Understanding Technology Risk & Investor Mindset

4 Dec

By Lucy Parkinson, Research Analyst, LSN

LSN recently released an article detailing the competitive landscape for therapeutic indications, and how your asset fits in. We all know that not all subsectors are equal from an investor standpoint; if you’ve been out there looking for investors, you’ve probably discovered whether your particular niche is currently ‘hot’ or ‘cold’. You’ve also probably noticed that investor appetite shifts, and that cold sectors can quickly turn red hot, and vice-versa.

So what drives these trends in life science investment, and what does it mean for your company?
Given the rapid pace of progress in life sciences, many investors find it hard to keep on top of every new innovation, particularly if their firm doesn’t specialize in life sciences. Though things change, opinions are often influenced by past experience. “We’re only human,” one investor told me last week. “We lost money on our diabetes investments, so we’d think twice about investing in that field again.” Many factors influence an investor’s risk assessments. One is the size of the potential market; it’s ironic that some investors have come to see larger markets such as diabetes and heart disease as unacceptably risky. A large market means established competition, expensive clinical trials and high overhead costs required to attain market share.

Even if an investor feels like they can rely on the science behind your product, they may have a prior opinion of your technology.  Some subsectors came to be seen as damaged goods due to publicized failures, and rather than focusing on the mistakes that were made and learning from those mistakes, investors may see an entire technology area as being a poor investment. Such failures can set a field back for years, as the gene therapy field experienced after a patient death in a clinical trial at the University of Pennsylvania in 1999. Fortunately, gene therapy has slowly recovered from this setback and is starting to see investment interest again.

So how can you optimize your search for financing if you’re working on something that’s seen as a tough sell?  The most important thing to keep in mind is that it’s not just about your technology; investors are also looking at you, and perhaps 50% of the factors that influence their investment decision will be related to you and your management team, not simply your products.  If you can show them that you’re a great business leader with enough experience in your field to learn from past mistakes made by others, and that you’ve got a solid team who have the skills to succeed where others failed, they may be willing to take a risk on you.

Next, look at investors who have backed successes in your field; finding an investor who’s a fit for your company and has invested in your area in the past is one of the most important aspects of fundraising. Seeking out the winners can help you hit the right target investors.

Finally, target funding sources who have incentives other than risks and returns. Foundations, patient groups and government funds might regard the promise of a potential breakthrough in your field as being worth placing a stake on, even without any guarantee of returns, accelerating the funding cycle, and shortening your time to market.

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