Funding Strategies For Life Sciences Startups In Today's Rapidly Changing Environment

By Peter Meath

Improving human health through innovation always has been the focus of life sciences companies. The impact of the pandemic has further illuminated the importance of this work the agility of the life sciences industry, and the state of our healthcare system. There is a renewed spotlight on the capability of startups as quick-moving channels to accelerate solutions that can help through the pandemic and beyond.

For leaders across this industry, it’s critical to understand how the funding environment will change as we look ahead to 2021. The challenges stemming from COVID-19 arrived as life sciences startups came off several years of explosive growth. Valuations were on the rise, partnerships were flourishing and startups were increasingly accessing liquidity through venture capital and the public markets.

While many investors cautiously await the domino effects from COVID-19, a tailwind of opportunity presents itself to founders that are able to pivot and strategically navigate through today’s ever-evolving funding environment in order to keep research and development moving forward.

Forces at Play: Unique Considerations for Life Sciences Companies

In order to navigate funding cycles, we must first evaluate the dynamics of establishing and scaling a life sciences startup. This sector varies significantly from other verticals due to:

• Long Runways: Timelines are long. Meticulous research must be followed by clinical testing and tedious application and approval processes with the government.
• Complex Layers: Industry developments and progress hinge on the unpredictable response of the human body to medical testing, adding another layer of intricacy.
• Steep Initial Capital Needs: Funding amounts need to be larger, and the payoff period tends to be inexact and long drawn.
• Funding Human Capital: Attracting and retaining talent is critical because of the in-depth expertise and skillset required in the space. Life sciences companies not only demand significant industry knowledge, but also attention-to-detail to ensure compliance, along with time and budget management.

Key Areas: Venture Capital

Although funding has become tighter in life sciences, the industry is better positioned than many others. This is due to venture capitalists’ more conservative approach to investment, as well as the lack of excessive valuations often seen in tech. The money is still available, but investors are becoming even more careful in when and how they invest it. A lot of challenge lies around transitioning from in-person boardroom meetings to attracting capital virtually. Networking and facetime has played a crucial role in funding for life sciences startups. Adapting to digital avenues is key to identifying opportunities and nurturing relationships through the pandemic.

There is also a pattern of capital shifts in every downturn. For instance, attracting new investors from an A to B round can be more difficult, and venture investors might retain more capital so they can double down on current portfolio winners. Founders need to develop strong contingency plans and be prepared for a more tough fund-raising environment.

On a brighter note, venture capital in this sector involves a long, data-driven investment cycle. The result is actually less direct impact from downturns, which are often seen as a little bump on the journey. Startups with important innovations are positioned particularly well in the current climate, as patients have many unmet needs that cannot be put to the side due to this pandemic, with time being of the essence in healthcare.

All of this points to why life sciences isn’t as impacted by acute spikes in unemployment and economic uncertainty. Timelines and payoff periods are longer, and investors fund and value startups based off years of projections, not months, so emerging startups are often able to outperform other industries during recessions.

Key Areas: Partnerships and Licensing

From biologics to gene therapy, life sciences startups have developed a diversity of promising new innovations in recent years. And because large pharma and biotech firms often did not have these paths to innovation, they moved to license new therapies by partnering with startups. The total deal value for biopharma, platform, medtech and diagnostic partnerships exceeded $110 billion in 2019, DealForma reports, which is three times the total a decade earlier.

As large firms evaluate how to respond to the changing economic landscape, we are seeing an increase in partnership activity, particularly for pharma and biotech companies. This is a trend we expect to persist. At the same time, startups could be more inclined to pursue these deals now than they were before, given that venture funding has slowed down.

Specialty Matters

Biotech and Biopharma

The last decade has seen an upsurge of new technologies such as biologics. These developments are highly coveted by large pharma and biotech firms, which often lack them among their core competencies, and will continue to be a focus for long-term pipelines and value. The share of biopharma R&D partnerships signed at the platform stage has grown since 2016, according to Dealforma data. This reflects a trend over the past 10 years toward more financings and dollars flowing to preclinical companies.

Additionally, COVID-19 is drawing new interest in the biotech space by those previously not involved. While many clinical trials have been delayed, we expect that COVID-19 will have limited impact on new product launches and product sales within biotech. It is important to note that healthcare solutions that will help move society past this pandemic are at the core of life sciences. As a result, more investors are seeing value in the industry, drawing significant liquidity quickly. In fact, the first half of the year saw the most venture capital financing in the history of the life sciences industry.  

Medical Devices

Healthcare providers play a critical role in the success of medical device companies, as their utilization of the developed products and devices directly define success. Given this, results are easier to measure and future performance easier to predict. In the current climate, the devices subsector is being broken down granularly as investors try to gauge longer-term impacts to business potential. Sales channels are of utmost importance for these companies. Is the company in a purely elective procedural space? Does the product require extensive in-person sales training? Can the product be pivoted to a virtual environment? The answers to these questions impact potential company value.

Tools and Diagnostics

People are quickly realizing through this pandemic that speed, accuracy and remote monitoring are fundamental factors. As a result, we are seeing more venture investment in tools and diagnostics. This is also a specialty area that is securing new capital from tech investors not typically involved in life sciences. This is in part due to an emerging crossover subsector that uses artificial intelligence and machine learning in combination with diagnostic data to better drive clinical outcomes. However, more established tools, diagnostic products and channels will continue to be under heavy strain as hospital capital spending is restructured due to the unprecedented pressure COVID-19 has placed on the system.

Beyond the Storm

The current environment is unlike anything we’ve seen before. This pandemic has illuminated the important work that life sciences companies do, innovating to save lives and change the world. Life science startups will have to shift their funding strategies in this environment, but they are well-positioned to weather this crisis and beyond.

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Peter Meath is co-head of Healthcare, Middle Market Banking & Specialized Industries, Commercial Banking at J.P. Morgan.