By Max Klietmann, VP of Research, LSN

As LSN has been tracking the shift in the investor landscape over the past year or so, an interesting trend has emerged among some boutique investment banks in the space. Traditionally, investment banks in the life science arena were more focused on institutional transactions, and buy-side & sell-side activity. However, as family offices have begun to play a more significant role in the space, some tactically-minded I-banks have reoriented their businesses to focus on serving these constituents.

This is not a trend among the bulge bracket banks for several reasons: first, there is too much separation between the investment banking and private wealth business areas. This lack of communication makes it hard to consistently source direct investment opportunities for family office clients with specific interests. Secondly, family offices want industry specialists to serve as navigators in the space – they are not merely looking for an investment advisor. Finally, the family offices tend to prefer the personal touch gained by working with a smaller, more flexible boutique partner – it is simply the nature of this investor group to look for long-term relationship potential.

The boutique banks that are doing this effectively are maintaining a custom-tailored approach – they are taking a family office’s interest in a specific disease area, and enhancing their search with institutional quality deal sourcing, a high level of industry & sector expertise, and high quality due diligence processes. This yields superior results for family offices that typically have a genuine desire to make allocations, but lack the technical insight to navigate the space on their own.

So what does this mean for the space? Beyond investment banks having a new prospective client base in the life sciences space, there are some other very interesting considerations to make: Entrepreneurs targeting capital should consider boutique, industry-specific investment banks as a source of potential investors. Family offices looking to enter the space should evaluate whether one of these entities might be the right partner with which to approach direct investment in life sciences. The sands are shifting, and those that adapt to these trends first will have the upper hand.

By Dennis Ford, CEO, LSN

The single most important issue in the life sciences space today is that traditional sources of capital have slowed, creating a void, and fundraisers are left navigating using outdated maps & trying to play catch up. Anyone who has recently attempted to raise capital knows that this causes a lot of frustration and churn. Times have changed, and adjustments must be made. There is a distinct sentiment that the old funding models were broken to begin with (which I won’t belabor here), and the past investor segments aren’t going to return. The new landscape is substantially different, and new investor breeds are emerging across the space. Enter the Venture Philanthropist.

Venture philanthropists, or VPs, are extremely active investors and want to see results. However, this is not your typical exit-hunting venture firm; VPs mission is to speed up medical progress by eliminating the myriad of obstacles that researchers face, thereby hastening the delivery of breakthrough solutions to patients. Essentially, we’re talking about a mandate for medical progress and improved outcomes (hence philanthropy). VPs are impatient, and their goal is to accelerate the development of treatments and cures for the world’s most challenging diseases. There is a high degree of direct involvement as these investors are hands-on – they are more open, and therefore, flexible deal terms with multi-year allocation timelines can be negotiated. VPs know how to get things done, so expect milestones and carefully scrutinized metrics, along with action plans & organizational input.

VP firms provide funding for scientists and young life sciences companies in order to move along the development of therapies for certain diseases. Unlike traditional philanthropic organizations, venture philanthropists expect the companies and individuals they invest in to achieve certain milestones and focus on accountability. This isn’t just funding basic research; it’s driving products to patients as quickly and efficiently as possible.

These investors are becoming increasingly important, especially due to many scientists’ inability to translate discoveries into compelling market opportunities, and because of impending cuts in the NIH budget, which could cripple future therapy development. Venture philanthropy currently only represents less than 3% of the spending on medical R&D in the US, but this figure is expected to grow as the need for funding from scientists and early stage biotech firms continues.

There doesn’t seem to be a global source on exactly how many of these Venture Philanthropist entities exist, although preliminary research indicates around 150 and growing. Both North America and Europe have burgeoning grassroots groups that are starting to organize and recruit fellow family offices, using the ideology of expediting science for the good of the world.

By Danielle Silva, Director of Research, LSN

There are a number of investor groups that are playing an increasingly significant role in the life sciences space as of late. One of the most compelling and motivated investors to enter the space are patient groups. These are indication-specific sources of capital that want to bring science forward in a distinct disease area. This includes a strong emphasis on carrying drugs across the “Valley of Death” to accelerate progress towards a cure. Patient groups essentially allow those afflicted by a disease to vote with their wallets to bring treatments to market, rather than seeking exit opportunities or financial returns.

At a basic level, patient groups are a collection of individuals who are afflicted by a disease that come together and mobilize to find cures for a certain affliction. In the past, patient groups often times partnered with foundations or venture philanthropists in order to make an investment or donation. One example of this is the Cystic Fibrosis foundation partnering with a number of patient groups and Aurora Biosciences [1]. However, we are now seeing more and more of these groups mobilizing others to make a strategic investment to more directly improve patient outcomes.

