November 17, 2022
Navigating the Current Financial Conditions: Insights from Biocom California’s Capital Development Team
Boom and bust cycles characterize markets. Record levels of investment and hot public markets marked the past few years. 2022 has seen valuations reset, biotech IPOs are infrequent, and the SPAC window has vanished. Tighter financial conditions and ongoing recession are likely to endure. Executives are putting a lot of thought into managing risk and building resiliency, juggling concerns around inflation, supply chain, rising interest rates, poor public markets and ongoing economic slowdown. Extending the runway, preserving capital and reducing expenditures are key. Thus, whether a seed-stage biotech or raising a series B with existing partnerships and revenue, CEOs are looking to manage the challenging circumstances. One Biocom California member notes accomplishing more time to raise, via: “Reducing burn, headcount and salaries, thereby increasing the runway. Additionally, leveraging commercial partnerships to demonstrate traction with industry and reallocate capital accordingly.”
Many companies are struggling to raise capital on the private markets. When it comes to the practical steps executives can employ, David Diamond, National Life Sciences Practice Leader at CBIZ, advises to “explore non-dilutive funding, downsize on physical space, offer executives equity to reduce cash allocated to salaries, outsource R&D and leverage tax credits in foreign countries.” Additionally, companies are seeking partnerships with larger market participants, shifting focus to generating revenue (license or sell non-core assets), outsource or trim down R&D in order to focus on one to two lead projects.
We have seen extensions of previous rounds, flat and down rounds as common—“the flat round is the new up round,” as the saying goes. While challenges abide, this also creates opportunities for cash-rich biotech companies to partner and build their pipelines through M&A and licensing. David Crean, Managing General Partner at Cardiff Advisory LLC, says: “Monetize, divest non-core assets, partner to extend runway, question every aspect of spending. As a CEO, board member or business owner, you must explore all alternatives to stay in business. Exhaust all avenues to bring in cash and build value. Adjust timelines and plans accordingly. There is a lot of money out there, the key is securing the right money at the right time. Seek help from your boards, identify potential capital routes in all areas.”
Monetize, divest non-core assets, partner to extend runway, question every aspect of spending. As a CEO, board member or business owner, you must explore all alternatives to stay in business. Exhaust all avenues to bring in cash and build value. Adjust timelines and plans accordingly. There is a lot of money out there, the key is securing the right money at the right time.
Due to the large amount of capital sitting on the sidelines and valuations being down on private markets, it seems that now is one of the best times to be an investor. The leverage sits with the investor and strategic corporate arms—they can dictate better terms, albeit modelling valuations is challenging with the ongoing economic uncertainty—and there is more scrutiny and due diligence from investors. CEOs need to be flexible on terms and realistic about their valuation expectations. “Big pharma have strong balance sheets and are looking to build up their pipelines via M&A. Experienced management teams may be able to raise capital in this environment, but the vast majority are still not experienced enough at running companies and will struggle,” Crean adds. Some investors are also being patient and waiting for a clearer signal from the markets and economy, before they commit to new portfolio investments. LPs may be hesitant to reinvest in funds, VCs must manage existing portfolio companies and may lean more risk adverse, translating into less capital for new companies.
On the bright side, the California life science ecosystem continues to flourish. New innovations are discovered and developed daily. California academic and research institutes perpetually spin out world-class companies. It is a matter of when, not if, the time returns where funding conditions are more favorable and the public market window opens again for our industry. In the meantime, a well-planned out and tactical approach to endure this indefinite window of uncertainty is what makes the difference. As of writing this article, inflation data has shown some promise of slowing and public markets responded positively. Is this a sign that the tides have changed or is this a short-lived reprieve, in a longer cycle of slowed growth? Will the IPO window reset and return towards the end of 2023? Biocom California and our Capital Development team will be here and ready to support our member organizations on this journey.
About Us: The Biocom California Capital Development team focuses on making meaningful connections between Biocom California member companies and investors. We create programs and introductions between investors and companies seeking capital or partnerships.