How VCs Make Their Decision When Dealing With Biotech?

Venture capital in biotechnology operates on a distinct set of principles compared to traditional tech investments. Unlike sectors driven by user acquisition metrics and rapid software iterations, biotech ventures, particularly in drug discovery, have longer development times and, unlike tech, no sustained revenue for years. Investors navigate, then, a landscape judged on data, patents, and capital-hungry lab milestones, not user growth curves. These foundational differences mean the classic venture capital rubric (deal flow → selection → valuation → exit) must be fundamentally adapted. We have stripped irrelevant tech-centric metrics to focus on what truly matters before an Investigational New Drug (IND) filing – the pivotal early stage where biological proof-of-concept, not revenue, dictates progress.

Deal Sourcing: The Biotech Pipeline

VCs cast a wide net to identify promising drug discovery opportunities. Key sources:

• •Sector conferences & partnering events.
• •Referrals from other investors, pharmaceutical companies, or trusted contacts.
• •Direct outreach from founders, TTOs, incubators, and accelerators.
• •Internal sourcing: Strategic scouting teams within VC firms or corporate venture units actively seeking specific technologies or therapeutic areas.

In a typical year, VCs or corporate venture units may review hundreds of biotech opportunities. Less than 5% reaches deep due diligence.

Investment Selection: What Biotech VCs Look For

Once a potential investment is identified, a rigorous evaluation process begins. Top evaluation factors:

• •Team assessment: Scientific credibility of the management team, relevant experience (drug development, business), and execution capability are paramount. Plans for key hires, e.g., a named SAB chair, or an interim/permanent CMO or CMC lead.
• •Science & technology: Quality, novelty, and differentiation of the underlying biology, modality, or platform.
• •Validation data: Early in vitro and in vivo data validating the therapeutic hypothesis and mechanism of action.
• •Market & unmet need: Size of the potential market and clear strategic alignment with significant, currently unaddressed medical needs.
• •Development feasibility: Plausibility of reaching key preclinical and regulatory milestones within a reasonable timeframe and budget.
• •Intellectual property (IP): Strength and breadth of the patent position; freedom to operate (FTO).
• •Financial projections & capital efficiency: Explain how the requested funding will help reach the next key value inflection point.
• •Regulatory strategy: Understanding of the regulatory pathway and potential hurdles.

Valuation: Determining Worth in Biotech

Determining the worth of a biotech venture requires a specialized approach, fundamentally different from valuing companies in other sectors. While metrics like user growth or quarterly earnings drive valuations elsewhere, biotech relies on forecasting future potential. Before the first human dose, a drug-discovery startup is priced on probabilities and expectations around key factors:

• •Potential for pharma partnership or acquisition, which are primary exit routes.
• •Valuations of similar companies (stage, indication, modality).
• •Investor Ownership & Future Rounds: Desired ownership percentage by the lead investor to influence future strategy and funding rounds.
• •Stage-adjusted risk discount: Preclinical assets are often valued at a significant discount (e.g., 40–60% discount applied to what might be expected at a Series A valuation for similar assets further along) to reflect the high risk.
• •Remaining patent life and any potential IP challenges can significantly affect valuation.
• •IND-enabling work packages required for the application. Timing or cost overruns here can severely destroy the risk-adjusted Net Present Value (rNPV).
• •rNPV model: Often built on milestone probabilities (e.g., target-validation → IND filing → Phase I Proof of Concept). This is a common tool, though its precision for early-stage assets is debated.
• •Platform companies must show asset validation, pipeline breadth and data integration.

Forecasting in Biotech: Milestone-Driven Projections

Traditional revenue-based financial forecasting is less relevant at the preclinical stage and focus areas are a bit different:

• •Milestone-driven projections: estimated costs and timelines to reach key inflection points like IND submission, clinical trial initiation, and early clinical data.
• •Triangulation: Investors will compare the founders' expectations with their own internal analysis or independent scientific/market assessments.
• •Non-dilutive funding: A parallel plan for securing non-dilutive grants (e.g., NIH in the US, Horizon Europe) to offset spending is attractive as it extends cash runway.