Patient groups are taking an innovative approach to investing in the life science space, and are becoming empowered, investing in promising companies & researchers. Patient groups will often times take a strategic approach to attempt to bring many parties together to push research along in a certain area. Generally, patient groups will try to bring together scientists that are researching different areas of the disease – usually, they will also try to find some of the best and most well known scientists in the space in order to gain further legitimacy. This is also helpful because it creates a collaborative environment amongst scientists who are researching the same disease area. Patient groups then establish their clinical network – which is a network of patients that can be utilized for clinical trials for companies that they invest in (essentially utilizing the members of the patient group that are afflicted by the disease). The final step for these patient groups is to bring biotechs / big pharma into the picture, who in turn help the scientists to commercialize their research.

Patient groups are also dynamic because they almost create an ecosystem within their particular disease focus. Generally, patient groups are huge advocates of sharing as much information as possible – and help researchers even outside of their network gain access to research and data more quickly and easily. Patient groups also help patients to educate themselves, and allow them to see the various options that are available to them that may not yet be FDA approved. Thus it is expected patient groups will start to become an increasingly major player in the life sciences space because of their collaborative nature, and gain the ability to bring together different groups to work towards a common goal.

[1] http://www.xconomy.com/national/2012/04/09/investing-in-biotech-isnt-just-for-the-investors-anymore/

By Michael Quigley, Research Analyst, LSN

LSN draws from the vast and talented pool of university & collegiate undergrads in Boston to recruit research analysts for its team. Michael Quigley is a Senior at Bentley University studying Economics and Finance.

It is no secret that the number of investments being made in the life sciences private sector is increasing at an extreme rate. At Life Science Nation, we’ve tracked over 4000 individual financing rounds in the space over the past few years. As is visible in the chart below, things are moving at quite a clip:

This may seem like great news for entrepreneurs looking to start up a life science company. With the number of investments increasing so rapidly, access to startup capital appears easy to come by. However, as anyone who has tried can tell you, this is absolutely not the case: Despite this increase in investment rounds, one trend that our data makes strikingly obvious is that the growth rate of seed and startup financing rounds is growing at a much slower pace.

This lack of growth is something that is, in part, a result of young life science companies inability to find the right fit in terms of funding partners. This problem is becoming more evident as competition for capital is increasing as traditional capital sources evaporate. Another factor contributing to this trend is that some investment firms, in particular venture capital, are looking more towards investments in the space with a shorter period to exit. They don’t want to hold a company for longer than they need to make a return on investment since the venture model no longer works well for early stage life sciences investment. The result is this “Valley of Death” we so often refer to, when discussing early stage fundraising.

When taking both of these factors into account, there is a portion of this industry that is being both undersold (due to lack of fundraising capabilities) and under-examined (due to the desire for faster ROI). As time progresses if this gap goes unfilled, there will be a pool of strategic players (Big Pharma) with painfully dry pipelines, and a shortage of prospects developed enough to in-license or buy up. Consider this a call to action: Life science entrepreneurs – throw out your old maps and start looking at new strategies and opportunities for finding sources of capital. Investors – evaluate emerging opportunities and take advantage of the upcoming demand explosion for developed assets. Change is upon us, and those players who will come out on top are those that adapt first.

By Max Klietmann, VP of Research, LSN

Incubators have become an increasingly integral part of the life sciences landscape. They play a key role in the advancement of nascent technologies from an academic research stage to commercial potential. However, in my discussions with many emerging life science entrepreneurs, I’ve learned that there are a number of myths and misconceptions about what value incubators really provide. However, statistics consistently show that the value of adoption by a good incubator considerably decreases risk and time to market. This article seeks to explain exactly what incubators are, how they can help move your company forward, and what to look for when evaluating an incubator to partner with.

Incubators in the context of life sciences can be loosely defined as a shared laboratory space to facilitate the growth of early stage companies and technologies. They are often run by universities, state or regional economic development organizations, research institutions, large industry players, or some combination thereof. The most basic mission of these organizations is to increase the success rate of early-stage companies for a variety of reasons. These typically include identifying future customers, creating valuable jobs within a certain region, or to find early-stage technologies that could be future investment or partnering opportunities.

A good incubator committed to its constituents offers a number of powerful advantages – First and foremost, there is the advantage of sharing space and equipment, which means massive cost savings. This is a huge advantage in the current investment environment surrounding life sciences, as capital efficiency is becoming a primary focus of investment evaluation in a highly capital-intensive space. Second, a good incubator offers resources and fosters an ecosystem that can help emerging companies to quickly fill gaps, learn best practices, and develop a more informed strategy to reach the market. These benefits can take the form of pro bono legal or financial services provided by firms seeking out future clients, consultative services provided by the incubator itself, or simply being surrounded by other entrepreneurs. Finally, it puts your company in the context of a network that helps to build out a highly compelling team. Most life sciences entrepreneurs previously existed either in the context of academia or within a large biopharma. They may be brilliant scientists developing cutting-edge technologies, but they lack the business sense to fully comprehend that their asset is the basis of a business, not just a research publication. Incubators provide a network that can help entrepreneurs find the right people to fill this gap.

