An explosion that has never been seen before Over the past decade, investment in the life sciences has led to exciting new treatments for patients, strong funding for companies, and an increase in overall translational research, which is critical to advancing the next generation. In addition, the capital invested in the clinic by early-stage companies increased the capital that remained in the clinic for years to come.
Naturally, a generous financial flow creates happiness for all involved. Capital is the fuel that drives science and technology innovation, and it means that life science startups can create products that benefit the world as a whole.
But what happens when the money suddenly dries up?
In the world of biotech, capital is vast to produce multiple products that all go through clinical trials at the same time. The infrastructure required to maintain these various programs is not well suited to withstand a funding drought.
A better approach is to focus on a lead program — a single product that you can take through various stages of development that will eventually lead to FDA approval. In fact, lead programs validate the value of the underlying platform, allowing companies to raise capital through licensing and partnerships.
Founders should not let peer pressure or investors dictate their financing strategy.
There are always ebbs and flows in funding, so here are five ways life science startups can set themselves up for success regardless of the economic climate.
Don’t confuse successful fundraising with a successful company
At the end of the day, fundraising is the goal. The mission of many life science startups is to improve patient outcomes. However, science is hard, and money in the bank does not overcome the complexity of human biology. Many companies have successfully raised large amounts of capital but have not been successful in developing an important product, therapy or technology.
While not a perfect proxy, the valuation of a venture-backed company (via M&A or IPO) can be an indicator of its success in developing a new product. However, there is no relationship between the amount of capital a company brings and the final exit price.
As of 2010, the R-squared between exit price and total invested capital—a measure of how well the two variables correlate—was a measly 0.34 for all health care exits. When you factor in the correlation between the exit price and the amount of capital raised in the company’s Series A financing, it drops to a negligible value of 0.05, according to PitchBook.
These statistics support that just because a company invests a large amount of capital (especially early on) does not guarantee a successful investment outcome.
Founders should not let peer pressure or investors dictate their financing strategy. Instead, focus on advancing your program through key stages of technical and clinical development.
