Corporate Venture & Foundations Investing Early

18 Dec

By Lucy Parkinson, Research Analyst, LSN

When the LSN research team gathers mandates from investors, we’re taking the pulse of the future; we ask about what the investor is seeking going forward, what areas of their portfolio they want to build up, and which new breakthrough technologies they want to be a part of.  This has allowed LSN to identify a few trends that 2014 may hold for life science investment.  Today, I took a deep dive into what our mandate data says about who is seeking to invest at which stage in a product’s development. Here’s what I discovered:

Venture capital is going later.  Traditionally, venture capital firms were seen as the go-to for a new life science company in need of capital to fuel their earliest trials.  But of the active venture capital firms LSN has spoken to, 15% say they refuse to consider investing in preclinical projects at all. The bulk of VCs (about 50%) now declare that they’re agnostic about developmental phase, and will invest at any point through to Phase III.  About 25% consider investments in therapeutic companies that have a product on the market and are generating revenues – a realm of investment that was traditionally reserved for private equity funds.  Among medtech investors, very early-stage companies may have an even tougher time with VCs; a third of VCs that invest in medtech don’t consider opportunities in companies that have no in-human data.

So which new investor categories are most aggressively targeting early-stage therapeutics?  Here are a few of the trends that could forecast the coming year’s activity: Foundations are backing commercial work.  Of the foundations we’ve spoken to who are interested in making research grants to for-profit companies in 2014 as well as to academics and non-profit institutions, almost 50% will only consider funding preclinical and Phase I work.  These groups often tell us that this strategy is designed to make their research dollars go further, and to de-risk projects that they see as important.  If a foundation thinks your research work is important, they may be able to offer you a $100,000 grant to conduct some risky preclinical research; if that trial produces a solid result, another investor with deeper pockets is likely to step in, make an investment and advance the product to market – and getting new treatments to patients is what a foundation cares most about.

Another notable player at this stage is corporate venture capital; unlike VCs, almost all corporate VCs are looking to invest in preclinical work in 2014. Also, they have deep pockets and a declared need to uncover innovative science, so these may be some of the leading players when it comes to capital allocations in the coming year.

So what factor do corporate VCs and research foundations have in common that enables them to put money into breakthrough preclinical work?  Judging from the conversations we’ve had with them, the common factor is scientific expertise.  These groups are notably more specific than VCs; many foundations are pursuing a cure for a specific disease, and corporate VCs usually have specific strategic interests dictated by their parent companies.  About two thirds of venture capital firms are opportunistic generalists when it comes to choosing which indications to pursue; under half of corporate VCs are opportunistic in this regard.  As foundations and corporate VCs have specific focus areas, they’ll also have deep understanding of these areas and that means they’ll have more faith in their ability to pick outstanding preclinical projects to support.  If your company is at an early stage, reaching out to these fellow experts in your field could be much more beneficial to your search for funding than approaching a venture capital firm.

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