By Dennis Ford, Founder & CEO, LSN

According to many pundits at conferences and across the internet, venture capital firms in the life science space have been shifting to later-stage investments. Despite significant activity among the other categories of life science investors, industry chatter still seems to be caught up with venture activity. However, when you take into consideration the full spectrum of investors that LSN tracks, the majority of investor interest is focused on companies with assets that are pre-clinical or in Phase I of clinical trials. But wait, there’s more! In this article we’ll be taking a look at data from the LSN Investor Database to highlight the case.

The chart below shows data from an export of the 1,000 most recently updated LSN investor profiles from the LSN Investor Platform with a stated preference in terms of development phase. It is clear that the overwhelming majority of these profiles have an orientation towards emerging companies with pre-clinical or Phase I companies.

 

The chart below further validates this orientation towards early stage investments. It shows the distribution of 315 investors who have expressed their development phase preferences through a 1-on-1 conversation with LSN researchers.

This stands in clear contrast to what is often cited as the overwhelming trend in the space. It is often claimed that investors are shying away from the early stage segment of the life science marketplace. However, most of the time, those who are pointing out this trend are referring to the venture firms who have moved further down the development pipeline or left the space. The remaining categories of investors seem to have moved to fill this gap, and the data validates this trend.

When you begin to look closely at the foundations, family offices, venture philanthropies, virtual pharma, mid-level private equity, patient groups, hedge funds, government organizations, angel groups and various corporate venture capital firms that are also investing, the landscape improves for early stage life science companies.

The advice remains the same – be open to all categories of investors, do your research, and identify those that are the best fit for your sector, indication, and phase. This is the basis of a successful fundraising campaign in today’s investor landscape.

By Maximilian Klietmann, VP of Marketing, LSN

We’re in “stealth mode” is one of the most common buzz phrases LSN hears from emerging scientist-entrepreneurs. This is often the cited justification for a lack of Web presence, failure to create formalized materials, and an unwillingness to build a dialogue with investors. However, as noted in my article from last week, stealth mode ranks among the top 10 fundraising misconceptions.

Often, protection of ideas is the primary reason scientist-entrepreneurs give for being in stealth mode. As LSN’s CEO, Dennis Ford, likes to say, “Ideas are more like mushroom spores than lightning strikes: they spread organically and often pop up in several places at the same time. Execution is what determines your success.”

Another reason companies give for being in stealth mode is that they “aren’t ready to approach investors yet.” However, what many entrepreneurs miss is that the right time to approach investors is well in advance of when you need the money. It can take 9-18 months to raise capital, so starting early is in your interest. A proactive approach allows you to introduce your concept to investors, build relationships, and identify what needs to happen for your asset to become “investable” per that investor’s mandate. Then, when you are prepared to actually seek capital, you know who’s interested based on existing dialogue, and you know what questions need to be answered.

In short, it is important to consider the full implications of staying under the radar. There are clear tactical advantages to preparing your target investor audience for your concept. In fact, you may be hindering the progress of your company otherwise.

You don’t need to publicize your IP. Highlight your team’s expertise and story, and call yourself in “discovery mode” rather than “stealth mode.” Then, when you’ve got an asset in place and you need capital, you’ll be able to call upon the relationships you’ve established, which will help your fundraising campaign.

Get the investor world ready for you, and you’ll be ready for it.

By Michael Quigley, Research Manager, LSN

I am always excited when I come across unusual life science investment models in my investor outreach. Recently, I learned about a fund whose primary investor, a philanthropic foundation, is providing the other investors in the fund with a “partial loss protection guarantee.” Under the guarantee, a first loss of up to 20% of invested capital is fully covered and 50% of any subsequent losses is also covered. This fund structure makes the risk/return profile for the investment much more attractive to investors and in theory will draw more total capital than in a traditional loss–sharing investment model. Basically, in an effort to get more investors to provide capital towards a specific indication, the foundation is voluntarily taking a bigger slice of the potential down-side.

This model known as “first loss capital” or “FLC” has been seen in other impact industries and social investments, such as education, home ownership for low-income populations, and healthy food for poor countries.  Providers of FLC historically have been endowments, foundations, and government organizations looking to catalyze a positive social outcome. These investors tend to have a deep focus on a specific target sector, and often a better understanding of the underlying risk associated with an investment than the generalist investors they wish to attract. By agreeing to cover a portion of the downside risk, they have the ability to bring more dollars to their primary cause.

The life science space is positioned for FLC to become a major financing solution. Increasingly, endowments, foundations, and government organizations are looking for ways to increase their impact by directly investing in emerging life science companies. If successful, FLC could be a tool for these organizations that stimulates innovation and growth in the biotech space by lowering the financial risk in a sector that is often perceived as high risk. The ideal outcome would be to attract the more financially motivated investors and bring more capital into the space.