Biotech startups that could help militaries tackle emerging threats secured $3.2B in VC funding over a 12-month period ending April 28, per Pitchbook's Defense Tech vertical report. Within the Five Eyes intelligence alliance — consisting of the U.S., U.K., Canada, Australia, and New Zealand — biotech raked in the third-highest share of funding in the period. Countries within the alliance are realizing the importance of biosecurity after the risks exposed by the COVID-19 pandemic, causing the investment to increase. Additionally, the rising threats from the increased pace of development of emerging technologies, such as gene editing and synthetic cell creation technology, play a key role in driving up the investment for biotech defense startups. Considering the importance of biotech in defense, VC funding deployment into the sector is poised to increase this year. Renewable energy and sensing, connectivity, and security startups were the only two domains that could nab more funding than biotech startups, raking in $4B and $3.4B during the 12-month period, respectively. Notable deals within the space that closed recently include synthetic biology startup Altos Labs' $3B early-stage round and medicine maker Resilience's $625M Series D round. The sector requires specialist VC firms with expertise in defense tech, including an understanding of the military-industrial complex and major military contractors. Pitchbook analyst Ali Javaheri said, "The risk is VCs entering the space without requisite knowledge of the federal sales cycle and defense innovation ecosystem. It's complicated and bureaucratic, and generally, you'd want some experience if you're placing bets on companies that will ultimately have to develop a catered go-to-market strategy for the Department of Defense." There are niche VC firms, such as Shield Capital and Razor's Edge Ventures, that exclusively invest in defense tech. In September 2022, Razor's Edge Ventures closed its third fund at $340M, surpassing its initial target of $250M, to invest in defense and security startups. The firm's focus for the fund is startups working on autonomous systems, cybersecurity, AI, and aerospace, space, and defense technology. However, there are new entrants into the sector, including institutional VC firm Andreessen Horowitz, which recently made a $500M commitment to its American Dynamism practice. The division is set to back early-stage startups that "support the national interest" across aerospace, defense, public safety, education, supply chain, industrial, and manufacturing domains. Despite the allure of defense tech, there are hurdles that are stopping additional VC investments within the defense biotech sector, namely the fragmentation within the biotech sector and the lower return on investment. The biotech sector can be categorized as public health, biological warfare security, and emerging biotechnology. Each of these elements requires their area of expertise, which differs from each other. Additionally, biotech development has longer timelines with lower returns, which does not fit into the investment criteria for many VC firms. Regardless, Javaheri adds that there is significant potential and opportunities, especially in sub-sectors such as vaccines, biofuel, biomaterials, and cell regeneration. |
