Surviving the Fall
This Fall of 2022 feels a lot like early 2000, when the “dot com bubble” was bursting and valuations were plummeting. 90% of 2021 new biotech issues are trading below IPO valuation, some dramatically so (50% or more). The carnage is across the board, from speculative stocks such as CDNA (70% down) to industry titans such as Amazon (46% down) and Meta (67% down).
Global macro-economic factors all imply tough times ahead, including inflation, rising interest rates, pandemic related supply chain issues, Russia’s invasion of Ukraine. Tech and biotech companies are responding with layoffs, cost cutting, and generally circling the wagons. Nearly 800 tech companies have laid off more than 120,000 workers this year. These include big names such as Amazon, Meta, Twitter, Stripe, Salesforce, Microsoft, Zillow, Snap, Robinhood. In Biotech, just this week Illumina cut 5% of its workforce, and in recent months Invitae, NanoString, 10x Genomics, Sema4, Quanterix, PerkinElmer, Siemens Healthineers, and others have all laid off workers.
Along with public stock valuations, private financing valuations are also dropping. The IPO window has closed. Venture capital funding is drying up. When they are making investments, VCs and strategics are focused more on supporting existing portfolio companies, or new assets close to market, rather than platforms or blue sky concepts that carry more risk and longer timelines to market. Given the glut of biotech companies financed in the past few years, it’s likely that the vast majority will fail to become self-sustaining, get public or be acquired. Many early stage companies are seeking bridge rounds to survive, all approaching the same investors to try to shore up their reserves.
My favorite quote of the week comes from Pitchbook, Nov 12, 2022:
“The market narrative has been of falling valuations for several quarters, and now data is finally corroborating that story. But while the slowdown in valuations has been expected, surprises like the swift downfall of crypto exchange FTX highlight the possibility that the venture market we know from the past couple of years is a house of cards.
Easy money has built a deal machine that has grown nearly 1,300 companies around the globe to valuations of $1 billion or higher. Yet these companies now have few options.
The revenue multiples of 2021 have snapped back to reality, so even if growth projections remain the same as last year, pricing expectations need to be adjusted.
The exits are closed, but the bars are no longer serving.”
The big question for many life science startups and early stage companies is how to survive the fall this Fall?
In my opinion they all need to prepare for a long period of austerity, cutting operating costs and focusing their activities on critical programs, while building or shoring up strong relationships with new and existing partners and investors. They should be constantly trying to raise funds opportunistically with a several year time horizon that assumes tight operating budgets and plans to knock off meaningful value enhancing milestones with whatever funding is available.
Financing plans need to be modified to attract investors by showing a:
credible story that has already been demonstrated to work
(proof of meaningful progress, rather than just a strong rationale),
leadership team that has delivered in the past,
plan showing how new investment will be used to achieve the next milestone (further increasing investor confidence),
short timeline to market and demonstration of adoption, with low regulatory or IP hurdles, and
clear path to exit in the not too distant future
Early stage companies must be focused, flexible, persistent and resilient in their approach to conducting their business. They must recognize that they will have to weather a Winter of uncertain length and intensity before finding sunny days again. Those days are certain to come, so the only question is which companies will remain viable and ready to bloom when Winter turns to Spring.