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The tides are turning for nascent biotech ventures—for the worse.

On Tuesday, the Alliance for SoCal Innovation hosted its annual showcase of startups at the Skirball Cultural Center. The event featured a promising crop of life sciences ventures, most of which are so early-stage that they’ve yet to raise their first round of commercial funding.

But many of these wide-eyed startups—often headed by academic researchers who have little experience in commercialization—unfortunately don’t have the benefit of robust capital market conditions like those that greeted cohorts past. COVID-19 launched a massive campaign among venture investors hungry to bet on biotechnologies with the potential to change the world; venture capital activity in the biotech and pharma sectors reached a record $28.5 billion in 2020, according to PitchBook Data, which was up more than 60% from $17.8 billion in 2019.

The reality is different now. The public markets are struggling, and the impact of that stock market slowdown has begun to trickle into the private sector, as well. That doesn’t bode well for pre-seed biotech startups like those at the Alliance’s showcase, who now must navigate a tepid market without necessarily having clinical data—biotech’s main proof of concept.

“The challenge is [biotech startups are] very capital-intensive, and we're moving into a [bearish] market with higher interest rates,” Ryan Witt, hub director at UCLA Biodesign, told me at Tuesday’s event. “You see this in the public markets—stocks are trading at cash value or close to cash value, some less than cash value. And because of that, you're seeing it’s harder for the therapies companies to exit.”

Witt said investors are now increasingly focusing on startups that have some clinical data to back them up, or first-time entrepreneurs who are surrounded by advisors with experience in the commercial realm. They’re also more interested in knowing what the exit strategies for those startups look like, he noted.

The rest may have to contend with the fact that their next round of funding is going to be lower than they expected, as David Crean, managing general partner at life sciences VC firm Equitos, told me. “They're competing against other companies that are higher quality [and] closer to the clinic,” Crean said. “It's very, very difficult for a lot of these companies.”

“Now, the nice thing is, as a venture investor, we can get bargains,” he added. “Right now, there's some really great bargains out there.” — Keerthi Vedantam