Seeking Funding During a Pandemic: Panel Discusses Recent Trends in Life Science Capital Investment

COVID-19 has created significant challenges for the Venture Capital (VC) market and life science companies seeking funding during the pandemic. While the pandemic has undoubtedly added a new layer of risk to an inherently risky field, the fundamentals for what makes a company attractive to a VC have remained steady. However, the way deals get done has changed.

At the recent BioHealth Capital Region (BHCR) Forum, which was held virtually, a panel of life science and VC experts came together to discuss what they want to see from a potential partner before pulling the trigger to invest and how companies seeking funding during a pandemic can better market and position themselves with VCs.

The world of VC funding has always been grounded in strong networks, “warm” introductions, and personal relationships developed over dinners, conference meetings, and boardroom table discussions. 

All of this changed in the age of COVID-19. Life science companies seeking funding during a pandemic and VCs searching for the right organization to invest in have had to shift quickly to virtual interactions. Initially, this shift caused significant disruption for an industry rooted in trust built through face-to-face relationship building.

Arti Santhanam, the Executive Director of TEDCO’s Maryland Innovation Initiative (MII) moderated an all-star panel that explored seeking funding during a pandemic. The panel included Benjamin Britt, General Partner of Route 66 Ventures; David Hilbert, President and CEO of Arcellx, a clinical-stage cell therapy company; Sara Nayeem, Partner at New Enterprise Associates (NEA); and Bill Snider, Partner at BroadOak Capital Partners, LLC.

COVID-19 Has Impacted Funding Strategies and Approaches

“There were two phases for the venture community. We had to recoup and retrench. It seemed the world was flying apart, but then in March and April there was an immense resurgence in interest in biopharma stocks. We had to step back and look at our portfolio…All of the companies across the different spaces have had to take a step back. Things slowed down for a period then in April things accelerated again and we became used to doing diligence remotely. Over the medium and long term, it’s clear what’s happening in biopharma, but it’s not so clear in travel, restaurants, and retail. Biopharma has become a defensive sector,” stated Nayeem.

“We need to show what biopharma can bring and how it can solve pandemics and bring attention to other diseases our industry is innovating around. The pandemic has also shown how the industry can be good players around pricing also,” she added.

Arcellx recently raised $85M in the midst of the pandemic. The company’s President & CEO had this to say about seeking funding during a pandemic: “What is interesting is that things have divided into the haves and have nots. The haves had COVID-19 assets or technologies that could be applied to the coronavirus. The have nots are in a different field…we are in oncology.”

“We needed to see if we were eligible for some of these COVID-19 programs, and we needed to figure out how to protect our employees. We needed to balance protecting our people with a need to move our programs forward…we needed to manage that risk profile,” he added. “On the financial front, we are very fortunate to have the right set of investors at the table who share our vision of what we wanted to do and what we wanted to be as an employer.”

In the COVID Age, Diagnostics and Telemedicine Have Seen an Uptick in Willing VC Investment

Santhanam noted that COVID-19 has caused a shift in VC perception of diagnostic companies as high risk. Prior to the pandemic, VCs tended to shy away from investing in diagnostic companies, but have pivoted away from this view because of the central role diagnostic tools are playing in the pandemic fight.

“Diagnostics are cool again. There were a lot of good reasons why people avoided the space; things quickly turned around, though,” stated Snider.

“One area of investment interest is in the supply chain. There are 551 manufacturers of COVID-19 diagnostics and there are 820 tests and 84 have emergency use authorization. If you dig a little deeper, I bet a number of these companies were incorporated after February of this year…this is a level of excitement no industry deserves. The system we have today is built around immuno assays, but the molecular tests are the future, but the instrumentation is expensive and reimbursement has been difficult. It’s possible we could see a quick switch to molecular assays and the government could step in…Clearly, you have to follow the government, and we are watching this very closely.”

Telemedicine has also seen a boost during the pandemic, as hospitals have had to interact with patients remotely to provide care given COVID-19 restrictions. Regulatory barriers to increased telemedicine use have loosened over the past eight months, and many healthcare experts believe telemedicine will be firmly entrenched in healthcare even after the pandemic recedes. This view is akin to those that see telework as the new normal regardless if it is safe to return to the office.

That said, investing in telemedicine still has its risks. 

“We got lucky. We went into digital health and wellness in December 2019…The timing turned out to be pretty good. The telehealth space has been a low take up over the last five years and the pandemic has changed consumer awareness that this is actually an option,” stated Britt. “Telehealth is on a bull run right now, and you see a rapid shift, and it’s not going to stay at this level, but now it’s in the game…Now telehealth companies are not viewed as moonshots anymore.”

Infectious Disease Companies Still Face Hurdles to VC Investment

Traditionally, as Santhanam noted, companies that focus on infectious disease treatments and therapies have struggled to find VC funding. However, with the push for a SARS-CoV-2 vaccine via Operation Warp Speed, there has been an influx of funding, mainly from the government, to a host of infectious disease-focused companies.

The question at hand, though, is this: Will VCs be more willing to invest in these types of companies after a vaccine is approved? Will this current push translate into increased VC funding?

“There are a lot of companies emerging with programs around COVID. All of the questions we have about infectious disease still exist for us…What’s the prevalence, how effective will the vaccines be, what percentage of the population will take the vaccine, how severe will the disease be?…An infectious disease drug might not be useful in 20 years,” stated Nayeem.

“In terms of COVID, we’re excited to see the energy around the space, and there is a lot of non-dilutive funding out there. I do think the world has become more aware of the problems around infectious diseases, and there’s more political will to get things done and more funding sources than private capital. Hopefully, this will spur interest and improve the capital sources for companies developing anti-infective drugs,” she added.   

What VCs are Looking for in BHCR Companies

“The team is important. Are the leaders thought leaders in the space? Having a proven team and going after an unmet need is also important…we see a lot of technology seeking an application. The right team has to be there to push it forward and make it meaningful,” stated Nayeem. “Interact with investors early on even when you are building your data set; get a lot of input early.”

“People are not like mutual funds, past performance does predict future performance. We’ve invested in the right themes, but just the wrong teams on occasion. If you invest in the right team, even if it’s not the perfect product, they’ll figure it out,” shared Britt.

“It’s really about what the idea is. We’re happy to get involved and give companies the resources to do something transformational. We want the companies to have the pieces to put something together and fill in the gaps,” added Snider.

Developing the right team that is attractive to VC investors is critical to the sustained growth of the BCHR. Having a great idea without the right leadership team and other expertise is a risk many VCs are not willing to take. That means increased VC investment in BHCR ecosystem companies requires talent attraction and workforce development strategies that supply professional talent at the c-suite all the way to the individual contributor levels. 

“Going back a few years there were very few players in the area. Many other companies emerged in the early 90s and early 2000s, but there weren’t enough spin outs…as the area starts this process again, we need to see places like AstraZeneca and Emergent spin out companies that are fundable ideas at the venture and private equity level,” said Hilbert. “We need to understand what a quality startup looks like to investors.”

“The unique aspect of the BHCR are the 1,000s of postdocs that exit the NIH. There is a talent base here that is untapped, as far as I’m concerned. Many of them leave the area but don’t want to leave the area. We need to offer them opportunities to stay here. If you have a great idea, and a great workforce, you can draw people from out of state…start with the ideas and investors and then leverage the workforce to bring in the talent that is harder to find and that’s how Maryland will continue to grow as a hub,” he added.

Replays of the 6th Annual BioHealth Capital Region forum are available online by visiting https://eventmobi.com/biohealth2020.