From drought to discipline: Lean, early-stage models for a scarce capital era — a Guest Commentary

Outsized returns can stem from small bets, enabled by standardization and outsourcing, argues biotech VC Uciane Scarlett 

Biotech’s dual mandate — deliver transformative medicines to patients while generating competitive returns for shareholders — has collided head-on with a funding drought and a persistently high cost of capital  (~10%, vs. 6–9% for most other sectors). The old playbook of “raise bigger” is no longer viable. The new imperative is to prove more with less.

My analysis of >200 U.S. venture-backed M&A transactions over the past 14+ years, using BioCentury’s BCIQ database, shows that acquirers are increasingly rewarding earlier signals (Figure I). Companies that can deliver clear, mechanism-validating data quickly, often at the preclinical or Phase I stage, frequently generate more value per dollar than capital-intensive, late-stage bets.

In this new normal, capital efficiency must be treated as a core design principle across venture builders, entrepreneurs, operators, and investors alike. Get that balance right, and the sector can continue advancing transformative science while still meeting its obligation to shareholders.

The dominant response to capital scarcity has been a flight to perceived “safe bets.” The boom in “China NewCo” transactions, which spin out clinical-stage assets from China into new U.S. or EU entities, has been driven by the promise of lower costs and faster timelines, while the sector’s appetite for de-risked, late-stage opportunities is evident in exits such as GSK’s acquisition of Aiolos Bio and in the nine-figure financings for Kailera Therapeutics and Verdiva Bio.

Concentrating on assets with human data is one way to cope with scarce capital. Yet this strategy faces limits: competition for best-in-class assets is fierce, demand is high, and the pool of transactable programs is shrinking. The China NewCo model may buy time, but it cannot, by itself, solve biotech’s systemic cost-of-capital problem or sustain long-term innovation.

Meanwhile, capital contraction is squeezing early-stage innovation, even as M&A remains robust and increasingly skewed toward younger companies. In the past 4.5 years, 50% (~5-year median) of acquisitions targeted companies with only preclinical or Phase I pipelines, compared with just 13% a decade prior (Figure 1). The trend is even more striking among private companies (n=112), with 83% of U.S. venture-backed M&A deals (2021-1H25) focused on early-stage companies (Figure I). Many of these acquisitions involved companies that raised only modest financing yet still produced attractive exits.

This dynamic underscores the outsized returns achievable with leaner ventures. Since 2021, U.S. venture-backed biotechs that were acquired with only early-stage programs (preclinical–Phase I) raised a median of ~$200 million (across all rounds) before acquisition and delivered an ~8x median multiple on total deal value. By contrast, companies with late-stage pipelines had a median raise of ~$660 million across all rounds before acquisition and achieved roughly a ~4x multiple in that same 2021–1H25 period (Figure 2).

It is important to note that M&A activity reflects a subset of attractive opportunities, rather than an holistic picture of early- vs. late-stage venture performance. Benchmarks of fund-level returns do support stronger outcomes for early-stage investing, though typically with narrower margins than the multiples observed in Figure 2.

Although multiples for private early-stage acquisitions have recently converged toward late-stage levels, the long-term pattern is clear: smaller investments that reach an M&A exit often generate greater value for shareholders. These outcomes demonstrate that highly attractive returns can be captured even with limited early-stage data.

The sector must lean into earlier exits, where attractive multiples are still achievable, to recycle capital more quickly, while also funding the long-cycle innovations that sustain the funnel. The future of biotech depends on doing both in tandem.

At the same time, the bar has risen for patient impact alongside returns. Meeting it requires a ruthless focus on capital efficiency. Both traditional and innovative models have roles to play, but new models are needed to compress timelines, reduce cash burn, and keep science moving forward. 

A call for innovative models

With NIH research budgets cut by several billion dollars and investor appetite diminished, early-stage biotech projects are increasingly underfunded, despite historical multiples that show potentially attractive ROI for investors given their lower capital needs (Figure 2). As an industry, we must sustain the momentum of science even amid these public and private shortfalls.

