U.S. Biotech Faces a Series A Funding Cliff—How Does China Compare?

In recent months, young U.S. biotech startups such as Vedere Bio II, Faze Medicines, and Ambys Medicines have folded before raising their Series B financing rounds.

Over the past year or two, U.S. biotech companies have found it relatively easy to secure Series A financing; however, many are now burning through their cash reserves without securing subsequent Series B rounds—a prevailing reality in the U.S. biotechnology sector today.

Previously, U.S. biotech companies were primarily discussing the Series B funding cliff; now, this cliff has shifted forward to the Series A round, reflecting the caution of investment institutions and declining market expectations.

During the investment upcycle, the number of IPOs reached record highs, and biotech companies’ market capitalizations rose accordingly. At that time, attention was focused on how to access Wall Street to attract more investors. However, the market slowdown over the past two years has led investors to perceive a disconnect between corporate valuations in 2021 and those in 2023. Jorge Conde, General Partner at the top-tier Silicon Valley venture capital firm Andreessen Horowitz, stated that this shift has become a source of friction in Series B financing rounds.

Meanwhile, the market slowdown over the past two years has made investment firms more cautious. Jon Norris, a Managing Director at SVB, noted that many investors are only willing to commit capital when drug projects are approaching or have already entered clinical trials. “Many early-stage platform companies boast highly attractive scientists, strong backers, and excellent teams, yet they have no clinical assets to show,” Norris said. “Investors in Series B rounds appear to be focusing on this issue.”

The situation in China is similar. VCBeat surveyed multiple investors, all of whom acknowledged the existence of a financing cliff. Of course, due to differences in the level of innovation and financing practices between the Chinese and U.S. biotechnology industries, there is still debate over whether it is a Series A cliff or a Series B cliff. Nevertheless,The issue of the “financing cliff” is critically important, as it often signals that a company is facing existential challenges.

Faze was one of several biotech startups in recent years that targeted biomolecular condensates. In November 2022, Faze shut down. Over its two-year lifespan, the company attracted $81 million in venture capital funding.

One of Faze’s early investors, a spokesperson for Third Rock Ventures, explained the reasons for its closure: “Although the company’s ALS and oncology programs have made progress since their launch in late 2020, the scientific advancements were insufficient to meet our requirements for further investment.”

Scientists and other researchers affiliated with Faze have published several articles in journals on the role of these condensates in the human body, but Faze has not advanced any experimental drugs into clinical trials, nor has it established any research partnerships with large pharmaceutical companies since its launch in December 2020. Meanwhile, one of its competitors, Dewpoint Therapeutics, has signed agreements with Pfizer, Bayer, and Merck.

Vedere Bio II, a company founded two years ago to develop ocular gene therapies, officially shut down in early April. The company’s two leaders announced on LinkedIn that Vedere would close after receiving disappointing preclinical data. In its previous Series A financing round, Vedere Bio raised $77 million from various investors, including Atlas and Mission BioCapital.

Silicon Valley Bank (SVB) has found that many biotech startups are facing challenges similar to those encountered by Faze and Vedere“A-Round Financing Cliff”。SVB data shows that 356 biotech companies completed Series A financing between July 1, 2020, and December 31, 2021, whereas only 102 pharmaceutical companies announced Series B financing in 2022.

According to data released by Arc Ventures in 2021, it typically takes 10 to 18 months for a typical startup to progress from Series A to Series B financing. However, only 66% of companies that complete Series A financing go on to secure Series B funding. The remaining companies either go bankrupt or cease to raise additional capital.

In comparison, SVB’s data is evidently far more severe. Moreover,SVB observed that the 2023 “cliff” would become steeper.In other words, an increasing number of companies with suboptimal financing outcomes will even face closure.

Of course, some companies have successfully secured Series B financing. For example, on March 22, Flare Therapeutics, a startup backed by Third Rock Ventures, raised $123 million in Series B funding with the support of new investors.

Other companies have adopted creative approaches, such as incorporating debt financing into their Series B rounds. In December last year, biotechnology company Enveda Biosciences announced the completion of a $68 million Series B equity and debt financing round.

Enveda CEO Viswa Colluru stated,None of the company’s projects have yet entered Phase I clinical trials, but what attracts investors is that the company has achieved the milestones it set for itself in its $51 million Series A financing round in 2021.

Other companies have turned to intermediate financing rounds.

Jake Becraft, CEO and co-founder of Strand Therapeutics, knew well that the company had sufficient funding to last until 2023, but likely not enough to fully advance into clinical trials. Its first pipeline candidate targeting solid tumors required additional capital. In November 2022, the Boston-based mRNA therapeutics startup announced a $45 million Series A1 financing round, attracting new investors. The previous year, the company had raised $52 million in its Series A financing.

“We had to make a decision: Should we proceed with Series B financing? Because the macroeconomic environment will make it more difficult for us to complete the fundraising task,” Becraft added, noting that the A1 round offered a time-saving approach.

These changes are also impacting the establishment of new biotechnology companies. Some investors have stated that companies are beginning to consider potential future cash shortfalls as early as the seed and Series A financing rounds, using cash more efficiently and focusing on the most promising projects.

