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From Lab to market: Navigating venture capital in life sciences

Janita Good
09/09/2021

Locations

United Kingdom

Venture capital (VC) is a vital form of funding for taking scientific ideas from lab to market, but for many academic scientists, negotiating with investors will be uncharted territory. Here, Dr Janita Good looks at how to make the most of current investor attention.

With the Covid-19 pandemic bringing in record levels of venture capital investment into life sciences and healthcare, there's no time like the present for those at the root of innovation to learn how to make the most of all the attention that VCs are giving to innovators within life sciences and healthcare. 

Venture capital (VC) investment has long been essential in commercialising scientific discoveries. While at the early stages of the pandemic, many feared a drought in funding, the opposite has been the case. According to a report by the BIA, £1.3 billion was invested into biotechs alone in the UK last year[1].  Another report from the BIA stated that ' UK’s biotech and life sciences sector is on the cusp of a golden age driven by strong demand from global investors for UK innovation[2]' The Covid-19 pandemic not only exposed how the slow uptake of technology in healthcare systems globally meant many countries buckled when trying to combat the pandemic in the early stages, but also revealed the abundance of opportunities and pathways to market for innovation.

In the life sciences sector, especially in the biotech space, new products often begin life in university laboratories, from where they are spun out into, or licensed by, companies which assume responsibility for taking these ideas to market.

Even if all goes to plan, these businesses will usually not be in a position generate cash until a long way down the line and require funding to sustain them during several years of expensive R&D, clinical trials and rigorous applications for regulatory approval.

Few life sciences products make it all the way to full commercialisation. They therefore represent very risky investments.

This high-risk, high-reward investment trade-off is what VC is designed to cater for.

By contrast, many laboratory managers and academics will have little or no experience of engaging with VCs or negotiating commercial agreements.

Below are some of the main issues laboratory managers should bear in mind when thinking about trying to secure VC funding.

Why VC?

In the last 10 years, life sciences investments have become increasingly popular with VC funds.

A combination of technological breakthroughs, demographic factors generating more demand for medical products and a better understanding of certain conditions have made the sector even more attractive to investors.

There are also a greater number of individuals within the VC market who understand life sciences, many of which will have previously been associated with the industry in some form.

A lot of new money has come into the sector from wealthy individuals who have taken life sciences start-ups down the VC route successfully and have since set up family offices or put their cash into VC funds to invest in other life sciences opportunities.

Additional funding has also arrived in the form of corporate VCs. Many big pharmaceuticals companies now have VC arms set up to invest in early stage life sciences companies.

Some VC funds – especially the big pharma variety – specialise in life sciences, and therefore have deep sector knowledge but a possibly a narrower base of skills and contacts.

Others may be more generalist funds with a life sciences team on board, who are less integrated into the sector but may have wider connections and expertise.

Although VC is not the only kind of money on the table for promising life sciences start-ups, early stage companies are likely to get more money from a VC fund than from a public grant or other funding sources.

Another benefit of VC is that you are likely to get an investor that understands the market you are trying to tap and one that will hopefully give you the contacts that help you grow and potentially exit your business at the right time.

How do I get noticed?

There is a lot of competition for funding in the life sciences space, so making your idea stand out is crucial.

In order to attract the notice of a VC in the first place, you need to know your product and have a clear idea of what your market is.

As well as knowing what problem your idea is going to solve, you need to think about who your primary customers will be and by what means you are going to deliver your product to them.

Communicating your idea in the right way is also very important.

Depending on how familiar your potential investor is with the life sciences sector, you can assume some degree of technical knowledge, but your proposal needs to be understood by your VC partner and your wider target market.

Lastly, having a good track record in commercialising life sciences ideas is not vital, but it does help.

If you have already been through the VC process successfully once, you are likely to get a lot more traction the second time round.

Mean business

Moving from an academic to a business role can be challenging, especially in the early days of a new venture.

However, it is important to demonstrate to your VC investor that you are capable of viewing the project as a business.