All of these sound nice, but will they actually increase your company’s probability of success? In short, yes – According to the National Business Incubation Association (NBIA), partnering with a hands-on incubator (not just rental lab space), doubles the likelihood that a company will still be operating five years later. This is because incubators exist to move companies forward and get them ready for their next round of funding. Considering that there has been roughly a 50% funding drop for early stage companies over the last two years, incubators clearly provide a huge advantage in this regard.

So how do you pick the right one? Fit is the most critical piece of the puzzle – It isn’t necessarily the most prestigious incubator that you should be focusing on. Look for those that provide services relevant to your firm, and ideally are specialized in helping companies similar to yours. Shop around – ask how long a typical member remains in incubation before moving to the next level, and make sure the organization is personally committed to your company’s success. Making this evaluation should be a carefully-planned and well thought-out decision. A solid relationship with a strong, hands-on incubator is one of the easiest ways to decrease risk surrounding your company. Heck, you may even learn a thing or two!

By Danielle Silva, Director of Research, LSN

In the life sciences space, most scientific breakthroughs fail to translate into commercial product. There are many forces behind this trend, including regulatory issues and many emerging scientist-executives’ lack of business acumen. The largest issue, however, is that many emerging biotechs are unable to obtain the necessary funding to move an early stage research project down the pipeline towards market. This gap, which continues to widen, has become known in the industry as “The Valley of Death.”

LSN maintains a focus on the Valley of Death, because it is chiefly an issue stemming from an inability to make the right connections with investors, rather than a problem with the fundamental science behind an early stage asset. As we’ve discussed previously, in recent years, LSN has seen traditional sources of capital for scientists and young stage life sciences firms, such as venture capital funds, all but dry up. That means there is even more competition to get a meeting with these investors, and because these investors are becoming more risk averse often times the firm with a less disruptive, but later stage product will be the winner, not the scientist with the novel discovery.

So what can the life sciences industry as a whole do to prevent the valley of death from getting wider? Quite simply, there needs to be a forum for early stage scientists to engage with the new sources of capital in the space. In today’s environment, it’s really all about targeting the family offices seeking to contribute money to accelerate research for a specific indication. All of the pieces are in place for a completely new paradigm of philanthropically-driven private capital pushing the next generation of drugs to market. The key to this will be in creating an environment for both parties to engage face to face collaboration towards a common goal.

By Dennis Ford, CEO, LSN

LSN regularly works together with emerging life science firms looking to raise capital in order to move an asset forward. Though there are some fundamental rules of the road when navigating the ever-changing investor landscape, much of this process must be tailored to the particular company. Often, when asked how a company should compose a target list of investors to go after, we explain the principles of inside-the-box and outside-the-box approaches to investor prospecting. This article explains the basic idea behind both, and how your life science company may benefit from each or a combination of the two.

The inside-the-box approach is fairly simple and intuitive – the idea is to take some time to conduct a survey of the past investment history of a pared-down list life science investors that have already committed capital (voted with cash) to look-alike companies with similar products to yours.  What I mean by this is companies with products that would be considered in the same general orbit (e.g. small molecules in phase II targeting cancer). If you think about it, these investors have already educated themselves, created a mandate to invest in your specific arena, and made allocations. These investors already get what you do and they understand the critical points to examine during due diligence to justify an investment.  There are many ways to gather this investor data; LSN has this data readily available, or you can conduct the research on your own by looking through investor portfolios. Once this list is created, it is a very powerful tool. First off, you know everyone you reach out to is already a fit to some degree. They get you, your company and your products! It is more than likely that if you are diligent and you have tenacious follow-up, you will more than likely be able to close the investor down on an introductory call, and hopefully, secure an audience with the investor. And as we’ve said many times before, investor fit is really the key to allocations of capital.

The outside-the-box strategy addresses the one shortcoming of the inside-the-box strategy. That shortcoming is the fact that historical data is exactly that – historical! The investor arena within life sciences is constantly shifting, and there are constantly new investors looking to enter the space, and many previous investors are either tapped out of capital or have moved away from the space. This is where it becomes advantageous to find what we in the financing realm call “opportunistic investors.” Typically, an opportunistic investor’s modus operandi is essentially “cafeteria investing.” That is to say, if something interesting comes onto the radar screen, the opportunity passes muster and we like it…then we will invest. On the surface this may sound like a cavalier investment strategy; others in the know might call it adroit. Adroit, because it has the capability turn on a dime without being encumbered by a restrictive mandate and has the ability to react to something that is hot or interesting. Opportunistic investors can be in front of the curve, and if they are in the right place at the right time, they are often are the first movers in disruptive areas of innovation. There are plenty of opportunistic investors because they are seeing the wealth of investment opportunity in the vacuum that now exists through the lack of capital in the early stage VC segment. These entities often include family offices, angel groups, and in many cases, early-stage corporate venture funds.

By employing both of these strategies effectively, an emerging biotech can quickly and easily navigate the global investor space tactically, leading to faster dialogue generation and a quicker route to allocations.