The emergence of the Series A funding cliff is not due to a lack of capital among investors—according to the latest annual report from the National Venture Capital Association, venture capital firms raised a record approximately $163 billion in 2022.

This is a question of market caution. For investors, investing in biotechnology is essentially a question of “Can I build conviction? Can I mitigate risk?”

In contrast, the domestic market environment is not entirely the same at this stage. According to statistical data from VCBeat Orange, in 2021, a total of 116 biopharmaceutical companies in China secured Series A financing, 71 obtained Series B financing, and 33 completed Series C financing; in 2022, 111 companies completed Series A financing, 40 secured Series B financing, and 9 completed Series C financing.

Is there a Series A or Series B funding cliff? Looking at the data alone does not seem to reveal much. Meanwhile, our observations indicate that the stages of industrial innovation and financing conventions differ between China and the United States; therefore, they should not be generalized or broadly compared.

For example, U.S. biotech companies generally exhibit a higher degree of technological innovation and take longer to advance a drug candidate to the Investigational New Drug (IND) stage, typically requiring three to four years on average. They also secure larger Series A financing rounds with fewer funding rounds overall. In contrast, Chinese companies pursuing fast-follow or me-too strategies can progress more rapidly, often advancing projects to the IND stage within one year of establishment. However, these companies typically undergo more frequent funding rounds, including additional rounds such as Series A+ and Pre-Series B.

So, does a financing cliff also exist in the Chinese market?Multiple interviewees also shared their respective views with VBInsight.

One respondent pointed out that, from the perspective of the industry development cycle,Domestic enterprises also face a similar Series A funding cliff.“From the perspective of product development stages, biotech companies in the Pre-IND and IIT phases typically raise funds at around Series A in China.Many are currently stuck at the Pre-IND stage, which requires substantial capital investment to advance to IND and Phase I clinical trials, particularly for biotech companies."He also pointed out that, in the biomedical sector, there is a gap in innovation between domestic companies and their U.S. counterparts, and many firms in the early stages of clinical development are currently facing significant financing challenges."

Another senior investor in the industry told VCBeat New Medicine that this issue will continue, “Companies that completed their Series A financing in 2021 or 2022 will also face difficulties in securing Series B financing this year.”

Another interviewee believed that,Domestic biotechs are facing not so much a Series A funding cliff as a Series B one.“From a capital perspective, the Series A round and pre-Series A stages are largely conceptual; by Series B and beyond, companies generally need to consider an IPO or M&A. From a pipeline perspective, Series B typically corresponds to the clinical stage, where the ability to generate efficacy data becomes a critical turning point. For companies with revenue, their revenue potential and growth space must also be evaluated at this stage.”

It is evident that, whether facing the Series A or Series B funding cliff, there are no fundamental differences in the factors considered by domestic and foreign investors in the biopharmaceutical sector; the distinctions lie merely in slight variations in perspective and timing.

Over the past decade in the United States, Series B financing has typically occurred after a company has passed its initial startup phase and achieved certain milestones in business development.Series B financing typically serves as a bridge between venture capital funding and an IPO., and an IPO enables investment firms to quickly realize returns through exit.

In 2022, the number of financing rounds exceeding $100 million in the United States declined by more than 25%. SVB characterized “financing rounds over $100 million” as those highly likely to culminate in an initial public offering (IPO).

Over the past two years, the sluggish IPO market has made investment institutions more cautious, posing challenges for biotech startups that secured Series A financing in 2021. With Series B funding becoming increasingly urgent, companies have had to devise various strategies—whether by conceding on valuations or through other means—to secure new investment. Moreover, relying solely on platform technologies without demonstrating tangible milestone progress has made it difficult to impress investors.

Moreover, many cross-industry and generalist investors who previously drove the sector’s growth have now exited, leaving biotechnology companies reliant on their original investors. These investors possess greater experience in life sciences investing and are more likely to focus on company valuations.

These may all be reasons for the Series A funding cliff faced by U.S. biotech companies.

In China, the issue of the financing cliff has yet to be thoroughly documented and analyzed with comprehensive data, nor has it been extensively discussed.

An investor stated that this was the second time he had heard industry insiders discuss the concept of the “Series A Funding Cliff.” Discussing this issue is also crucial. “First,The financing cliff corresponds to the survival issues of enterprises,“It is a critically important stage that companies must navigate. Every milestone phase of a biotech company requires financial support; if it encounters a financing cliff and fails to bridge the gap, it will fall into dire straits.”

Moreover, what types of biotech companies face a financing cliff? At which stage do they encounter it? This provides certain explanatory power and guidance regarding the current state of industry development.

From this perspective, the financing cliff is undoubtedly a significant concept.

Historically, both Series A and Series B funding cliffs have invariably coexisted with the prevailing financing environment.

In fact, China’s internet industry faced a similar situation in 2015, with O2O startups being the hardest hit. Data from that period showed that as many as 846 O2O companies secured Series A funding in 2014, yet only a handful survived until the end of 2015. Many companies encountered the “Series A cliff” and failed to secure Series B financing.

The wheel of time rolls relentlessly forward, yet the trajectory of history may well repeat itself.

References:

Biotech startups face ‘Series A cliff’ as venture capital stays cautious，Biopharma Dive