The unprecedented explosion of investment in life sciences over the past decade has 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 eye-popping levels of capital raised by early-stage companies, some of which were years away from entering the clinic with their first product.
Naturally, a generous flow of financing generates excitement for everyone involved. Capital is the fuel that advances scientific and technological innovation, and it means a life science startup can create products that benefit the world at large.
But what happens when the funding suddenly dries up?
In the world of biotech, for example, it’s extremely capital intensive to develop multiple products that are all going through clinical trials simultaneously. The infrastructure needed to maintain these different programs can be too unwieldy to weather a financial drought.
A better approach would be to focus on a lead program — a single product that they can take through various stages of development, ultimately leading to FDA approval. In fact, lead programs validate the value of an underlying platform, enabling companies to raise capital through licensing and partnerships.
Founders shouldn’t let peer pressure or investor check size mandates dictate their financing strategy.
There will always be ebbs and flows 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 company
At the end of the day, fundraising is a means to an end. The mission for most life science startups is to improve patient outcomes. However, science is hard, and cash in the bank does not overcome the complexities of human biology. Plenty of 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 exits (through M&A or IPO) can be an indication of its success in developing a new product. However, there is practically no correlation between the amount of capital a company raises and its ultimate exit value.
Since 2010, the R-squared between exit value and total invested capital — a measure of how correlated the two variables are — for all healthcare exits is a paltry 0.34. When you drill down to a correlation between the exit value and the amount of capital 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 notion that just because a company raises significant amounts of capital (especially early on), there is no guarantee of a successful investment outcome.
Founders shouldn’t let peer pressure or investor check size mandates dictate their financing strategy. Instead, focus on advancing your program through the key stages of technical and clinical development.
5 ways biotech startups can mitigate risk to grow sustainably in the long run by Ram Iyer originally published on TechCrunch