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A window to the past: is the investment boom in biotech going to last?

Perspective, by Simon Goldman

DeepTech UCL Tech Fund


A window is something that opens and shuts. So the clear implication of everyone talking about the ‘biotech window’ is that it’s something that will ‘close’ at some point, and that there will be an extended period of hard times for the biotech industry, both public and private. I often wonder where this assumption comes from and whether it’s based on rational foundations: why do people think that it’s going to close? And what do they think will cause it to do so? The answers to these questions are not often well articulated by many in the industry.

History, as ever, is a terrific guide for understanding human behaviour. To this end, I take a dive here back into prior periods of boom and bust to see if that can help to make sense of biotech investors’ thoughts and actions today – and I argue that a secular change in biotech’s global financial and societal impact will support the industry for a long time to come.

Biotech as an investment theme is quite rightly seen as risky (‘high beta’ in finance industry jargon). Large amounts of capital need to be expended to progress programs through to data readouts (e.g. clinical trials), which are highly uncertain, and often-binary success/fail moments in a company’s evolution. When markets are bearish, it’s no surprise that biotech stocks are heavily sold off as investors move to reduce their risk profile (and buy safe assets like bonds or utilities instead). This negative sentiment flows back upstream into the private markets – it becomes much harder as a VC to exit your investment via an IPO if the public markets are in freefall, and so it becomes harder for biotech startups to raise money in the first place if the investors are worried about their ability to exit.

This is pretty much what happened when the biotech market was smashed in the early 2000s alongside the bursting of the dot-com bubble. In many ways, biotech was tarred with the same brush as the internet companies – neither were generating any revenues to speak of, despite enormous valuations at the peak. The biotech bust lasted more than a decade despite the public-market bull run which started the day that George W Bush started bombing Baghdad. Lots of therapeutics, diagnostics and medical devices companies went out of business and lots of high-quality ideas were starved of funding.

Everything changed in the 20-teens, as a confluence of events fired up biotech investment again. Just as recombinant DNA tech and monoclonal antibodies turbocharged the nascent biotech sector in the 1980s, cheap high-throughput sequencing and the advent of safe cell and gene therapies underpinned a new technological (and therefore VC investment) era just as markets were recovering from the financial crisis of 2008-2012. Given the shakeout in the industry in the preceding decade, there was also a significant pent-up demand for funding of high-quality biotech startups.

So the general ‘feeling’ 6 or 7 years ago was that the good times were finally here again, the ‘window was open’ for biotechs to get funded and for VCs to have the opportunity to exit their investments. Exciting new technologies promised to change the world, but you needed to be quick just in case the opportunity went away again – make hay while the sun shines.

And this, in my mind, is what it comes down to: the way investment professionals make their decisions relies to a very large extent on the state of the world in which they learned their trade. Lots of people at the top of the biotech investing game today ‘grew up’ during the tech bust and the lean years that followed. So they’re almost programmed to worry about when the music might stop because the last time round there were no chairs for a long, long time. This reminds me of what I learned when I started in the investment banking industry in 1998, working with people who had ‘grown up’ through the recession of the late 80s and early 90s. For them, a second big boom/bust within about a decade (the dot-com bubble) meant that they approached it with far more sangfroid. They calmly understood the mantra of being scared when others are greedy and greedy when others are scared. Their experiences shaped the way they invested.

I learned to be a contrarian from these brilliant people, so I always frame my investment decision-making in terms of risk. Risk is everything. When I take something to my investment committee I always shoot for the ‘worst case’ specific addressable market – and if I can still hit my required returns hurdles then the result will likely be better and we’ll go way over, so long as we can dispense the technical/regulatory/clinical/commercial risks along the way.

So now to my second question – what could reasonably cause the window to snap shut on the biotech industry’s fingers? There are two ways of looking at this. The first is at a macro level – what would affect all sectors such that there’s a flight to safety and a generalised ‘risk-off’ trade? It’s easy to think of some examples, such as a war between the US and China, a major climate disaster, or an inflation shock.

The second is at an industry level – what would destroy confidence in the biotech sector specifically and drive relative underperformance for a long period of time, like what we saw in the early 2000s? I think it’s harder to come up with ‘foreseeable’ reasons for this, or at least they sound fantastical (e.g. billions of people dosed with SARS-CoV-2 vaccines experience fatal side effects, just as the unexpected leukaemias buried the idea of gene therapy for 20 years).

I’d go even further to say that the biotech industry is experiencing a step change in its contribution to the global industrial mix, its widespread social impact and therefore also its financial importance. The pandemic has probably reinforced this dynamic, as has significant public investment in (and onshoring of) biopharmaceutical manufacturing. Biotech’s burgeoning scale has seen the sector increasingly becoming a core holding for big generalist institutional and pension funds worldwide, particularly given the rock-bottom interest rates forcing investors to seek returns in risker places. At the same time, the biotech investment industry itself has grown to a critical mass where the generalists are less necessary for long-term funding – if they pull out like they did in the early 2000s it won’t be quite as devastating.

These trends collectively represent a real secular change. There may well be fluctuations in public markets that feed back into the private, VC sector – the inflation bogey comes to mind – but it’s not so much a window anymore, rather it’s a solid foundation of a whole house that’s being built.

As venture investors, we have a fiduciary duty to look after (and substantially grow) the funds that our own investors entrust to us. Learning from mistakes is central to how the industry works – failure breeds success. Becoming a student of history can make this process much more efficient (and potentially cost-effective!). Technologies may change, the world may move faster, but many aspects of human cognition and behaviour don’t (tulips and NFTs, anyone?). And though the past might not teach us exactly when the markets might face a paradigm shift, it can definitely guide more rational behaviour – better than blindly worrying about when that increasingly poor metaphor of a window might close.

This piece was originally published in Labiotech

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