Biotech VCs have become like bankers and we might all pay the price
A shift in business models conflicts with the long-term nature of developing new drugs and treatment
It is not news to US and UK biotech entrepreneurs but it might be to those outside the sector: many biotech venture capitalists have morphed into bankers and innovation is the victim. This shift could well see a reduction in the development of new drugs and treatments.
Bankers are all about the transaction. They can be forgiven for this focus — that is how they get paid. On the other hand, VCs get their salaries and bonuses from a management fee of 2 per cent per year of their fund size regardless of the performance of their investments. And, of course, they get a 20 per cent share of all returns above a performance threshold, so the very top VCs make huge amounts of money.
While VCs have always looked to the exits from the companies they have invested in, this fee structure has in the past helped support the longer term, risky bets required in biotech.
But with sector fundraising down sharply, the desire for better returns to perpetuate firms has shifted the investment thesis to quicker turnarounds and exits. Analysts at PitchBook noted in a report last year that fundraising from biotech VCs fell from an annual peak of $152.3bn in 2018 to just $12bn in 2024, an outcome in line with 2012 levels.
How are quicker investment cycles possible in biotech when the product development cycle is more than 15 years? Well, the focus is now on medicines that have already proven themselves scientifically, even clinically.
Compared with their forebears, VCs today are less interested in building new companies. Like bankers and buyout firms, they are more focused on the asset and moving it forward, often with a bare-bones operation. Ergo, VCs are funding more companies that have obtained their drugs from elsewhere, not discovered and developed in house.
VCs can be found rummaging through Big Pharma’s shelves for cast-offs or going to China to license a me-too, slightly better drug, all with the hope of taking that asset to the next development step and flipping it to the public or back to pharma.
This has given rise to VC firms featuring a front line of MDs and PhDs who gave up their clinical and science dreams to perform due diligence, some of whom have little hands-on experience in drug development. The investment thesis can often become all about the technical aspects of the asset and less about the team, the track record, the clinical need or the potential impact of a breakthrough.
As PitchBook also reported this year that early stage deals have declined from 43 per cent of VC activity in biopharma — the bulk of the biotech sector — to 32 per cent in 2025.
“Where early rounds once funded preclinical programs focused on initial scientific validation, early-stage activity now includes consolidated mega-rounds backing clinically mature assets and experienced leadership teams. In practice, early-stage capital is being deployed later in the development cycle with greater emphasis on execution,” it said.
An adjunct is that companies are initially funded to be too big to fail, meaning if the original asset does not perform, there is money to buy something else.
But this model has its hazards for VCs. One has to know what products and data the pharma industry wants to see three years from when the investment is made. One has to find that product at the right stage of development with some differentiation from competition. And operational execution has to be flawless to get the timing right. Finally, pharma’s tastes are subject to fads and changes in management strategy. A lot has to line up perfectly.
Well-known academics with gee-whiz technology are still funded, many of them spawning half-a-dozen or more companies. But for walk-in entrepreneurs with truly novel ideas looking for seed capital (say under $5mn), it is a challenging time.
Meanwhile, China’s biotechs, the beneficiaries of enormous state funding for basic research, are transitioning from being copycats to real innovators. If you don’t mind where the intellectual property comes from, there are new drugs in that pipeline. Big pharma now shops there too, so the arbitrage for VCs is disappearing.
Many of the most profound changes in treatments and medicines still come straight out of publicly funded academic research labs and are refined by biotech companies in a process that takes years, even decades. The critical step is the handoff from academia to “industry” — that requires capital, imagination and optimism from both backers and entrepreneurs. Do VCs today have the same appetite for bold ideas that the last generation of VCs did?