Factors That Make or Break Biotech Startups

• A top VC shared three necessities for startups in the biotech market, which has stumbled in 2022.
• Lux Capital’s Josh Wolfe said they need a war chest of cash, supreme science, and killer leaders.
• Lux oversees $4 billion and has invested in startups like Eikon Therapeutics.

Lux Capital is advising its biotech startups to focus on three qualities as the public-market pullback threatens to hit private companies.

After record years for launching startups, raising capital, and going public, the tone in biotech investing has changed in 2022. A leading biotech index, the SPDR S&P Biotech ETF, has fallen by 24% in 2022 and is down nearly 50% since peaking in February 2021. While cash is still flowing in the private market, venture capitalists and startups think the private market could soon catch up to the public market.

Josh Wolfe, a cofounder and managing partner of Lux Capital, told Insider he’s advising his portfolio companies to focus on cash, science, and management to take advantage of the downturn.

“I think we’re going to have a massive wave of consolidation,” Wolfe said. “The people who are going to be poised to pounce and do that consolidation are going to have those three criteria I’m looking for.”

1. Have a war chest of cash

Most biotech startups are years — sometimes decades — out from meaningful revenue, let alone profits. That leaves the industry reliant on capital markets to fund research, making downturns particularly tough on companies running short on cash.

Many smaller biotechs have touted plans in 2022 to lower expenses and stretch the cash reserves, often by deprioritizing research programs and sometimes by reducing headcount. A layoff tracker managed by Fierce Biotech counts about 40 biotechs that have announced layoffs so far this year.

But building war-chest levels of cash is also about playing offense. Wolfe said startups should be taking advantage of the downturn, predicting an impending wave of mergers and acquisitions and talent available for hire.

“You want to have the balance sheet that can not only weather the storm but can take advantage of situations where others are illiquid, running out of cash, and having to make zero-sum choices,” Wolfe said.

Lux’s startups have largely followed that advice. In the firm’s annual letter for 2021, Lux, which oversees $4 billion in investments, said 90% of its companies were funded into 2023 and beyond.

2. Be built around supreme, celebrated science

The hottest research areas can initially excite investors but quickly become crowded; there are more than 4,700 immuno-oncology treatments and over 2,000 cell therapies in development, for instance. Wolfe said biotech startups need to be working on science that isn’t incrementally better than what’s out there but truly stands out from the crowd.

“If you’re in a competitive area — oncology or immunotherapy or cell therapy — and there’s 20 other companies that are doing what you’re doing, you’re at a disadvantage,” Wolfe said.

He added that if a startup doesn’t make that cut, it will struggle to make it through.

“You’re going to be part of that messy middle of companies that are running out of cash, walking zombies that are either going to call it a day and return the cash, get taken over by activists, roll into somebody else, or out of necessity have to do restructurings and sell themselves,” Wolfe said.

3. Have killer management making clever deals

Exciting science attracts the type of talent that Wolfe seeks: killer leaders. He described them as not just people who are brilliant or experienced, but executives who can identify and kill business risks.

Businesses usually face different key risks at different stages. The right leader for a biotech looking to raise cash might be a pro at storytelling and connecting with investors, while a well-funded startup might need someone who can map out a development strategy and execute on clinical trials. Wolfe said leaders who take the big risks off the table build value.

“Every risk that you can kill, value gets created, and a later investor should pay a higher price than we did, because they’re taking less risk and should therefore intellectually demand a lower return so they should pay a higher price,” Wolfe said.

Eikon shows Wolfe’s approach in practice

Wolfe said Eikon Therapeutics, a California biotech that’s backed by Lux, is one example that checks all three boxes.

The startup closed a $518 million Series B round in early January. Eikon was founded based on a Nobel Prize-winning technique to look inside cells in real time. The company is now developing drugs using those microscopes, seeing how drug compounds interact and affect the body.

That science has attracted killer leaders, particularly from the pharma giant Merck. Roger Perlmutter became Eikon’s CEO last year, leaving his role as president of Merck’s research labs. Roy Baynes recently left his spot as Merck’s head of global clinical development to become Eikon’s chief medical officer starting in July. And Ken Frazier, a former Merck CEO, joined Eikon’s board in March.