The past few years have felt like a perfect storm for biotech fundraising. From preclinical startups to public biotechs, capital got sharper about what it would back – and when.
The result: a sustained pullback in early-stage financing, a flight to later-stage, and a noticeably deeper chill across Europe than in the U.S. Here’s a practical, evidence-backed read on what happened, why preclinical companies struggled, why Europe felt it harder, the signals that appeared in late-2025, and what the fundraising landscape may look like in 2026.
What actually happened (the short version)
- Venture and public capital for biotech contracted materially after 2021–2022 – fewer IPOs, fewer follow-ons, and much larger price sensitivity among LPs and crossover investors.
- Investors concentrated capital into fewer, later-stage rounds (Phase II+ and de-risked assets) and reserved dry powder for companies with clearer regulatory/clinical inflection points.
Why preclinical companies found fundraising so hard
- Macro risk made long, binary bets costly.
Rising interest rates (and the higher cost of capital that followed) shortened investor time horizons and raised the discount on long development timelines. That made early discovery-stage cash burns look much less attractive than nearer-term clinical inflection points. - Public market illiquidity removed the exit ladder.
With IPO windows shut or fragile for most biotechs, crossover investors and later-stage funds pulled back from seed/Series A exposure – they didn’t want to be stuck holding long-duration private positions with no clear path to public liquidity. - Concentration of capital in larger funds and mega-rounds.
A handful of big funds doubled down on assets that could scale to large commercial value; the remaining venture pool fragmented, producing smaller cheques and fewer rounds for discovery teams. In practice that squeezes companies that need meaningful Series A checks to hit translational milestones. - De-risking preference: clinical results beat mechanism-of-action.
Investors became more phenotype-driven – they preferred assets with clinical proof rather than preclinical promise. That structural preference raised the bar for preclinical startups to demonstrate translatability or immediate partnering potential. - Regulatory, commercial and pricing uncertainty.
Debate over drug pricing, payer scrutiny and regulatory complexity increased the perceived execution risk for early programs – again tilting capital toward assets with clearer regulatory/commercial stories.
Why Europe felt the squeeze more badly than the U.S.
- Shallower capital pools. European VC fund sizes are, on average, smaller and fewer LPs allocate at the scale U.S. funds do. That limits the ability to syndicate large seed/A rounds.
- Slower IPO and M&A markets in 2023-2025. Europe’s public biotech recovery lagged the U.S., so the regional exit pathways remained constrained longer – which fed back into risk aversion.
- Timing of policy and government support. While governments pledged life-science support, many programs were incremental and slower to unblock private follow-ons versus the faster, deeper late-stage appetites in the U.S.
In short: same scientific quality, but less velocity and fewer large cheques – a recipe for a magnified downturn in early-stage European biotech.
Are we seeing a positive change at the back of 2025?
Yes – cautiously. Several signals in H2-Q3 2025 suggested a moderation or partial rebound rather than an immediate return to peak froth:
- VC activity in biotech showed meaningful quarter-on-quarter improvement in Q3 2025, driven by both follow-on activity and some large late-stage rounds.
- Big banks and advisers began to forecast a recovery in deal activity and IPO readiness for 2026 as rates stabilized and private markets digested prior corrections.
But – important caveat – the improvement was uneven. Late-stage and clinical assets rebounded faster than preclinical discovery companies. Europe’s recovery lagged the U.S., though pipeline deals and government initiatives created pockets of momentum.
How fundraising/investment will probably look in 2026 (what to expect)
- Selective rebound, biased to later stages. Expect continued appetite for Phase II+ assets and platform companies with clear translational routes. Early-stage capital will return more selectively – often from specialist biotech angels, corporate venture, and new micro-VCs focused on deep science.
- Larger median rounds but fewer deals. The market will favor quality over quantity: bigger rounds for de-risked startups; smaller ecosystems will see lower deal counts.
- More corporate & strategic partnering early. Preclinical teams that can structure industry collaborations, options, or milestone payments will have better access to capital than those relying purely on VC syndicates.
- Europe closes the gap – but slowly. Expect policy-driven programs, national life-science initiatives and SPAC-like alternatives to improve liquidity in Europe, but full parity with U.S. capital depth will take time.
- LPs sharpen focus on durable returns & platform risk mitigation. Investors will demand clearer value inflection maps, staged capital with milestone protection, and stronger governance in early financings.
Practical advice (for founders and investors)
For founders:
- Design financings in tranches tied to de-risking milestones; blend VC with strategic/corporate capital where possible.
- Consider translational proof (robust translational PK/PD, human-relevant models, biomarkers) to make a preclinical story investable.
- Build non-dilutive runway (grants, partnerships) to extend time to a milestone that materially de-risks the company.
For investors:
- Prioritise structures that protect downside (e.g., milestone tranches, priced rounds with convertible lines that reward early upside).
- Keep a portion of the portfolio for high-conviction early bets via specialist syndicates or co-invest with experienced scientific investors.
- Watch regional policy shifts – targeted public capital can change regional investment math quickly.
The pullback in biotech investment was structural, not purely cyclical: it combined macro tightening, diminished public exits, and a re-rating of risk tolerance. The end of 2025 showed the first credible signs of selective recovery – primarily at later clinical stages. For 2026, expect a cautious but real return of capital, with winners being those who demonstrate near-term de-risking, creative financing mixes, or strategic corporate validation.
If you’re a founder building at the preclinical edge: focus on translational clarity and partnership optionality. If you’re an investor: accept fewer, better deals – and sharpen the playbook for protecting the downside while capturing outsized returns.