David H. Crean, PhD, Managing Director for Objective Capital Partners, a leading investment banking advisory firm examines the venture investment activity in life sciences for the past year. 


In order to have a successful life sciences R&D program, biotech and pharma companies must develop game-changing therapeutics, companion diagnostics and personalized medicines.



According to Pitchbook and National Venture Capital Association, capital invested in US venture-backed companies across all sectors has reached a decade high of $86.4 billion in 2018 YTD.

There is a phenomenon toward fewer but larger deals that is seen as a driver of increases in company valuations. Startup firms have seen annual valuation increases in the double-digits across deal stages over the past two years. Investors have also been taking a larger ownership position at the very early stages.

Valuation gains have been most remarkable in late-stage rounds, with median pre-money valuation of late-stage deals increasing +50% YoY. The rise in valuations can be partially attributed to the buildup of available capital on the sidelines (dry powder), enabling large funds to funnel significant capital into either mature and/or high-growth ventures, as well as increased competition for a finite number of high-growth, late-stage opportunities.

While median investor stake acquired in angel & seed deals remained steady between 2011 and 2016 at about 20%, this has shifted over the past two years, with founders now giving up a median ownership stake of 25.0%. This shift may be explained by the increasing age of startups raising angel & seed rounds. Increased competition and capital availability among venture investors may also be leading founders to accept larger investments than in prior years. Appreciation from the post-money valuation in one round to the pre-money valuation in the next round continues to grow on an annual basis.

On average, founders are raising more capital in exchange for less equity. With plenty of capital pouring into early-stage ventures, startups potentially run the risk of taking on too much capital, leading to overvaluations, unrestrained capital expenditures and subsequent down rounds.

Another factor correlated with pre-money valuation is corporate participation. Across stages, deals with corporate venture capital (CVC) participation consistently receive higher valuations than those without. At the early stage, the influx of available capital has given significant valuation bumps to deals both with and without CVC participation. This shift is the opposite of what is being seen at the late stages, where the premium paid for deals with CVC participation was 154.5% higher than deals without in 2018, up from a premium of 132.2% just two years ago. CVC’s may give such a significant valuation premium at the late stage for two possible reasons: Either companies chosen for investment by CVCs have specific use cases and potential exits that fit with the CVC investment thesis, or CVCs actively seek out startups that are fundamentally different from their peers.


Life Sciences Sector

Companies in the life sciences sector are often differentiated by high development risk, significant R&D costs, and the various milestone inflection points needing to be achieved during the preclinical and clinical study development process. Identifying the optimal source of capital to help fund their efforts can be challenging, but it can also lead to greater success in the long term.

Given the amount of funds being invested in venture capital, entrepreneurs increasingly need to look to VC partners for the growth of their business. Venture firms bring a wealth of resources to the table outside of just capital needs. Life sciences VCs have likely experienced the challenges and successes of multiple operations in the pre-clinical, clinical and commercial stages. For this reason, they can help founders and managers navigate pitfalls and capitalize on scientific and market opportunities.

In 2018, late-stage pharma & biotech deals saw the most significant lift in valuation, increasing to $125.0 million pre-money, demonstrating the large amount of capital availability in private markets. Investors have intensified their focus on this sector, investing $6.5 billion YTD into late-stage pharma & biotech ventures, up from $4.3 billion in 2017. Investor focus on the space is also reflected in the public markets, with IPO count up 20.4% YTD and total IPO exit value up 23.1% YTD, with pharma & biotech firms generating a cumulative $18.5 billion of liquid capital YTD through IPOs.

Pharma & biotech differs from other sectors in that firms, in general, tend to have relatively low valuations at the early stage (there are outliers, however) before becoming exponentially more valuable as they receive positive research results and near commercialization. As has become the norm across venture capital, there is a clear trend towards fewer yet larger deals.

Deal count rose slightly while capital invested climbed precipitously YoY through the first three quarters of 2018. There has been a 40.1% increase in early-stage valuations and 152.5% increase in late-stage valuations.


Who’s Putting up the Investment Dollars

Given that the US healthcare system is a focus of reform in the coming years and given the changes in Washington, DC, as well as the pressures on Main Street and Wall Street, greater emphasis is being placed on innovation and value-based therapies.

Less emphasis will be placed on incremental improvements to existing therapies. Rather, in order to have a successful life sciences R&D program, biotech and pharma companies must develop game-changing therapeutics, companion diagnostics and personalized medicines. VC’s are taking this into account as they select their investments. Venture firms appear to be most interested in funding companies with advancements that address significant unmet medical needs and viewed as disruptive and differentiated.

The cream of the crop are able to raise funding while less promising ideas fall by the wayside. Some of the most active venture firms investing in the life sciences sector include but are not limited to Domain Associates, New Enterprise Associates, Polaris Venture Partners, MPM Capital, Alta Partners, ARCH Venture Partners, Flagship Ventures, SV Life Sciences Advisers, Sanderling Ventures, Kleiner Perkins Caufield & Byers, InterWest Partners, Sofinnova Ventures, OrbiMed Advisors, Foresite Capital and Venrock Associates.


What Areas Are Hot for Investment?

It’s no surprise that cancer continues to be the main therapeutic area of focus both for the number and size of the deals. There’s also a large interest in therapies targeting neurologic disorders and infectious diseases. Furthermore, VC investment in companies developing first-in-class and best-in-class small molecule therapeutics appear to have surpassed investment in immunotherapies, cell therapies, and gene therapies (source: DealForma, 2018).



David H. Crean, Ph.D., is a Managing Director for Objective Capital Partners, a leading investment banking advisory firm whose Principals have collectively engaged in more than 500 successful transactions serving the transaction needs of growth stage and mid-size companies. Services include M&A sale transactions, partnering/ licensing, equity and debt capital raises, valuation and comprehensive advisory services. Additional information on Objective Capital Partners is available at www.objectivecp.com.

This article is provided for informational purposes only and does not constitute an offer, invitation or recommendation to buy, sell, subscribe for or issue any securities. Securities and investment banking services are offered through BA Securities, LLC Member FINRA, SIPC. David H. Crean is a Registered Representative for BA Securities. Objective Capital Partners and BA Securities are separate and unaffiliated entities. While the information provided herein is believed to be accurate and reliable, Objective Capital Partners and BA Securities, LLC makes no representations or warranties, expressed or implied, as to the accuracy or completeness of such information. All information contained herein is preliminary, limited and subject to completion, correction or amendment. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person.