Funding Gaps Continue to Spell Opportunity for Those with Capital

21 Aug

By Michael Quigley, Director of Research, LSN

mike-2Just over a year ago I published an article discussing how the growth rate of seed and startup stage life science financing rounds was substantially smaller than all other financing rounds. More recent data pulled from the LSN’s Company Platform further validates that claim. Exhibit 1 compares the number of seed and startup stage financing rounds to the total number of financings in the US life science space over the past 9 years.

Exhibit 1

Exhibit 1


Exhibit 1 demonstrates that, as said by Alexis Borisy (a partner with life science VC firm Third Rock Ventures), “In the overall numbers, early stage life science investment isn’t growing compared to later stage investments.” The disparity in growth between these two variables presents a serious threat to large pharma companies, and provides savvy investors with an opportunity for strong returns. If this trend continues over time, the demand for later stage and more developed technologies will grow to be significantly greater than the supply. Large pharma companies are constantly looking to in-license and acquire technologies for their pipelines in order to protect future revenue streams as patents expire and better treatments become available, threatening their market share. However if there are not enough of these early stage companies getting funded today, then down the road pipelines will go dry.

By investing in early stage research today, investors could position themselves to have great exit potential to large pharma companies who, if this gap goes unfilled, will be suffering from painfully dry pipelines. Interestingly enough, large pharma companies seem to be well aware of this threat and have become a major funding source for early stage companies through the establishment of corporate venture capital arms. Many of these companies are also now investing in entirely separate venture capital and private equity funds with hopes that they will yield financial returns as well as funding the development of strategically relevant technologies. Other types of investors are also gaining interest in early stage life science companies as well, though their motivations vary across the spectrum from philanthropic to financial.

As a life science entrepreneur, it is important to understand what the long-term strategic opportunities for your assets will look like. While the recent IPO window has shown significant exit potential via public market interest in the life science space, there is significant uncertainty surrounding how long it will remain a viable option. However, the seemingly insufficient investment in early stage rounds for life science companies today could make the future exit possibilities for your asset very attractive to potential investors.

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