Funding Gaps Spell Opportunity for those with Capital

8 Apr

By Michael Quigley, Research Analyst, LSN

mike-2LSN draws from the vast and talented pool of university & collegiate undergrads in Boston to recruit research analysts for its team. Michael Quigley is a Senior at Bentley University studying Economics and Finance.

It is no secret that the number of investments being made in the life sciences private sector is increasing at an extreme rate. At Life Science Nation, we’ve tracked over 4000 individual financing rounds in the space over the past few years. As is visible in the chart below, things are moving at quite a clip:

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This may seem like great news for entrepreneurs looking to start up a life science company. With the number of investments increasing so rapidly, access to startup capital appears easy to come by. However, as anyone who has tried can tell you, this is absolutely not the case: Despite this increase in investment rounds, one trend that our data makes strikingly obvious is that the growth rate of seed and startup financing rounds is growing at a much slower pace.

This lack of growth is something that is, in part, a result of young life science companies inability to find the right fit in terms of funding partners. This problem is becoming more evident as competition for capital is increasing as traditional capital sources evaporate. Another factor contributing to this trend is that some investment firms, in particular venture capital, are looking more towards investments in the space with a shorter period to exit. They don’t want to hold a company for longer than they need to make a return on investment since the venture model no longer works well for early stage life sciences investment. The result is this “Valley of Death we so often refer to, when discussing early stage fundraising.

When taking both of these factors into account, there is a portion of this industry that is being both undersold (due to lack of fundraising capabilities) and under-examined (due to the desire for faster ROI). As time progresses if this gap goes unfilled, there will be a pool of strategic players (Big Pharma) with painfully dry pipelines, and a shortage of prospects developed enough to in-license or buy up. Consider this a call to action: Life science entrepreneurs – throw out your old maps and start looking at new strategies and opportunities for finding sources of capital. Investors – evaluate emerging opportunities and take advantage of the upcoming demand explosion for developed assets. Change is upon us, and those players who will come out on top are those that adapt first.

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