Navigating the Life Sciences Funding Landscape
At each stage of growth for a life sciences firm, the funding needs change. Learn about the different types of capital investors and which ones might work best for your firm as a funding source.
Growing a life sciences company is time- and resource-intensive, and identifying the optimal source of capital to help fund your efforts can be challenging—but it can also lead to greater success in the long term. Life sciences startups have many avenues available to raise capital at various stages, each with their own benefits and considerations. Entrepreneurs must understand which asset class can offer the best partnership to advance and support their success.
Here's what you should know about four main types of investors, including incubators (accelerators), family offices, venture capital and corporate/strategic investors:
Incubators (sometimes called accelerators) can be great resources at the earliest stages of a life sciences company’s development. There are hundreds of life sciences incubators in the US, and each offers a distinct approach to capital formation and resource management. Some of these incubators are sponsored by private or public academic institutions, some are based in specific communities or regional areas, and some are tied to large corporate partners. The common denominator, however, is that these organizations can offer research and lab space for relatively low or even no cost—and some provide seed funding to operate. While the level of funding varies and may be nominal, it is often sufficient for those seeking proof of concept or early-stage pre-clinical efforts.
The primary factors when considering an incubator or accelerator are both strategic and practical. Some have longer-term occupancy options, while some can be very short in tenure. Some specialize in certain sub-vertical efforts, such as medtech or specific therapeutic areas, while others are all-encompassing. Entrepreneurs should seek out facilities that cater to their needs for an identifiable time frame with quantifiable costs and resource needs. Consider added benefits as well, such as access to development and corporate equity partners, which could ultimately provide longer-term funding.
Life sciences companies might not think of family offices as viable funding sources, but they are taking an increasingly active role in the life sciences landscape, particularly at very early stages of development. In 2008, there were an estimated 1,000 single-family offices worldwide; fewer than 10 years later, that number has ballooned to more than 10,000, according to data from Institutional Real Estate Inc. These family offices have an estimated $4 trillion in assets under management, and while the percentage of their capital devoted to alternative assets—such as directly investing in life sciences opportunities—is small, it is increasing and still presents a sizable capital base that could help a life sciences firm.
Family offices can offer several benefits to companies seeking capital. One of the most important advantages is they are not constrained by many of the structural and economic concerns inherent in institutional venture capital or private equity funds, such as the need for board representation or control. Also, there are fewer investment timing needs, meaning the family offices are not pressured by limited partner expectations of return and time to liquidity. Finally, since family offices can be more flexible in deploying their capital, there are fewer expectations around the timing and need of future equity participation. These factors allow family offices to be more nimble in their investment management, ultimately allowing them to entertain investments at an early stage of development or with different risk profiles than other institution equity sources, such as venture capital and private equity firms.
While there are benefits, family office involvement also brings additional considerations and potential risks. By nature, family offices tend to invest in what they understand. Life sciences opportunities are often specific in nature and require a technical understanding of the science involved. Therefore, finding a family office with a knowledge of the life sciences industry can be a plus. Family offices also tend to invest in areas geographically close to their office. This is particularly true in areas like the Midwest and Southeast that are dispersed geographically. Depending on the office, this type of investor also can be more granular: Amounts tend to be smaller than institutional venture capital investment and therefore more applicable in early capital rounds.
A venture capitalist (VC) provides critical resources that aid in the ultimate growth and success of many life sciences endeavors. Life sciences companies often need significant amounts of capital to reach scientific and operational milestones, particularly in the clinical growth stages. Given the amount of funds being invested in venture capital, entrepreneurs increasingly need to look to VC partners for the growth of their business.
Healthcare VCs invested a record amount of capital in 2017 for both biopharma and medtech. This means that capital is increasingly available and flowing into the life sciences space at unprecedented rates for companies at all stages of development.
Venture firms bring a wealth of resources to the table outside of just capital needs. Life sciences VCs have likely experienced the challenges and successes of multiple operations in the pre-clinical, clinical and commercial stages. For this reason, they can help founders and managers navigate pitfalls and capitalize on scientific and market opportunities. Many VCs also have cultivated valuable networks of mentors and partners through other successful endeavors, and these can be utilized and maximized by entrepreneurs. As a result, it is important for entrepreneurs to evaluate what qualitative value the firms can bring.
Finally, while there are many advantages to VC funding, potential challenges also exist. While many VCs may be happy to join a company's board of directors as an observer, others prefer a more active role or even controlling interest. Sometimes they can be perceived as governing the company and will be very active in strategic decisions and direction. This is often reflected in the deal terms, which can require strict governance and board seats as well as other rights. Importantly, as the VC firms tend to be largely motivated by the return on investment from selling a company or going public, VCs typically focus their efforts on a path to exit.
Corporate Venture Capital (CVC)
The world of Big Pharma, biotech and medical devices has become much more active with large corporations setting up dedicated initiatives to directly invest in smaller private companies. The number, size and pace of investment has accelerated in recent years and looks to only increase. In 2017, CVC investors closed 1,370 deals with life sciences companies valued at $37.2 billion, according to Pitchbook’s 2018 NVCA Venture Monitor. Life sciences investments are a disproportionately large part of overall CVC investment, representing nearly 16 percent of all deals closed in 2017, according to the same report.
CVCs tend to invest directly in companies as a path to technological development, which can often be more cost-effective than internal research and development. The motivations behind any individual investment can largely depend on the strategic fit for the corporate partner. Considerations include whether the technology is appropriate for its pipeline management and expectations, and whether it is in an asset category or therapeutic area the company would like to expand into. Eventual merger and acquisition from the corporate partner is often a possibility and frequently a focus when approaching a corporate investor. Historically, M&A from CVC investors has exceeded those in other industry spaces. In 2017, 9.4 percent of life sciences M&A came from a corporate investor versus only 6 percent in other industries, according to the 2018 NVCA Venture Monitor report. Increasingly, however, some CVC stakeholders are investing for purposes outside ultimate M&A opportunity, such as market and competitive diligence or pure return on investment concerns. Regardless, the increased activity and availability of corporate venture capital is a valuable trend in life sciences investing and one that remains a viable path for many emerging companies.
Selecting the Right Funding Source
When looking for the best funding source to support your life sciences organization, consider your firm’s unique needs, where it is in its growth cycle, and where you expect it to go in the future. Incubators, family offices, VCs and CVCs each present different advantages. One size does not fit all when it comes to selecting a capital investor, and the better an entrepreneur can communicate and qualify their needs and plans for growth, the more likely they are to find an optimal partner that can add value on the great journey they are taking.