Biotech Startups Get Seed Funding From Tech Venture-Capital Investors

• New biotech founders can face difficulties getting funding from traditional biotech VCs.
• They say that the VCs rarely hear outside pitches and that the terms of investment can be predatory.
• Tech VCs have become some of the top biotech seed investors — and they give founders more control.

When Jen Nwankwo left Bain Capital in 2017 to get her Boston biotech company, 1910 Genetics, off the ground, her first investor set out clear terms.

Scientia Ventures’ Richard Warburg said he would write a $250,000 check for the seed round. But he warned that the investors in the next financing round would likely need her to let go of the chief executive title and sign over 80% to 85% of the company. He said biotech investors simply wouldn’t put money in a startup led by a young woman who had never held a C-suite role before, she recalled in a recent interview. In an email to Insider, Warburg called Nwankwo’s account of the events “totally erroneous.”

One of Nwankwo’s acquaintances suggested a different but increasingly common route: Go out west to Silicon Valley, where tech investors are more willing to place bets on young and unproven biotech entrepreneurs.

The influx of tech cash could help a new generation of biotech entrepreneurs like Nwankwo become CEOs, and it could diversify the top ranks of an industry largely led by white men. But some young founder-CEOs worry that taking tech-VC cash could jeopardize their ability to raise capital from traditional biotech investors in the future.

Still, Nwankwo, now 32, took her friend’s advice. After raising a $4 million seed round from Scientia, the Silicon Valley accelerator Y Combinator, and other investors, she raised $22 million from Microsoft’s venture arm and the deep-tech investor Playground Global last year.

1910 Genetics

Nwankwo’s experience wasn’t unusual. Four other biotech founders — both men and women — told Insider that tech VCs offered them more favorable investment terms than biotech investors. In particular, they said the biotech VCs wanted them to give up control of their companies in exchange for cash infusions.

Biotech investing has never been hotter: A record $37.8 billion poured into drug companies last year, up from $26.8 billion in 2020, a PitchBook/National Venture Capital Association report said. Tech investors are playing a bigger role in this early-stage investing. According to PitchBook, among the 15 most active investors in biotech are SOSV, the Apple and

Netflix

investor Sean O’Sullivan’s firm; Khosla Ventures, a DoorDash investor; and 8VC, an investor in Asana.

They’re coming in at a critical time for private biotech financing. Public biotech stocks have been falling for the past year, and it’s beginning to affect private companies, which are facing down rounds and dire warnings from investors against going public. But biotech investing is risky, and some tech VCs might not have the experience needed to succeed.

One source of seed funding — traditional biotech VCs — is dwindling for independent entrepreneurs

Startups boast a 90% failure rate — and biotechs are no exception. For biotechs the seed round is typically the riskiest stage, because there’s usually little data that investors can use to assess whether the startup will succeed or fail.

Biotech VCs can attempt to reduce some of the risk by building startups internally, molding the company’s business plan, and hiring seasoned CEOs who may be better at navigating research-and-development problems.

Some major biotech investors focus their resources on startups they’re building internally. Flagship Pioneering, the firm best known for backing Moderna, doesn’t take outside pitches anymore.

Similarly, Bruce Booth, a partner at Atlas Venture, said that about 80% of Atlas Venture’s early-stage investments were in startups that had come out of its incubators.

When a firm like Atlas gets involved at the seed round, they’re usually planning to invest in multiple future financings, according to Booth. So if the biotech ends up raising $40 million or more over several years, for example, its investors will likely end up owning 67% to 75% of the company, Booth said. 

Jake Becraft, the founder and CEO of Strand Therapeutics, said the East Coast biotech-investment world has become a walled garden.

Meanwhile, investors who made billions of dollars from tech companies like Coinbase, Facebook, and Uber have opened their doors to the biotech industry. “While one level of seed funding is gone, a whole other has emerged,” John Noonan, a managing partner at Lifeforce Capital, told Insider.

