Strong data for start-up and scale-up biotech investments

The first investment often needed to get ideas off the ground is founder’s equity. It is the initial investment made by the founders of the company. This investment can be capital but can also be of another type. Founder’s equity can translate into ownership stakes in the company.

An angel investor is often one of the first forms of start-up funding. The angel investor often has a personal relationship with the founders or a connection to the company. The angel investment can translate to ownership equity, can be a loan, or can even be a gift. Sometimes capital funding is accompanied by mentorship or other guidance. The common investment type of angel investor can be pre-seed capital seed capital or growth capital. The latter often when founders’ equity pushed the company through the early start-up phase.

Private equity is an umbrella term that stands for equity held by individuals or investment companies. The type of investment is often a venture capital fund, which means that a group of investors invest together in different companies. For venture capital funds, the terms of the funding are predetermined. These include the stage of the business, niche, and location. When you’re in a pharmaceutical biotech start-up, you can look for healthcare investment funds or better yet, for investors in healthcare startups. The better the match with the Venture Capital (VC) firm, the higher your chances of success often are. For instance, medical device VC firms are often less willing to invest in pharma start-ups because they may feel they lack the expertise to conduct a proper risk assessment.

While hedge funds are generally more associated with publicly traded stocks, they can also invest in private companies. In an article from 2006 in Nature Biotechnology hedge funds are discussed. One of the reasons for the article was the estimated doubled investment amount in biotech in the two years prior to the article’s publication date. Biotech hedge funds might not be of interest to start-ups looking for biotech investments. However, the increase in the popularity of biotech on the stock market can boost interest in investing in biotech companies that are still private.

Biotech investments are more suitable for a long-term strategy

For biotech companies that are already trading publicly, the article comes with a critical note. Medical or life science hedge funds might have a short-term investment strategy. Therefore, the long road in market approval for a new drug might not match the biotech hedge funds strategy.

Read the article here: https://library.wur.nl/WebQuery/file/cogem/cogem_t44ffe9a0_001.pdf

Banks can be a solution for biotech companies in need of capital. Two of the top biotech investment banks are J.P. Morgan and Goldman Sachs. As you will see on their websites, biotechnology investment banking comes in several forms and offers more than biotech capital need. For biopharma investment banking, you see both banks offer strong industry expertise and insights. J.P. Morgan’s Annual Biopharma Licensing and Venture Report and Goldman Sachs’ advisory board underline this. Early stage entrepreneurs should keep an eye out for the JP Morgan life sciences fund and the corresponding Life Sciences Innovation Summit.

Pre-seed capital is capital provided in the earliest stage of a company. It can be needed to create a prototype, evaluate ideas, product development, and market research. Pre-seed capital can be needed even before there is an actual start-up. Pre-seed capital or early-stage start-up capital is often provided by angel investors or by the founder(s).

Seed capital or start-up capital can be needed to cover the initial company operating costs before those expenses can be paid from revenue. Seed stage biotech companies need to look for early stage biotech investors in the form of biotech angel investors or seed-stage venture capital firms. Initial capital invested by the founder(s) can be needed as well, if only to show investors that you as founder believe in your start-up.

Biotech investment firms often mention that they invest in “fast-growing companies”. The fund provided for these biotech companies on the rise is named Growth Capital (GC). Healthcare growth equity firms take only companies in consideration that are in a mature start-up / scale-up stage. These companies typically have a proven business model but lack the resources to gain a significant market share. Growth capital can be used to scale up operations, enter new markets, acquire competitors, or for further product development. This is the stage when a company becomes interesting for private equity firms investing in healthcare. For life sciences private equity firms companies in the critical phases of development are interesting. For example, successfully reaching the next phase of clinical trials can have a huge effect on their asset valuation.

Venture Capital (VC) is a form of Private Equity (PE). There are many private equity firms, from small to large, and from active in a certain niche to broad-scale investments. When you look at medical investment firms, you often see a physician venture capitalist being part of the team. Industry-focused life science investment firms can have a team of specialists who know the market. Next to providing the start-up biotech capital, part of their strategy can be sharing knowledge, network, and expertise.

Funding is divided into different series/funding rounds, indicated with A, B, C, etc. The different series correspond more or less with the stages of a company. Funding in all series can be categorized as growth capital, where series A is the first round after the seed stage. Subsequent series follow as certain milestones are achieved. There are investors who are only looking for series A funding biotech opportunities, so it’s all about finding the right investor for your stage.

Pre-IPO funding falls under late-stage venture capital and is provided before the Initial Public Offering (IPO). The capital can be needed to prepare the company for public markets. After this, the final stage arrives where equity in the company can be traded on public markets. This also means that investors can offload their stocks once the price hits the desired level and they can maximize their investment. After the IPO investing in the company is via public equity.

Mergers and acquisitions start to become relevant from series A funding and onwards. To accelerate growth, to obtain a larger market share, or access new technologies, merging or acquiring companies can save time and resources. The other way around is also possible, where the company is bought by another company. It can be an exit strategy for founders and investors to monetize their investments. An exit through sale, also named M&A sale or M&A deal, comes quicker than the exit through IPO. However, there are more methods for liquidation of assets, like recapitalization or secondary buyout.

