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An investor whose firm has raised $1.8 billion to invest in biotech explains why we're seeing so many huge early funding rounds

Published by Business Insider on Fri, 06 Apr 2018

Money is flowing into biotech startups, with companies increasingly raising more than $100 million in early-stage funding rounds.Steve Elms, a managing partner at Aisling Capital, which invests in certain private and public life-sciences companies, says there are a few reasons we've been seeing these massive funding rounds.Those include early-stage venture funds having more cash, as well as investors wanting to fund companies to get them further in developing a particular drug or position them for an initial public offering.Funding has been flowing into biotech over the past few years.Over one week earlier this year, biotech and healthcare startups raised almost $1 billion in capital. And on Tuesday, a cancer-drug startup called Allogene raised $300 million in its series A round.All the funding has led to a lot of unicorns, as companies with multibillion-dollar valuations have raised hundreds of millions, predominantly during their series A or B rounds.Steve Elms, a managing partner at Aisling Capital, which has raised $1.8 billion to invest in private and public life-sciences companies that have gotten their treatments into human clinical trials, says there are a few reasons these massive rounds have started to pop up.For one, the capital, raised with the intention of getting the startup into human clinical trials, is being used to move companies further along in development."A lot of these companies want to raise as much money as they can now so they don't need to raise capital again until they're in that clinical phase," he said.Getting an experimental drug to that stage has become a key inflection point, Carol Gallagher, a partner at New Enterprise Associates, told Business Insider in January."The larger size of the series A is coming more from this realization that there just really isn't a value inflection that's very significant ahead of the actual clinical proof of concept," Gallagher said.There's a caveat to those huge sums, Elms said: The funding rounds could be designed so that a biotech doesn't get the entire funding all at once but receives more based on whether it hits development goals."If we were to ever participate in some huge early-stage round, we would probably say: 'Sure, we'll commit $100 million. But we'll only give you $20 million today, and if you meet this milestone, and if this risk is reduced, we'll put in additional capital to fund you,'" Elms said.Another reason we're seeing such large early funding rounds, Elms said, is that early-stage venture-capital funds have money they need to put to work."You have a lot of early-stage funds that have a lot of money, and they have to put money to work," Elms said. "If they come up with what they think is a great idea, then they're going to put a ton of money in it."Meanwhile, public markets have been more open to companies with exciting science that might still be early in development, like gene therapies and gene-editing technologies. Having that funding to start with can put them in a solid spot coming into an initial public offering."I think what they also want to make sure is they have a lot of money on their balance sheet before they go public," Elms said. "So if they raised an $100 million A, maybe you spend half of that, and then you go into an IPO, if everything works out, with $50 million on your balance sheetand that really is kind of shows a strong IPO for potential IPO investors."SEE ALSO:'We're not going to follow the hype': Biotech VCs are concerned by the staggering size of early-stage startup fundingJoin the conversation about this storyNOW WATCH: How one CEO went from rejecting an offer from Steve Jobs to an $11 billion IPO
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