Y Combinator, which accepted its first biotech startup in 2014, is now the 14th-most-active biotech seed investor, according to PitchBook.

Y Combinator and IndieBio, a popular accelerator created by SOSV, take much lower equity stakes than some biotech investors would ask for. Y Combinator gives startups $500,000 for a 7% stake, while IndieBio generally takes a stake of 8% to 16% in the startups that go through its program, said Stephen Chambers, an IndieBio partner.

Strand Therapeutics

A couple of years before COVID-19 vaccines brought mRNA to international prominence, Becraft reached out to every VC in the Boston ecosystem to pitch his mRNA startup, Strand Therapeutics.

After months of work, he finally managed to interest a biotech VC. But the investment terms were predatory, he said. In exchange for a $2 million check, the firm wanted to install its own CEO and own 60% of Strand. Becraft, now 31, declined to disclose the firm’s name out of fear of jeopardizing future fundraising efforts. He ultimately turned down the biotech VC and raised a $6 million seed round in 2019 led by Playground Global.

“Tech funding was the way forward,” Becraft said.

‘Biotech investors have had a pretty good thing going. Now they have more competition.’

When Nwankwo told Warburg that she wanted to apply to Y Combinator, he got angry, she recalled. “He was like, ‘That is such nonsense. These guys are tech people. They don’t have any experience whatsoever. If you’re in a biotech company, why would you want to do that?'” she said. “He was straight mad at me.”

Another founder told Insider she was concerned that taking seed funds from tech investors could jeopardize her ability to raise from biotech VCs in the future. She asked not to be identified because her startup is still in stealth mode and she’s attempting to raise seed funds.

The Theranos case hasn’t helped the credibility of investors who know little about biotech but still pour money into the field. The failed blood-testing startup attracted money from many independent investors with little experience in healthcare, like the media giant Rupert Murdoch.

Outside investors have said Theranos managed to fool its investors because they were too credulous, performed weak due diligence, and wanted to move fast.

“Theranos’s investors weren’t serious health investors,” Greg Yap, a Menlo Ventures partner, told Fast Company last September.

 

There is also a history of successful partnerships between tech VCs and biotech startups. Gilead Sciences, the $77 billion biotech company that introduced the first COVID-19 treatment in 2020, was incubated at Menlo Ventures in the 1980s. Menlo would go on to fund Uber and Siri, the voice-recognition software that’s now on every iPhone.

Menlo dropped its biotech practice in the ’90s but resuscitated it in 2017 and hired Yap. Other West Coast tech investors have made similar hires. GV, Google’s venture arm, has hired the former biotech CEOs David Schenkein and Rosana Kapeller; Andreessen Horowitz hired Jorge Conde in 2017 and raised a $1.5 billion fund specifically for biotech investments in January. In some cases, these investors have rebranded as “techbio” firms.

“Biotech investors have had a pretty good thing going. Now they have more competition,” said Tony Kulesa, a cofounder of the Boston accelerator Petri Bio.

Founders fear they could alienate biotech VCs, which still carry a lot of clout

Verge Genomics

Alice Zhang, the CEO of Verge Genomics, said some biotech VCs were warming to their new competitors, though plenty of others prefer to invest alongside the familiar ecosystem of healthcare investors.

Zhang, 33, is another Y Combinator alum who had relied on tech investors for her first funding after failing to get any traction with biotech investors. But last year she was able to include Lifeforce, the ALS Investment Fund, Eli Lilly, and Merck as investors in Verge’s $98 million Series B round.

“I think what’s changed is that we’re no longer in the dark ages,” she said. “There are a lot of high-growth companies that have emerged that have first-time founder-CEOs.”

Today, Nwankwo’s relationship with Warburg and Scientia Ventures has improved. She’s gearing up for a Series B round and hoping to attract more traditional biotech investors because of the expertise and connections to the medical community they would bring.

“The B round is about getting to the clinic. I would love a biotech investor to lead that round,” she said. “But any attempt that says ‘Replace Jen’ is dead on arrival.”