One more alarming IPO statistic

By now you’ve heard, from this newsletter and elsewhere, that people are worried about the future health of biotech IPOs. The whole thing could come unglued if generalist investors lose interest, if pharma stops buying, or if a few recent entrants disappoint when it comes to actual data. But what if the crossover money dries up?

So-called crossover investors are the funds that buy into a company right before it goes public, giving startups a timely infusion of cash with the expectation of immediate returns once the IPO goes through. Crossover funds assume less risk — and get a smaller reward — then the venture firms that get involved on day one, but they’ve come to play a key role in the ecosystem that has helped hundreds of biotech companies go public since 2013.

But that dynamic could change if recent trends persist. According to the analysts at Jefferies, crossover returns are trending downward in 2019. For the past three years, the average biotech IPO valuation has been 40% above its crossover round. This year, that number has fallen, according to Jefferies, with a cluster of companies going public at a nearly flat valuation and three debuting at a discount.