Biotech - Hey! Where have all the life sciences investors gone?

The biotech industry has experienced significant growth and innovation in recent years, attracting investment from a wide range of investor types, including biotech VCs and generalist investors looking for big paydays. In turn, the entrance of these generalists caused valuations for biotech companies to grow, and a biotech bubble to form.

However, due to unrealistic expectations, high-risk investments, and the impact of COVID-19, the biotech sector subsequently experienced a significant bubble burst when many generalist investors took their money and headed to greener, more predictable, pastures.

Now, let's take a deeper look into where the biotech investors came from and where they went.  

Bubble Blowers  

At the beginning of the bubble, generalists, as well as strategic investors (experienced investors), were putting funds into drugs, therapies, and technologies that were still in the early stages of development. 

‘Early-stage biotechs typically have less certainty about whether they would be successful or even make it to market at all,’ says Roop Chandwani, CEO of the search firm for life science and biotech executives, Mazards. ‘The significant influx of investment dollars suddenly meant that the biotech valuations were being driven up, creating a bubble in the biotech sector.’

But increased valuations had their upsides too: higher valuations stimulate innovation.

Clinical Trials

The success of a biotech investment often depends on the success of clinical trials, regulatory approval, and the ability to bring a drug or technology to market and sell it. 

Because of the high level of risk involved in biotech investments, it became difficult for investors to evaluate each biotech’s true value and make informed decisions about investing in them, as strategic investors had successfully done before the bubble formed.  

These uncertainties and risks made it even harder for generalist investors to accurately assess the potential returns on their investments. Very quickly, the biotech industry became too risky for these generalist investors to continue working in. So, in 2021, they left, and the bubble burst.   

Why did the generalist investors leave? 

A few factors led to generalist investors taking their investment funds elsewhere. One primary reason for the biotech bubble burst was the unrealistic expectations and hype surrounding the biotech industry. Late-stage biotech companies—companies that were closer to taking their products to market—found it very difficult to find opportunities to find funds at all. 

Another reason that generalists began leaving was the rise of alternative investment opportunities, such as the rapidly growing tech sector. Some biotech venture capitalists weren't far behind them.

‘There was excitement surrounding new technologies in other sectors that attracted investment dollars away from biotech,’ said Sophie Clifton, executive search consultant at Mazards. ‘This led to a decline in demand and a fall in valuations.’  

The final reasons that generalists left were the COVID-19 pandemic and the ensuing global recessions. COVID and the recession played a significant role in the biotech bubble burst as Interest rates rose, creating an environment that was not good for long-term, high-risk investments. 

The uncertainty and volatility caused by the pandemic led many investors to become more risk-averse and to seek out more secure investment opportunities. This shift in investor behaviour, combined with the aforementioned challenges in the biotech sector, all contributed to the decline of generalist investors in the life science industry.

Conclusion

To summarise, the biotech bubble burst and the decline of generalist investors can be attributed to a combination of factors. Those factors included unrealistic expectations, the high level of risk involved in biotech investments, the rise of alternative investment opportunities, and the impact of the COVID-19 pandemic. 

Despite these challenges, the biotech industry continues to hold significant potential for innovation and growth. It attracts specialised and knowledgeable investors who are well-equipped to navigate the risks and opportunities in the space. 

Or in other words: plenty of biotech investments are still to come. 

Mazards, a retained executive consulting group and search firm for biological science jobs UK and globally, commissioned this piece from Dastrum, a digital marketing agency.