Biotech and COVID: A Case Study of Generalist and Specialist VC firms
For several years during the pandemic, generalist VCs outperformed their specialist counterparts in the biotech industry. That has since changed.
By Alexander Zhao
Introduction
In late 2023, a narrative emerged surrounding the return of private biotech investors. Within the period from 2019 to 2021, data showed that generalist firms outperformed specialist firms in the biotech space. However, following this period, a new set of statistics indicated that the trend was inverting — specialist firms began to dominate the space instead. This shift in performance begs for analysis on the topic. Why are specialized biotech firms dominating industry funding now? Why were generalist firms dominating before? This article is an attempt to paint a picture for generalist and specialist venture capital firms as well as their position within the venture capital space.
Definitions
To begin, two terms must be defined: generalist and specialist venture firms. Essentially, generalists and specialists represent two strategies for venture capital investment. Specialists choose to be sector specific utilizing their competitive intelligence to provide targeted support to select companies in order to claim a strong hold within a specific vertical. In comparison, generalist firms are sector agnostic and take advantage of broad networks to create diversified portfolios.
Although these two strategies are significantly different in their methods, the return that they receive are relatively equal. In fact, studies have shown that the two strategies receive similar returns with specialists having a slight advantage with funds under $250M and generalists have a slightly higher performance above the same metric. These values, however, shifted in performance around the end of 2020.
Impacts of COVID-19
The COVID-19 pandemic shifted life across the entire globe, changing the way people lived, worked, and interacted. In particular, venture capital saw a significant fall, which was often attributed to the inability to interact with and fund startups. Nearly every vertical saw significant losses. The major exception? Biotech. With the increase in demand for medical solutions — including diagnostics, vaccines, and therapeutics — nearly $16.8 billion dollars was put into biotech-focused VC funds.
This increase in funding can be easily attributed to the generalist investors. With COVID on everyone’s minds, visibility for the biotech sector greatly increased and hype emerged around promoting new health technologies. This drive then created lower perceived barriers to entry which led generalists to invest in order to immediately benefit from these COVID prevention solutions.
Now, circling back to the introductory premise, generalists became the key investor for the biotech vertical during COVID. From this narrative we can see that the rise in generalist investment entered the sector primarily because of the immediate demand for the vertical. In an overheated market, even mediocre technology stands a chance at being invested in, but when that same market cools off, investors become more hesitant. Greater due diligence and depth of knowledge is demanded which is exactly the characteristic of specialist firms. Thus when COVID was no longer as immediate of a threat, generalists were less likely to invest, hence specialist domination returns.
Summary
Generalist and specialist firms take two different approaches to targeting companies. During a period of high interest in certain sectors, generalists are able to leverage their wider reach and larger funds to deploy more capital and compete for deals. However, when the demand for the sector becomes less immediate, specialists are favored due to their deeper knowledge of the vertical. The COVID-19 situation reflects a greater understanding about VC involvement. With the next major world shift, we can be prepared to see a similar course of events occurring as the market continues to reflect what’s on people’s minds.
