Five Reasons Why Family Offices Invest in Life Science Companies

4 Sep

By Lucy Parkinson, Senior Research Manager, LSN

lucy 10*10At LSN, we meet many life science entrepreneurs seeking capital, and they are generally aware of some of the options they have for funding. In fact, they may already be approaching venture capital firms, the licensing arms of pharmaceutical companies, or nonprofits that give grants in their field. Yet many entrepreneurs are surprised to learn that family offices are investing in the early stage life science space—and in significant numbers.

Why have so many family offices moved into this space? There are many motivations, but in talking to family offices, we’ve found that the following five reasons are the most common:

  • Sophisticated Investment Strategies. As institutional investors with significant assets under management, family offices use a variety of strategies to conserve and grow their wealth. The risks and rewards of early stage life science investments can contribute to a balanced, diversified portfolio of family assets. In some cases, these investors were formerly limited partners in venture capital funds but returned to managing their own investments because they received poor returns in spite of paying high management fees to VCs. These family offices typically have a similar buy low, sell high approach to private equity funds.
  • Impact Investing. Traditionally, family offices have a philanthropic mandate in addition to an investment mandate; wealthy families often care about having a positive social impact. But philanthropy has itself been evolving. In recent years, the concept of impact investing has become more popular; family offices can put their long-term investment capital towards goals they care about, such as improving public health or advancing science, and achieve something meaningful in addition to ROI.
  • A Personal Connection. This is a more close-to-home variant on the reason above. Some family investment funds are focused on investing in a specific indication area that has affected the family. Perhaps a family member has a serious disease, and the family hopes to get a new drug to market as fast as possible. Or, perhaps the family founder died of a certain disease and the rest of the family has decided to devote part of their wealth towards treating that disease. The family may also have come into contact with top researchers because of their personal interest and may have access to scientific advisors who can help them target their investments wisely.
  • Expertise and Resources. The founders of family offices made their wealth in many industries. In some cases, that wealth was earned from entrepreneurial success in the healthcare sector. Warren Buffett once said, “Never invest in a business you cannot understand.” These families agree. They have a great deal of expertise and many personal connections in the healthcare field and are confident that they can find the best opportunities. In some cases, these families still have ownership in a healthcare or life science business and are therefore also interested in strategic synergies with their existing holdings.
  • Truly Patient Capital. Investors often tell us how long they intend to remain invested in a company after making an initial commitment: 24 months is common; a forward-thinking venture fund may plan to stay invested for three to five years. Recently, a family office investor told me that he had been backing a life science company in his portfolio since 2003. Because a family office’s investment horizons can run into the decades, family offices have to be aware of long-term trends that are going to affect their wealth, including demographic and social changes.  It makes sense for them to place some long-term strategic bets on trends favorable to the healthcare industry, such as aging populations and rising rates of chronic disease.

For all these reasons and more, life science entrepreneurs may find that their interests align with family offices. Although these investors are typically more under the radar than others, building a relationship with them isn’t a hugely dissimilar process. If you have reason to believe you’re a good fit for the mandate of a family office, the process starts with you sending your pitch and following up with a phone call.

 

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