Why cash is still flowing into European biotech startups

Putting Tech to Bio: Why Cash Keeps Flowing to European Biotech Startups

Amid ongoing concerns about declining VC funding in the UK, Biotech startups are doing quite well. According to British Bio Association, businesses working in the sector raised £563m in venture capital and public funding in the quarter to September. After a slow start to the year, the Association predicts the industry will surpass funding levels seen in 2022. Meanwhile, the latest KPMG UK Venture Pulse The report notes that biotech – along with artificial intelligence and climate technology – is set to dominate the investment agenda.

So what’s going on? Why are biotech startups enjoying a moment in the sun?

James Field is CEO and founder of LabGenius, a London-based Biotech company focused on discovering the “next generation” of therapeutic antibodies. As he sees it, the growing importance of the UK biotech industry is partly due to the coming together of two previously distinct disciplines – namely biology and machine learning.

The combination has the potential to speed up the development of treatments that would previously have either eluded researchers or taken years to develop. Referring to his own company’s work, he says: “The human brain has zero intuition for designing these molecules,” he says.

To augment the work of human researchers, Lab Genius created a robotic platform that designs experiments, analyzes the results, and also learns from previous experiments.

Accelerated Development

What will this combination of artificial intelligence and biology mean in practice? Umza Choudry has worked as a research scientist in the fields of photochemistry and synthetic biology and currently leads the Tech Bio strategy at the VC fund Octopus Ventures.

In Choudry’s view, researchers have often struggled to make sense of the vast amount of biological information available to them. “There’s a huge amount of material, but it’s hard to imagine,” he says.

This is changing. The power of artificial intelligence to automate workflow and analyze data is paving the way for new treatments. Hence the resurgence of VC interest in the Bio Tech sector.

Choudry cites a number of areas where the combination of artificial intelligence and biology is set to make breakthroughs. He expects new and more targeted treatments and also – crucially – lower costs. Whether healthcare is funded by taxes – as in the UK – or by private insurance, the cost of treatment is a critical factor. A potential benefit of the Bio Tech revolution is its potential to “democratize” access to cutting-edge medical technologies, facilitating the development and scaling of new solutions.

To some extent, we are already seeing this democratization in action. As Choudry points out, reading human genes is now simple. Processing them is not another matter. However, Crispr editing tools not only pave the way for new treatments, but also make the process of gene manipulation much less expensive.

Of course, several VCs are taking note. Sajith Wickramasekar is its founder Benchling, a California-based company that provides a cloud-based data management and collaboration platform for companies working in the biology and biotechnology sectors. It mentions the innovations that create new business opportunities. “RNA, Gene therapies, Antibodies. That’s what investors see.”

Risk factors

But, as Choudry acknowledges, Tech Bio is risky. Timelines are long, development of new technologies tends to be capital intensive, and there are no guarantees of success. However, it is a risk that increasing numbers of VCs are willing to take. “Around 2021, investors became interested in riskier sectors, says Choudry. “We also see European VCs wanting exposure to more specialist sectors, although in Europe we don’t have many specialist fund managers.”

A potential limiting factor for traditional VCs is the time it takes to bring bio-tech products to market. “The timelines are slightly longer,” says Choudry. “The shelf life can be about 10 to 12 years.” This does not sit well with many VCs. Octopus, however, is an evergreen fund, making it easier to lock in funds for a longer period of time.

Despite the robust investment environment in 2023, there are some concerns for the immediate future. “A lot of money went into Tech Bio in 2021 and that was helpful. The big challenge now is that the markets have changed, we’re in a non-zero interest rate environment and a lot of publicly traded biotech companies are trading below cash,” says Field.

On the plus side, here in the UK, the life sciences are a priority area for policymakers – not least because there is an opportunity to support a well-established science base that could yield huge commercial gains. There is a significant amount of grants as well as tax incentives to support R&D.

The Talent Challenge

Arguably one of the biggest challenges in the Bio Tech sector is access to quality data. This raises the question of where the information needed to build AI models actually comes from.

In the case of Labgenius, biology provides data for the operation of artificial intelligence. “We have a sophisticated wet lab that produces data,” says Field.

This double-sided operation suggests a further challenge. As Wickramasekara points out, Bio Tech companies hire from two highly competitive pools.

“Another challenge is talent,” says James’ company has a wet lab and also a data side. This is not unusual in this area. But now you have to walk and chew gum,” says Wickramasekar.

Tech Bio founders not only need to hire people with the necessary skills, but they also need to create an environment and culture where people can collaborate effectively. Sometimes collaboration is remote. For example, Labgenius has its biologists working in Oxford, while its AI business is based in London. However, Wickramasekara wants to emphasize that cross-fertilization should be celebrated. “I’ve seen people go from technology to biology,” he says. This is very exciting.”

Umza Choudry agrees. “When you bring together different disciplines, you bring together different mental models. This is not necessarily a bad thing. You have people approaching the problem from different angles.”

It’s still early days for Tech Bio, but the potential to accelerate development of new treatments suggests it will continue to soak up cash from investors.