What should researchers be looking for when seeking funding?
By Giovanni Rizzo, PhD MBA Chief of Innovation Division, Z-Cube S.r.l.
The global life science sector is buoyant with commentators reporting that it is set to grow to the value of $447.5 billion by 2020 [1]. The outlook for early-stage life science start-ups, however, is slightly less rosy as they are often largely cut-out of this bounty with large-scale M&A activity accounting for most investment. The European life science start-up panorama is in fact blighted by a critical inconsistency: businesses typically tend to get funding when they have reached relative maturity, and yet they are unable to reach maturity without significant funding. To solve this many businesses are going public too early by commentators’ standards at the risk of undervaluing their business.
Traditionally, large pharma has been the source of funds for life-science businesses, but alternative funding initiatives are now gaining ground especially for early stage start-ups. So for example Liquidia Technologies received a $10 million equity investment from the Bill & Melinda Gates Foundation in support of their development and commercialisation of safe and more effective vaccines, while hedge funds in Boston and San Francisco recently backed Intarcia Therapeutics, which is developing a potential treatment for type-2 diabetes [2].
Medical Device start-ups were seen to be securing an even smaller share of venture capital in 2016, however, here too the scenario is not all negative as early stage acquisitions for companies with just a CE mark or no regulatory approval is increasing. This result indicates that there may be an important shift in confidence among funders as medical device acquisitions typically happen at a much later stage than their biopharma counterparts. This shift suggests that strategic acquirers are becoming more interested in and confident of early stage device innovation [3].
In the UK alone University spin-offs accounting for 34% of new life science start-ups each year [4]. This finding highlights that start-ups in life sciences are very often composed and set up by visionary academics who, unfortunately, would probably not hesitate to describe themselves as inexperienced with the practicalities of setting up a business such as composing a robust business plan, sourcing a reliable supply chain, managing partners, tax and staffing issues. Yet all these key business activities need to be fleshed out and accounted for if early stage companies wish to impress investors and secure funding. A recent report by MindMetre Research confirms that a lack of key skills is a turn-off [5].
This environment, which sees early-stage, often academic, start-ups struggling to get funding, translates into a Catch-22 situation, where the only people knowledgeable enough to innovate are denied access to funding because they lack business experience and only firms that have already received funding are able to access more. Such an environment is damaging to the whole life science sector as it stifles innovation, discourages entrepreneurial initiative and ultimately suppresses important developments that could improve patient health.
Life science early-stage start-ups should, therefore, consider wisely what type of support is offered by different types of investors, being careful not to underestimate the importance of access to mentors and advisors that can show them the ropes when it comes to the practicalities of setting up a business. So, while the initial draw to a particular accelerator programme might be the availability of funding, not all programmes are set up to provide structured growth opportunities and counsel.
You should also consider the overall regulatory and entrepreneurial environment of the country your accelerator programme is based in specifically: are start-ups being offered incentives such as tax incentives or credits for R&D? How accessible are bank loans? What is the regulation on the transferral of fiscal losses? Is incorporation procedure seamless and easy? Italy for example has recently passed a pioneering ‘Italian Start-up Act’ placing it second in the 2016 European ‘Start-up Nation Scoreboard’ for adoption rate.
Data shows that 90% of all start-ups fail within the first year [6] and raising money also relies on a person’s ability to relate their vision and network, but securing the right exposure- being in front of the right people at the right time- is no easy task with many businesses crashing at this stage. Choosing an accelerator that operates in the right sector can help connect with advisors and peers that understand your business, its processes and can help map out a future roadmap that avoids many of the obstacles and pitfalls that are common to your type of business. Similarly, the right type of accelerator will expose your business to investors that are a good fit to your business. Joining an accelerator programme that provides counselling and practical training as well as introducing you to truly relevant and experienced mentors can also be critical to building up the business to a stage where it becomes even more valuable and when finding funding is less fraught with obstacles.
References
1. EP Vantage data
2. http://www.scalefinance.com/life-science-startups-look-to-new-sources-of-funding/
3. Fierce Biotech, U.S. med tech venture investment wanes–even as venture-backed M&A holds strong, January 2016
4. Life Science Network, Life Science Startups in the UK, 27th December 2016
5. MindMetre Research, Mind the (skills) Gap, June 2015
6. Forbes, 90% Of Startups Fail: Here’s What You Need To Know About The 10%