LSN Investor Database Feature: What are investors seeking in 2014?

By Lucy Parkinson, Research Manager, LSN

LSN tracks about 5,000 life science investors around the globe. In the last issue, I took a dive into the LSN Investor Database, and looked at who was planning to back early-stage innovation in 2014. In this article, we’ll look at where in the life science sector these investors plan to put their funds. This data is based on the last 250 investor mandates LSN’s research team has collected from 1-on-1 interviews with investors. Some major trends we’ve uncovered include:

• VC comprises under 25% of investors active in the life sciences, based on LSN’s most recent investor mandates.
• Most investors have multiple sector interests.
• Devices are hot for many investors, but especially very early stage investors such as angels.
• Corporate venture and private equity represent some of the most opportunistic investor groups.

A fascinating piece of information that is presented by the mandate data is that VC comprises less than 25% of the active investors in the space based on forward-looking mandates. LSN has identified about 1,500 VCs in life sciences broadly, and about 500 that claim to be active. However, based on the last 250 mandates collected by LSN research, they are comprising a shrinking percentage of total capital available to companies. This shows that the number of non-traditional investor categories, such as family offices that are going direct, is increasing on a relative basis.

Many of the active life science investors we’ve spoken to have multiple sector interests; only about 30% restrict their life science mandate to only one sector (such as therapeutics, diagnostics, or medical devices).  Foundations are a major exception; almost half of the foundations we’ve spoken to are solely interested in supporting therapeutic and diagnostic companies.  Pharma firms and large biotech search and evaluation groups tend to be focused in this area; however corporate VC funds are more opportunistic, and many of these funds are willing to look at other sectors where they see the potential to complement their parent company’s portfolios.

What about the device space?  LSN meets many emerging device companies that claim there is a dearth of capital available to them. Perhaps surprisingly, about a third of angel networks in the life science space are focused only on medical devices.  While there are many angel groups out there who back therapeutic companies, the shorter exit-horizons associated with devices, makes them compelling opportunities for very early stage investors.

Another possible reason is that the former entrepreneurs who join angel networks usually invest in areas where they can apply their expertise; those who made their fortunes in the technology industry may have more confidence in their ability to assess a device technology than a molecular technology. Family offices may similarly be guided by the family’s expertise and existing business network, and these investors are notably more focused than most; about a quarter of those we’ve spoken to are only interested in medical devices, whilst another quarter are interested only in drug development.

At the other end of the scale, who are the life science sector’s most generalist investors?  Private equity funds are largely interested in making established businesses more profitable across a variety of industries, and if they know the life science sector they tend to seek their opportunities widely.  Notably, very few PEs invest only in therapeutic companies, although several have a focus on medical devices; these tend to be funds that have a general interest in high-tech manufacturing.

So what’s going to be the hot sector in 2014 – medical devices or drug development?  It’s almost neck and neck, but overall we’ve spoken to slightly more medical device investors than therapeutic investors.  Stay tuned as we revisit the data as the year progresses!