A VC will be focused on how they get their return, i.e. what their exit strategy is from their investment.

This might be a sale of their stake onto another VC, private equity fund or a life sciences company, or it might be a stock market flotation.

Showing that you appreciate their objective will help you gain credibility as a potential partner.

How much money do you need?

In the early stages of the commercialisation process, it is helpful to ascertain, as far as possible, some idea of how much it will cost to take your idea from lab to market.

Often, investment recipients do not think through the full cycle of commercialising their product.

As well as having an idea of how much funding you need from your VC partner, thinking this through will help you understand the potential dilution you may experience along the way – and what you might eventually end up with from a personal financial perspective.

What is your role going to be?

Right from the beginning, academic scientists thinking about setting up as a commercial concern need to think about what happens to their academic role.

Some scientists will want to stay within a university and continue to take on academic assignments, while also holding an executive position in a commercial spin-out business.

How a VC caters for someone's wish to split their role depends on the individual investor.

Some will prefer a clean break and demand that a person lets go of their academic responsibilities in order to focus on their business interests.

Others may tolerate or even welcome the distinction between having an academic and a business focus.

Depending on what it is you are trying to do – for example, if it is something very early stage or novel – some VCs may prefer you to have links with a university its wider network of academic support.

Having high-profile positions at prestigious universities can also bring helpful publicity and business attention to a commercial enterprise.

License or spin-out?

At the outset of negotiations with any investor, it is important to have a conversation around how the various stakeholders in an agreement expect to make money from the intellectual property (IP) being commercialised.

Often, the first stage of VC investment is to take an idea from a university laboratory and set it up as a separate company focused on developing that idea.

In these situations, the inventors of the IP will usually get a stake in that company, as will the university that originally hosted the lab where the idea was conceived.

Some universities however prefer to licence the IP to a new company or third party as way of monetising the IP.

Investors will not typically allow IP owners to have both a shareholding and licensing arrangement, as this involves taking two pots of money off the table.

If the IP is still being developed and has not yet been patented, it is essential to discuss where the ownership of the IP will ultimately sit.

Licensing

Licensing has the benefit of delivering a regular flow of cash from the IP to the licensor, once it has been commercialised.

The main issue with this type of arrangement is that you may never get to the point of commercialisation.

This is especially relevant for biotechs, which typically require at least three phases of clinical trials, meaning that getting your product on the market could be 10-15 years down the line, after which further trials and monitoring may be required.

If you have a bad clinical trial, or if your product is superseded by a rival technology during the trial phase, the product may be never be licensed, meaning the owner of the IP will come away with nothing.

Spinning-out

Over the last few years, there has been more of a shift towards setting up spin-out companies, especially around technologies like gene therapy.

There have been quite a few examples of spin-out companies going through two-or-three stages of VC funding before eventually listing their companies on a stock exchange, at which point the IP owner either takes shares in the listed entity or sells their stake.

Consider your tax position

A simple but frequently overlooked point is that individuals seeking VC investment for a life sciences spin-out need to think about their tax position from the get-go.

The bigger a spin-out company gets, the harder it gets for individuals to take stakes in that company without causing significant tax issues.

Many scientists and academics believe they have fantastic ideas that deserve investment, but convincing an investor to part with their cash means you need to think carefully about, and cover off, any weaknesses in your proposition.

Consider how you want to structure your agreement with an investor and what you want that agreement to look like in 10 years' time.

If you decide to license your IP, consider the implications of the product failing to get to market.

If you opt to spin-out your business, make sure, to the extent that you are spinning out, that you have protected the necessary IP within that business.

Tackle all the hard questions with your funding partner at the beginning. VCs are focused on securing their own returns and will not raise questions about your ultimate financial position, so you need to take responsibility for looking after your own outcomes.

Ask yourself: What am I giving up on day one? How much of your company are you going to be left with at the end?

Finally, remember that getting good legal advice at the start more than pays for itself in the end.

A version of this article was first published on Laboratory News.

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Areas of Expertise

Corporate

Related Work Areas

Life Sciences