The Unprecedented Explosion Investments in life sciences over the past decade have resulted in incredible new therapies for patients, strong financial returns for companies, and an overall increase in translational research, which is critical to advancing the next generation of therapies. It has also led to dazzling levels of capital raised by startup companies, some of which were years away from entering the clinic with their first product.
Naturally, a generous flow of funding creates enthusiasm among all involved. Capital is the fuel that drives scientific and technological innovation, and it means a life science startup can create products that benefit the world as a whole.
But what happens if funding suddenly dries up?
In the world of biotech, for example, it is extremely capital intensive to develop multiple products that are all clinically tested at the same time. The infrastructure needed to maintain these various programs can be too unwieldy to weather a financial drought.
A better approach would be to focus on a main program – a single product that can take them through different stages of development, ultimately leading to FDA approval. In effect, lead programs validate the value of an underlying platform, allowing companies to raise capital through licensing and partnerships.
Founders should not allow their funding strategy to be dictated by peer pressure or controlling investor size.
There will always be ebb and flow in funding, so here are five ways life science startups can optimize for success regardless of the economic climate.
Don’t confuse successful fundraising with a successful business
Ultimately, fundraising is a means to an end. The mission of most life sciences startups is to improve patient outcomes. However, science is difficult and cash in the bank does not overcome the complexities of human biology. Numerous companies have successfully raised significant amounts of capital, but were never successful in developing a beneficial product, therapy or technology.
While not a perfect proxy, the value at which a venture-backed company is exited (via M&A or IPO) can be an indication of success in developing a new product. However, there is practically no correlation between the amount of capital a company raises and the final exit value.
Since 2010, the R-squared between exit value and total capital invested — a measure of how correlated the two variables are — across all health care exits is a paltry 0.34. When you get to a correlation between the exit value and the amount raised in a company’s Series A financing, it drops to a practically negligible value of 0.05, according to PitchBook.
These statistics support the idea that just because a company raises significant amounts of capital (especially in the beginning) there is no guarantee of a successful investment outcome.
Founders should not allow their funding strategy to be dictated by peer pressure or controlling investor size. Instead, focus on advancing your program through the key stages of technical and clinical development.
