- Healthcare fundraising continues to surge after a record year in 2021.
- Strong early-stage investment braces for slowdown in H2.
- IPOs and M&As stall due to public market volatility.
For quick overview of Q12022, I invite you to read my previous blog: First quarter healthcare industry trends worth tracking.
Early-stage investment in all four sectors is on track to rival 2021. However, the decline of investment in both early- and later-stage companies in Q2 may indicate a slowdown for the second half of 2022, as many companies look for additional funding through smaller bridge loans or insider rounds to take them through 2023. After record venture-backed healthcare exits in 2021, IPOs and M&A activity was down across all sectors in the first half of 2022 due to public market volatility.1
SVB recently released Healthcare Investments and Exits Mid-Year 2022, followed by a webinar, "Strong venture fundraising for healthcare during times of uncertainty." I spoke alongside industry experts and discussed the healthcare industry trends.
The conversation featured:
- Deena Shakir, partner, Lux Capital
- Mira Chaurushiya, senior partner, Westlake Village BioPartners
- Sarah Pringle, health tech reporter, Axios, who moderated the discussion
What type of investors do you expect will be most active in putting capital to work this year?
Deena Shakir: We continue to see healthcare-focused funds and generalist funds deploying a lot of capital. We’re also seeing more non-traditional players stepping into the mix. And part of that is because there’s more appetite from healthcare companies to look at creative financing with corporates around the table.
Mira Chaurushiya: In this market, later-stage biopharma investors will gravitate to teams who’ve demonstrated an ability to discover and develop medicines with confidence. They’ve done it before, or we believe they can do so now. So, it’s about valuation, programs, market opportunities and teams.
Deena Shakir: Some may, but I don’t think we will see a mass exodus. A number of the crossovers have separate private vehicles that are very well capitalized and ready to move. I think investors that privately and publicly co-mingled might be focusing on publics for a little while, although they will continue to be long-term players. It’s worth noting that they already invested in many of these companies and have lessons learned to apply to other investments down the road; it just may take a little time.
From a health tech perspective, what does the perfect Series A business plan look like, will it need a quicker path to profitability? Will the path to IPO be more difficult?
Deena Shakir: At the earliest stages, it’s fundamentally about founder-market fit and that's certainly how we think about our investments. We’re seeing very large seed rounds that look like what a Series A looked like just a few years ago. I think it’s less about the business model per se, and very much depends on the company. The path to profitability should always be a consideration. Regarding virtual care, I think we've learned enough now over the last few about what is actually profitable when it comes to virtual care. There are regulatory things up in the air around telehealth regulation. I think there's still a lot of unknowns but there's also changing user behavior. But huge investments are being made by the major stakeholders—payers, pharma companies, providers and health systems. These big players will likely be collaborators in the development of these new technologies and may end up as the acquirer. Healthcare is recession-proof—we will continue dealing with diseases and need to do so with technology.
To what extent are you seeing VC-backed companies consider M&A opportunities that wouldn’t have been on the table a year ago, and what are the challenges and opportunities?
Mira Chaurushiya: Large pharmas are sitting on unprecedented amounts of capital, and external innovation is an important part of their pipeline. But the few deals we’ve seen recently have been at massive discounts. I think deals will happen at much lower valuations than we may have thought a year ago. But for the companies that have de-risked their technologies and are developing programs that are synergistic with those pharma pipelines, there are interesting opportunities now. And that’s another reason business development becomes particularly important—it’s the first step for that pharma to get an inside look at the company, how the technology’s working, how the team is working and if they like what they see.
Jonathan Norris: It wouldn’t surprise me to see upfronts come down and the back ends go up – more of a “prove-it” style of M&A that still can generate big returns. Over the last few years, we saw how the IPO market was a predicate or even a stalking horse for a lot of M&A discussions, which pushed that upfront payment up. With less IPO activity, these M&A deals will now likely be good back-end opportunities for companies that can hit milestones post M&A, which still gives the company and investors the ability to generate huge multiples.
How do you expect the Dobbs ruling to influence venture investment in and around women’s health?
Deena Shakir: I have been heartened to see an influx of interest from investors—not only those who have already invested in this space. but new players who see capital deployment as a mechanism of action. There is a long history of examples where regulatory constraints have compelled creativity and innovation among entrepreneurs, leading to new companies are being formed. Meanwhile, even Fortune 15 and 20 companies are helping their employees receive the care they need. Within our portfolio, companies like Maven Clinic have seen a significant month-over-month increase in inbound sales opportunities since the ruling.
What are you seeing concerning valuations, and how far have you seen deals get re-priced down?
Mira Chaurushiya: Valuations at seed and Series A are art, not science. It’s about the founders and investors and how much you want to work together. As for later-stage deals, you can’t expect Series B valuations today to equal what we saw last year. Instead, you must understand what you’re funding. What’s the milestone this company will hit with this funding? And then, you can triangulate the market opportunity and where these valuations should be. It’s not just driven by the data today and the current public markets; there’s a lot of historical data and fundamentals to consider. Many high-quality companies have seen their valuations dampened, but they’ll come out of this better and stronger than they were.
Jonathan Norris: In the first half of this year, Series A biopharma valuation trended to about $20 million as a median. And you could see that most of these deals had founding teams that have been there and done that. I think that adds a lot to the valuation exercise—the founding team’s history of getting to exit is even more important during a more difficult financing environment.
What advice do you have for founders?
Mira Chaurushiya: Don’t tell a 2021 story in 2022. Understand the macro environment, understand where your technology and company are from a stage perspective and when you can hit the next milestone. Don’t make it hard for investors to see how they will generate value from that round. Secondly, choose investors who will be great partners—someone who will be there when markets like this happen. Is your investor already thinking about how they’ll reserve capital, so you have money for that insider round? Having a solid investor syndicate is way more important than your valuation.
Deena Shakir: Continued focus on fundamentals is important, and it’s not easy for founders who have been used to a certain way of fundraising for a long time. You're unlikely to be raising at 3x to 4x every three to four months, which seemed normal for a while. The best CEOs are already thinking about what is best for the company and its employees. Not being myopic about valuation is one of the most powerful things you can do to recruit and retain talent and weather this storm.
A big thank you to our guest panelists and moderator for their participation in the event. For more of the report’s findings, download Healthcare Investments and Exits Mid-Year 2022 and watch the on-demand webinar for report highlights and the complete question and answer session between the panelists.
If you’re interested in learning more about how SVB supports global life science and healthcare companies, visit our Global Life Science & Healthcare practice and contact us.