Deal Structure: Terms & Conditions

Biotech deal terms reflect the high risk, long timelines, and capital-intensive nature of drug development.

Standard deal terms often Include:

• •Pro-rata rights: Participation rights in future funding rounds to maintain ownership percentage.
• •Liquidation preferences & anti-dilution: Protection for investors in downside scenarios.
• •Board representation: Investor seats on the board of directors to influence key strategic decisions.

Terms may also reflect the long timelines and staged nature of drug development, including performance-based tranches or convertible instruments.

Syndication: Teaming Up for Success

Biotech investments are frequently syndicated (co-invested by multiple VC firms) to diversify risk, bring complementary expertise (e.g., scientific, regulatory, or commercial) and increased capital access to fund larger rounds. Syndicate composition often reflects:

• •Prior collaborations / past shared successes.
• •Domain expertise.
• •Shared vision for the asset.
• •Reputation / brand.

Post-Investment Value-Add in Biotech

In this sector, value-add activities often include:

• •Scientific and clinical development guidance.
• •Network access: Introductions to pharma partners, CROs, or regulators.
• •Help with hiring experienced drug development professionals and executives.
• •Preparation for subsequent funding rounds or non-dilutive grant application.

Strong investors remain actively involved throughout preclinical and early clinical phases, often through board participation.

Exits in Drug Discovery

The ultimate goal of a VC investment is a successful exit.

Primary exit route: Mergers and Acquisitions (M&A) by pharmaceutical or larger biotech companies are the most common successful exits. IPOs are less common as an initial exit for early-stage drug discovery companies. Because of the technical and financial hurdles, many early-stage programs are deprioritized or discontinued before reaching clinical proof-of-concept.

High-multiple exits (>10x cash-on-cash) are possible but rare; 2-4x cash-on-cash returns are common for many successful exits.

Most value creation occurs when platform scalability or strong early clinical data attract significant acquisition interest.

Value Creation: What Moves the Needle

Driving significant returns in biotech hinges on several key elements.

• •Deal selection: Investing in high-quality science with a strong team and realistic, well-vetted development plans.
• •Strategic post-investment value-add: Actively guiding the company to key inflection points.
• •De-risking the asset: Systematically generating data that makes the asset attractive to pharmaceutical partners or, less commonly for early assets, public market investors.

Success & Failure Factors in Biotech

Team quality is the most critical factor influencing both success and failure. An experienced, adaptable, and resilient team can navigate inevitable scientific and business hurdles. The journey of a biotech startup is fraught with challenges:

• •Scientific irreproducibility.
• •Clinical trial failures: Lack of efficacy, unexpected toxicity, or poor trial design.
• •Misalignment between investors, management, or with market needs.
• •Insufficient funding/poor capital management.
• •Competitive landscape shifts.

Segment Differences within Biotech Investing

VC approaches can vary depending on the type and stage of the biotech company.

• •Early stage (Pre-seed/Seed/Series A) focuses on academic licensing, validation of novel biology, and strength of the founding scientific team.
• •Later stage (Series A/Series B and beyond) emphasizes robust clinical trial plans and execution, CMC readiness for later-stage trials and commercialization, IP situation, and clear partnership or M&A potential.
• •While therapeutic programs (single asset or focused pipeline) are evaluated based on specific milestones related to that asset, platform companies must demonstrate validation of the platform through one or more lead assets, pipeline breadth potential, and data integration capabilities.

How this differs from a classic tech VC deal

Conclussion

Intuition and metrics both matter, but in biotech, they're framed by a deeper understanding of scientific risk and development timelines. It's not just about fundraising; it's about aligning your narrative, your data, and your milestones with how experienced investors evaluate early-stage science. Founders who embrace this shift lay the groundwork for lasting, strategic partnerships.