7 Threats to the Survival of Biotech Startups in 2025

Amid a tightening capital market and rising development costs, a growing number of biotech and healthcare startups have shut down in 2025, citing difficulty raising capital, insufficient clinical results, and strategic misalignment.

For instance, in June 2025, after seven years of operating, Lucy Therapeutics closed its doors. The company took two ideas with no initial supporting data to positive results in multiple animal models for Rett syndrome and Parkinson’s disease, but did not get the opportunity to test its drugs in humans.

“We are in a time when even if the science is working, the environment surrounding our biotech ecosystem is not,” wrote Amy Ripka, Founder and CEO, in a LinkedIn post.

She pointed to a few reasons for the company’s failure, including low investor risk tolerance, misalignment between drug discovery and ROI timelines, a disconnect between commercial readiness and acquisition expectations, and entrenched KOL control.

“Perhaps the above conditions have always been true, but when money and exits were plentiful, we ignored them. Now, we are all waking up to a bad hangover from investor-fueled parties,” Ripka wrote.

Omega Therapeutics is another company that could not thrive in today’s environment due to lack of funding. It filed for Chapter 11 bankruptcy in February. Despite a partnership with Novo Nordisk that provided $5.1 million upfront in funding for developing novel therapeutics for obesity management, Omega faced financial struggles, forcing it to shut down.

Abata Therapeutics also closed in August due to fundraising difficulties. The company focused on developing regulatory T cell (Treg) therapies. Although Abata received initial funding from investors like Third Rock Ventures and ElevateBio, it could not secure enough capital to move forward with research and development.

HC Bioscience shut down in March following weak preclinical results for its therapeutic targeting hemophilia A. The company cited challenges in targeted delivery and other factors as reasons for closing. HC Bioscience developed transfer RNA (tRNA) therapeutics and had backing from investors like Arch Venture Partners and Takeda Ventures.

To better understand why companies like these failed, Cure sought insight from experts. Here are seven of the biggest threats to biotech and healthcare companies this year.

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1. Lack of Strategy

Many startups emerge from strong academic or translational science but lack the operational, regulatory, and capital market strategy required to sustain long development timelines when advancing a compound through multiple phases of clinical testing.

“Many, for example, underestimate the cost and time to reach key value inflection points (e.g., IND filing or Phase 2 proof of concept), particularly as costs of clinical trials have increased, or over-rely on a single asset without backups,” said Amy C. Reichelt, PhD, Neuroscientist and Neuropharmacologist and Senior Consultant at Cade Group, told Cure.

She said mistakes like these are compounded by the contraction of capital markets in biotech in terms of the number of active investors.

“Investors have become more conservative post-2021, particularly with higher interest rates, making it harder for small startup companies to secure early funding rounds,” said Reichelt.

2. Financing Runway Miscalculation

While a startup may have strong science and a strong product, Kiara DeWitt, BSN, RN, Founder and CEO of Injectco, said that if their burn rate exceeds what a seed round can sustain for 24 months, they will run out of time before Phase 2 has a chance.

“Creating the timeline is the real challenge. Payroll doesn’t care if precision medicine can take seven years to launch. Most biotech dreams become expensive PowerPoint presentations if a layered, tiered funding approach is not established from the outset,” she told Cure.

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3. Tightened Risk Tolerance by VCs

Venture risk tolerance has tightened compared with 2020–2021, with many investors prioritizing assets closer to clinical or commercial inflection rather than early discovery or high-risk, novel mechanisms.

“As a result, preclinical or platform companies often struggle to raise capital unless they can demonstrate a credible, accelerated path to clinic and solid proof of concept data,” said Reichelt. “Investors are also pushing for clearer de-risking strategies like biomarker-based patient selection or early partnering potential with larger pharmaceutical companies to share risk.”

However, she noted that there are issues when it comes to “de-risking” strategies. “Investors may favor compounds that can be prescribed broadly without complex contraindications or stratification requirements,” she said.

In Ripka’s LinkedIn post, she stated that the industry has increasingly embraced a bottom-up approach to drug discovery. She used the example: “New technology X facilitates discovery and drugging of new targets for disease!”

“This strategy continues to underdeliver on its promises, leading to a lack of exits for investors, which fuels a cratering risk profile,” she wrote.

4. Building a Team Too Soon

Steve Morris, Founder and CEO of newmedia.com, said that part of the reason risk-adjusted survival odds are worse this year for early-stage biotechs is about more than funder reticence.

“The biotechs that do get funded seem to be prematurely building out senior teams with big pharma pedigrees,” he told Cure.

He has witnessed biotech companies stall after hiring pharma VPs to run things right after launch.

“It makes sense why they do it. They’re trying to win funding, and nothing convinces VCs more than lineups of big pharma execs. But the result is to turn the organization top-heavy with expectations of service-level agreements that can’t be met at pre-Series A stages, to lock doors with lock symbols on spreadsheets, and to burn money on salaries when there isn’t any to burn,” Morris said.

He said his life sciences clients that survive the storm are the ones who hire only the people they absolutely need to hit the next 12- to 18-month milestones. Thoroughly vetted staff and board members make a difference, too.

“Their boards are still able to reach decisions without infighting. Whereas those that still think they need to bring in pharma veterans at seed to run platform validation get a half as good outcome, their seed round only stretches 20 percent further, and the start of their Series A is a bloodbath, because VCs now demand tranche rounds based on milestones and are terrified of high burn rates,” said Morris.

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5. Misalignment in Drug Discovery and ROI Timelines

The average drug development timeline far exceeds the typical VC fund horizon.

“It can take 10 to 15 years from preclinical studies to approval, whereas many funds expect much faster returns,” said Reichelt. “This means that startups that cannot articulate clear value inflection milestones (e.g., IND filing, Phase 2 readouts showing efficacy) risk being passed over—even if their science is compelling. Startups cannot depend on being acquired by larger companies as a route to ROI.”

While misalignment of revenue and discovery pace is not new to 2025, DeWitt said the problem is that the mismatch seems much more severe now due to inflation, headwinds, and geopolitical noise.

“As a result, companies begin looking for shortcuts that provide short-term ROI workarounds that undermine their edge. Worse, they enter into licensing agreements too early to get traction,” she said. “That keeps them afloat on paper. In reality, it waters down the science before it is ready. That ends the long-term game most of the time.”

6. Powerful KOL Interests Impede New Ideas

Entrenched interests can slow the adoption of disruptive innovation. In particular, Reichelt said key opinion leaders (KOLs) often have significant reputational investment in established therapeutic areas or mechanisms of action.

“At the academic level, established and vocal senior academics can influence and bias grant funding towards established mechanisms rather than emerging innovation,” she said. “Companies need to pick the right KOLs to support their interests when forming scientific advisory boards, and should look beyond just highly cited academics to people with drug development experience who understand the particulars of clinical trials.”

7. Missing AI Nativeness

AI nativeness—from logic of discovery to decision-making—makes investors listen and helps startups move faster, said Morris.

“It’s now harder for a life sciences startup to impress investors unless the AI is at least incorporated deep in the decision tree,” he said.

For example, his company recently built a platform for a preclinical client that uses AI to recommend which libraries to screen and which compounds are likely to fail.

“[This] saved 25 percent of iterations and wowed investors when the client raised its last Series A 15 percent ahead of target in a bear market,” said Morris. “The key was that we could say precisely how proprietary datasets gave us a technical advantage, and the AI could pivot the science and the business.”

In a market where risk appetite is dropping, he said this is the new baseline to compete for bets among late seed-stage biotechs.