Despite a stable flow of absolute dollars into biotech venture, the sector's relative share of all VC funding has shrunk from ~14% to ~7%. This is due to the denominator effect of massive capital flooding into AI-focused tech companies.
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Unlike tech investing, where a single power-law outlier can return the entire fund, biotech wins are smaller in magnitude. This dynamic forces biotech VCs to prioritize a higher success rate across their portfolio rather than solely hunting for one massive unicorn.
The strong performance of biotech stocks in late 2025 wasn't solely driven by sector-specific news. A significant factor was a macro-level rotation of capital from generalist investors moving money out of cooling AI and tech stocks and into the undervalued healthcare and biotech sectors.
Despite headline figures suggesting a venture capital rebound, the funding landscape is highly concentrated. A handful of mega-deals in AI are taking the vast majority of capital, making it harder for the average B2B SaaS startup to raise funds and creating a deceptive market perception.
The life sciences investor base is highly technical, demanding concrete data and a clear path to profitability. This rigor acts as a natural barrier to the kind of narrative-driven, AI-fueled hype seen in other sectors, delaying froth until fundamental catalysts are proven.
The focus on AI among institutional investors is so absolute that promising non-AI companies risk "dying of neglect" and being unable to secure follow-on funding. This creates a potential opportunity gap for angel investors to fund valuable businesses in overlooked sectors.
Aggregate venture capital investment figures are misleading. The market is becoming bimodal: a handful of elite AI companies absorb a disproportionate share of capital, while the vast majority of other startups, including 900+ unicorns, face a tougher fundraising and exit environment.
VC Bruce Booth warns that investors without deep biotech R&D experience are backing AI-driven drug discovery companies at inflated valuations. He predicts many will 'get their hands burned' due to flawed assumptions about value creation in the sector.
The AI boom is masking a broader trend: venture fundraising is at its lowest in 10 years. The 2021-22 period created an unsustainable number of new, small funds. Now, both LPs and founders are favoring established, long-term firms, causing capital to re-concentrate and the total number of funds to shrink.
Venture capital for US seed and Series A cell and gene therapy companies has collapsed from a historical high of 17-21% of deals to only 7% this year. The sharp decline is driven by a confluence of factors including patient deaths, persistent manufacturing challenges, and growing regulatory uncertainty.
The past few years in biotech mirrored the tech dot-com bust, driven by fading post-COVID exuberance, interest rate hikes, and slower-than-hoped commercialization of new modalities like gene editing. This was caused by a confluence of factors, creating a tough environment for companies that raised capital during the peak.
