Elites always welcome

How VCs think about the IPO process in a windowless world

The fact that 69 biotechs have raised $6.1 billion via IPO financings on NASDAQ since the start of 2016 might suggest the IPO window has remained wide open in the U.S. A closer look at the data reveals that, instead, a dual-class system has emerged in which elite biotechs backed by deep-pocketed VCs and crossover investors can tap the public market at will.

Companies without such support remain shut out, particularly as generalist capital has remained scarce. For the privileged class, the decision to go public is therefore a question of when, not whether.

According to VCs polled by BioCentury, this thinking still applies even in the face of the current spate of market volatility.

The investors said a host of factors influence their decision on when to take a company public.

The primary reason remains access to a much larger pool of capital. While VC funds are flusher than ever, the money needed to build biopharma companies from the lab through commercialization is still beyond their means.

The efficiency and typically lower cost of capital on the public markets also mean IPOs are still very much part of the long-term financing strategy for portfolio companies. The majority of VCs aim to get their companies public as soon as they’re ready.

What’s changed is that VCs feel less constrained by past dogma around what stage of development a company needs to reach to pursue an IPO.

Public specialist investors also are more willing to fund companies based on their intrinsic value, rather than pigeon-holing them into a defined range of postmoney valuations. This flexibility allows VCs to take a wider variety of biotechs public, expanding the definition of “IPO ready.”

Must-haves for an IPO include a development pathway that features a cadence of clearly defined milestones, and the ability to raise enough capital to see them through. VCs are even willing to finance IPOs at lower valuations to ensure the second condition is met.

Biotechs that don’t meet these key criteria are best kept private. Other factors, such as lacking the corporate controls necessary to meet public listing requirements or having a management team not yet ready to interface with the

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