Venture Capital’s Game of Inches | Ep. 662

Strategies, Predictions, and Theories That Matter

Hello Avatar! Welcome back for another week of biotech analysis. Today is Sunday, which means this is our Building Biotech newsletter that is focused on discussing biopharma strategy topics. In this edition of the newsletter, we dive deep into the strategies, frameworks, and evolving dynamics of venture capital in biotech. From the challenges of navigating overfunded mega-rounds to the potential opportunities in early-stage exits, we explore how investors can find inefficiencies and play their own game in a sector where transformative science meets high-risk, high-reward economics. We’ll discuss the power law’s impact on fund strategy, the critical role of valuation discipline, and why timing exits, whether through M&A, IPOs, or innovative approaches like initial liquidity events, can make or break a fund’s performance. Along the way, we’ll challenge the status quo, asking whether seed-stage biotech investing still makes sense, how follow-on investments fit into the equation, and what lessons from tech VC can (and can’t) be applied in life sciences. Whether you’re an investor, operator, or simply biotech-curious, this issue is packed with insights to help you navigate the game-changing opportunities ahead. Let’s dig in.

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Enough shilling for the day, lots to cover this week, let's get started!

Introduction: The Two Golden Rules of Investing

In every investment decision, two principles stand tall - get paid for the risk you take and play offense with your money. These aren’t just guidelines; they’re the DNA of successful investing. In venture capital, and biotech especially these rules define the difference between mediocre and extraordinary returns.

Biotech epitomizes this ethos. Funding a preclinical platform targeting a novel disease pathway may seem audacious to outsiders, but to those with conviction, it’s a strategic bet. It’s the offensive play that can lead to transformative therapies and, just as importantly, massive returns. Venture investors are rewarded for courage, but courage tempered by insight.

Does Seed Even Make Sense as an Asset Class?

Seed-stage investing in biotech raises a critical question, are the risks inherent in this early-stage strategy worth the potential rewards? The answer depends on an investor's ability to identify inefficiencies and capitalize on them.

Biotech seed funds have a distinct edge. They often engage with innovations at the frontier of science, long before these breakthroughs achieve widespread recognition. For example, a company pioneering a first-in-class protein degrader might receive tepid interest at the seed stage due to unproven preclinical models. Yet if the science validates, that same company could command a $1 billion valuation by Series B.

The challenge is clear, the seed stage isn’t the time to scatter investments but to focus. Seed funds excel when they finance critical experiments aimed at proving or disproving a core hypothesis. This precision-focused approach is especially valuable in biotech, where early validation of a novel approach often dictates the trajectory of future funding rounds.

Let’s consider an example. A biotech company raises a $5M seed round to optimize its CAR-T platform for a niche oncology target. Success leads to a $60M Series A for IND-enabling studies and an $80M Series B to initiate early-phase trials. While initial investors face dilution through successive rounds, the value creation through de-risking science often offsets this. Even with a smaller stake, the upside potential remains substantial.

Seed works when it focuses on precision, not volume. The early investor’s goal is simple: prove transformative science, create leverage for the next round, and position the company for a trajectory that attracts institutional follow-on capital.

Those of you reading our Sunday columns will recall a few weeks back we shared some math suggesting the opposite. That to really have a mathematical shot at finding a unicorn, venture portfolio need to be much bigger. Please have a read if you missed - it is alway good to take in conflicting perspectives as we evaluate advanced concepts.

Fund Size and Strategy: Can One Really 10x a Fund?