by Ward Capoen
The biotech life cycle has a bit in common with the North Atlantic conveyor belt, in that it uses a gradient of resources to drive an ecosystem. But rather than an ocean current circulating temperature and salinity, biotech is driven by innovation and capital that drive this one. However, both are equally impacted by exogenous events and macro dynamics. Recent global events have slowed down the European biotech conveyor belt, resulting in a frigid climate where it is hard to predict what is going to happen next.
The past few years have seen strong declines in IPOs and M&A, largely driven by high interest rates and inflation. And while we started seeing some green shoots of biotech growth last year, the life sciences cycle seems to once again have come to a grinding halt due to tariffs and regulatory uncertainties.
According to an analysis by Jeroen Van den Bossche from KBC Securities, shared at the State of the Union at this year’s Knowledge for Growth, the insecurity has led many in the industry to run for cover, hunkering down while they wait for clarity. While large-cap pharma fared better than biotech companies in 2024, there was a general trend of deal numbers going down while deal sizes went up – in other words, it’s currently a ‘winner takes it all’ market, with smaller companies left by the wayside.
Limited liquidity leads to sluggishness
The inadvertent result of this trend is that Venture Capital firms are dealing with reduced returns due to the dearth of exit deals. This is eroding the confidence of their Limited Partners and limiting liquid capital, making it harder for VC to raise new funds and reinvest their returns. The end result: fewer investments and a historically low rate of new venture creation. A recent post from well-known VC Bruce Booth highlights this dynamic in the US: according to Pitchbook data, Q1 of 2025 displayed the lowest quarterly level of biotech startup formation in the US for the past decade. The numbers are unfortunately similar in Europe.
Of course, an optimist will tell you that this datapoint is simply pregnant with possibility –with less companies competing for dollars, they would anticipate a rebalancing of supply and demand down the road, thus supporting improved valuations and restarting the life sciences cycle. But until that happens, the fact is that it’s very hard to access risk capital for innovative companies (excepting the small subset that’s currently absorbing the majority of investment dollars).
A slowdown in breakthrough biotechs
A recent analysis by JP Morgan also highlights this trend of larger funding rounds being raised by fewer, more mature companies. According to Invest Europe, this is partly driven by the rise of billion-euro VC funds, allowing companies to raise large rounds, generate late-stage clinical data and remain independent for longer. But nothing ever occurs in a vacuum: according to that same report, early-stage VC fundraising has declined by a whopping 87% between 2021-2023, which of course then leads back to that lack of company creation.
To keep the European conveyor belt running, it is essential that we help companies bridge that gap between foundation and late-stage funding rounds. For companies to mature into the high-quality opportunities that billion-euro VC funds are looking for, they need to be battle hardened and stress tested so only the really good, innovative ideas emerge from the early-stage crucible.
Many opinions on what is needed exist, ranging from more harmonized European equity market regulations, a European Nasdaq, improved government support, to more (and larger) growth funds. All these things may form a part of the solution. But ultimately, if the current state of affairs continues with companies staying private for longer, then that lack of liquidity from exits will result in fewer early-stage euros, creating a bottleneck and causing the conveyor belt to slow down.
How to kick the conveyer belt back into motion
A secondary market could help improve the redistribution of LP returns and make it easier to raise new early-stage funds in Europe. This is a platform or mechanism wherein the shares of private companies are traded among investors. A secondary market system would allow early-stage funds to create intermediate liquidity events and bridge the early-to-late-stage divide.
So far, this option is very limited in a European context, but it is not entirely without precedent. The secondary market is on the rise and maturing quickly in the US, mainly in tech. The shift came as a response to the Silicon Valley trend of staying private longer and raising billions in the private market, which then led to early VCs, Angel Investors and Founders becoming stuck for increasing periods of time, exactly as European investors are now experiencing.
By providing liquidity for these early backers, late-stage investors could step in to top up funds where IPOs or M&As would traditionally have been providing liquidity. As a result, a new layer of megafunds managed to emerge in the US ecosystem, extracting value from companies that would traditionally have been reaped by public markets. Vitally, companies like SpaceX, Stripe and OpenAI could not have existed in the private markets without the secondary market players jumping in.
A new layer to our diverse ecosystem
Given that the trend of staying private and/or independent for longer is clearly already starting to happen in European biotech, we need to take action and respond accordingly. The good news is that this is a clear sign of the European ecosystem maturing.
By adding a new ‘trophic layer’ of secondary funds, we can help bridge the gap between early- and late-stage Venture Capital—creating a circular system of innovation and capital, restoring the flow of the life sciences conveyor belt. This will greatly help the European biotech ecosystem become more resilient in the face of adversity, but also grow and produce solutions for patients and societies in Europe and beyond.
