New Investors Join the Fray – CROs Leveraging Service for Equity

6 Nov

By Michael Quigley, Research Manager, LSN

mike-2Life Science Nation tracks the full spectrum of life science investors, and is always at the forefront of emerging investor trends. One increasingly popular investor model in the space revolves around service providers engaging in equity deals with clients. LSN touched upon this emerging trend back in March, describing how CROs have begun to take positions in cash-strapped companies in exchange for providing services. Now, many of these CROs are becoming more focused on getting directly involved in a sophisticated manner. New players are bringing both services and capital to the table with several service providers spinning out their own dedicated corporate venture capital division. That’s right – several CROs are, for the first time, opening corporate venture arms.

Having spoken with several of these investors personally, they are savvy, strategic, and capable: They tend to be extremely knowledgeable of the technologies and science they are investing in. Typically, they have established powerful networks with strategic partners in place. Most interestingly, since the service provider owns portions of the companies that they are working with, they are further incentivized to perform their services as efficiently as possible and with the highest probability of success. This increased alignment of interest makes these partnerships not only attractive to fundraising companies, but also to co-investors looking to allocate capital. In an industry that is inherently high-risk, a partner who is an expert in the scientific and regulatory hurdles your firm is going to face is a massive advantage.

As CROs focus more on cash-strapped early stage companies and look to make greater returns, this model could very well become more prevalent. After all, who better to vet technology than the firms that have been running trials for years?  The current shift in the financing environment has left an opportunity for firms with expertise in the development process and significant capital to make massive returns. The fallout is yet to be seen, but as a fundraising company, is it important to stay focused on this emerging trend.

 

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