Short-Term Investors in Long-Term Development: Matching an Investor’s Time Horizon

13 Oct

By Lucy Parkinson, Director of Research, LSN

One of the greatest difficulties in raising early stage financing in the life sciences is that many investors balk at the development timelines involved in biotech and medtech opportunities.  VC investors in particular are driven by short term fund lifecycles; particularly if you are receiving an investment late into a fund’s investment period (which may extend 2-3 years after the fund is closed), the VC will be often looking for the possibility of an exit in under 3 years. Angel investors and evergreen funds may also operate under similar horizons, as they rely on successful exits to generate capital to make further investments. Beyond structural constraints, from an investor’s perspective, time is money; their rate of return is directly governed by how long their capital is tied up in your company.

Everyone knows that it takes a long time to develop and commercialize a new drug, medical device or diagnostic. It’s estimated that it takes 11-14 years to move a drug from preclinical testing to the marketplace. Yet many investors step into this marketplace with a 2- or 3-year investment horizon. Early stage companies must therefore learn how to get in step with investors when it comes to timelines.

It’s important to understand that early stage investors most often don’t intend to remain invested in a company all the way to commercialization; rather, they want to deploy capital to enable a company to reach an important milestone that can be used to generate an exit opportunity.  If your company has a long development path ahead, it’s therefore vital to identify these milestones and provide investors with a map that will demonstrate your near term opportunities for value inflection.  A company can also look for potential ways to accelerate their development path.  Recently one LSN client created a new clinical development plan that would provide significant results much sooner than their original plan; this has improved their investor traction tremendously.  In the biotech world, many companies look for potential applications of their products in orphan diseases so that they can pursue an accelerated plan.

Alternatively, a company can focus on investors who are looking for longer term opportunities. This may include family offices or strategic investors; however, it’s important to reach out to every possible category of investors, and having a timeline that can provide value to both short-term and long-term investors is important for increasing your potential to receive investment.

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