Other sectors offer lessons. In construction, modular firms prefabricate components in factories and assemble them on-site like LEGO blocks. A Chinese company famously erected a 57-story skyscraper in 19 days — three floors per day. Prefabrication cut time by up to 50% and cost by ~20% compared with conventional builds.

The analogy for biotech is compelling: use standardization and outsourcing to accelerate translation while lowering capital intensity.

Some leading biotech funds have already created in-house “discovery engines” to streamline R&D. Flagship Pioneering and Versant Ventures, for example, launch multiple start-ups from shared internal infrastructure. These approaches accelerate pipeline creation but require deep pockets and scale, advantages limited to large, established funds. For smaller or newer VCs, the greater opportunity lies in external partnerships and leaner venture models.

Biotech has long relied on partnerships with CROs, CDMOs, and academia, but in today’s market, this model should be embraced more aggressively. “Virtual” biotechs already operate this way, advancing programs with small teams while relying on partners to execute experiments — much like how cloud computing enabled lean software start-ups, or how fintech was built on banking-as-a-service platforms. Instead of defaulting to in-house infrastructure, more start-ups should tap existing platforms, such as Alloy Therapeutics, to access cutting-edge R&D on demand. These partnerships convert fixed costs into variable ones, extend runways, and allow small companies to operate with greater reach.

There are signs biotech is rediscovering the virtual company model that Nimbus Therapeutics exemplified a decade ago. Many asset-centric biotechs now operate virtually or semi-virtually, advancing single hypotheses quickly and cheaply. āshibio Inc., for example, is advancing a pair of assets for rare bone disease with a semi-virtual team running two clinical trials. This milestone-driven model is not right for every opportunity, but where proof-of-concept can be reached with modest capital and lean teams, it is the most efficient path forward.

Other lessons from capital-intensive industries that biotech can adapt include the benefits of studios and accelerators. In tech, the Softeq Venture Fund backs early concepts with small checks and in-house engineering, rapidly producing investor-ready prototypes. Biotech is beginning to follow suit with pharma-backed accelerators, academic spinout engines, and new studios (e.g., Lux Capital’s biotech studio) designed to industrialize company creation. Independent VCs could take this a step further by partnering with studios for exclusive access to maturing pipelines, allocating capital to de-risked opportunities on faster timelines with lower spend to PoC.

Robotics and agritech hold lessons in keeping burn lean. Robotics firm Carnegie Foundry, for example, used a no-fee SPV linked to Carnegie Mellon IP, while Bayer and Temasek’s Unfold seeded an agritech company by contributing assets and infrastructure instead of cash. Biotech parallels include SPVs anchored by universities or incubators, and biopharma option deals, joint ventures, or build-to-buys — all ways to concentrate investment on science or clear exit milestones while reducing overhead.

Striking the balance

While leaner, faster models are essential, biotech is not software: some innovations will always require substantial investment and patience. Striking the right balance means two things. The first is ensuring innovation delivers on both sides of biotech’s mandate, transformative impact for patients and compelling value for shareholders. The second is balancing where capital is deployed. Today’s environment is pushing more venture capital into later-stage opportunities, which does create value but risks starving the early innovation that fuels the pipeline.

The objective is not to cut indiscriminately, but to allocate each dollar with precision — lean where possible, deep where necessary.

My analysis of >200 U.S. venture-backed biotech M&As illustrates why: early-stage companies have historically generated higher multiples with far less invested (Figures 1 & 2), demonstrating the outsized value lean models can unlock. At the same time, later-stage bets remain indispensable for delivering scale and carrying programs through pivotal trials.

We must innovate the venture model to stretch scarce capital and make early-stage bets more fundable, while still supporting later-stage opportunities at true inflection points. Lean venture models can sustain progress through the current crunch, but long-term success will come from pairing efficiency where it works with the patience required for big ideas. By doing both, biotech can keep innovation alive through today’s drought while positioning the sector to surge when capital flows return.

Uciane Scarlett is an investor at a stealth VC, before which she was principal at MPM BioImpact and previously held investment roles at Oxford Sciences Enterprise and Atlas Venture.

Signed commentaries do not necessarily reflect the views of BioCentury.