innovation Organization for their Business Solutions Program.
Best Practices Lower Risks for Biotech Startup Investments
Investing in biotech startups is a high-risk, high-reward proposition. To improve one’s chances, a smart investor does research, assembles a team of expert advisors, creates a diversified portfolio, and lets their investment work over a long horizon – for a great reward.