Med tech investors can be divided into subcategories like drug development, healthcare, and medical device investors. They can be further divided into the company stages they invest in. Early-stage companies can, depending on their product, look for drug development or medical device seed funding and pharmaceutical products and medical device angel investors. Because of the high risk of venture capital investment, medical device venture capital firms are less likely to invest in pharmaceutical products. However, medical angel investors may still take the risk if they have a strong belief in the founders.

What is an angel investor? Angel investors are people who invest their own money, usually in a start-up. A biotech angel investor often has a personal connection to the company, founders or therapeutic area of the company. Many companies have started with an angel investment. The financial backing, sometimes accompanied by mentorship, is especially valuable in the early phase. The terms for the investment are generally different from those of a venture capital firm. Venture Capital (VC) falls under Private Equity (PE). A venture capital firm buys equity (ownership stakes) in a private company.

In the start-up phase angel investors are generally more willing to invest, but the total investment is often lower than that of venture capital firms. Also, angel investors, especially the ones with a personal relation to the founders of the company, might have more flexible terms or lower requirements. How good that might sound for start-ups, it is therefore more important to discuss the terms.

Things to consider

Think about this: What will the angel investor get in return for their risk? What is the exit strategy for the investor and under what conditions can both parties terminate the contract? After the start-up phase, more options become available, like Venture Capital (VC) and Growth Capital (GC). It is important to have a clear strategy so your angel investor does not hold back your company’s future growth.

When looking for medical investors, especially for medical venture capital firms, you will notice the lack of interest in start-up funding. It is a result of the high failure rate, 60% fail within the first five years and 90% fail eventually. This trend is also visible in clinical trials, where around 90% of investigational new drugs (INDs) eventually fail. By looking at these statistics, you can’t deny that offering investors a de-risking mechanism is appropriate. Especially seed stage biotech companies still looking for preclinical funding should consider Phase 0 clinical trials. It can partially replace preclinical work, while data from clinical trials in patients is generally considered more valuable.

Focussing on investors in your region and country can be beneficial. However, their funding scope can be region-transcending. A few examples:

For biotech startups in the Netherlands one of the top medical investors is Gilde Healthcare with a headquarter in Utrecht. This healthcare investor has a Venture&Growth fund for fast growing companies in EU and USA and life science private equity funds for lower mid-market healthcare companies in the EU.

Biotechnology startups in USA looking for investors in healthcare startups can check out Innova Memphis. This early-stage medical investment firm provides (pre)seed capital and mentorship. The company is based in Memphis, Tennessee.

It is often far easier to convince investors with experience in your field. Investors in healthcare startups understand the business and are therefore more able to spot a chance when they see one. Try to find investors as far in your niche as possible, and divide them further on the other criteria: investor type, company stage, and region. For example, Regal Healthcare Capital Partners solely invest in healthcare service companies. Med Tech Venture Partners invests in medical device entrepreneurs, from the early stage and onwards.

Markets are often dominated by trends, and biotech is no exception to this. Where there are trends, there is often growth. The biotech market is expected to grow by 12.8% each year, to $3.21 trillion in 2030. The bio pharmacy segment had a share of around 41% in 2022. Some trends you can easily find online, are the use of AI in drug discovery and Real World Evidence (RWE), regenerative engineering, bioprinting, stem cell technology, gene editing, Antibody Drug Conjugates (ADCs), and Targeted Protein Degradation (TPD). Other factors influencing the market are related to regulatory, M&A, and government initiatives. As a biotech start-up, you need to stay informed!

Look for investment programs provided by regional or field-specific investors. These can be seed investments and accelerator programs. Often there is already a certain amount that will be given to the most promising application(s) for the program. Below we provide an example we made ourselves, finding (biotech) investment programs in the Netherlands. You can get ideas to make a similar list for your region and niche.

Bain capital is one of the largest healthcare private equity firms. Their private equity assets under management represent a value of more than $77B. They can be considered one of the leading private equity firms that invest in healthcare. In life science (therapeutics, medical devices, diagnostics, and tools) their asset value is around $3.7B. They work with companies worldwide and in all stages of growth. From start-up to established companies. Their support goes beyond providing capital, offering companies to go global, or moving a pharmaceutical pipeline through clinical trials. Read more on their website.

TPG Healthcare Partners is, with a Assets Under Management (AUM) value of $212B a well-known name. TPG Capital healthcare investments are in size around $2.7B. The company does not only invest in healthcare but also in life science and biotech. More importantly for life science and biotech companies, each year around $500M is invested in R&D. The TPG Life Sciences Innovation Fund invests in novel therapeutics, diagnostics, medical devices etc. In their portfolio, you find companies like Allogene Therapeutics and Ellodi Pharmaceuticals. Read more on their website.

G Square Private Equity invests in mid-market healthcare companies, most of them based in the EU. This London-based medical investment firm does so with growth capital and a buy-and-build strategy. G Square Healthcare Private Equity not only provides funding but also participates with management teams in strategic and operational decision-making. The company focuses on mature companies with high-growth potential. In their portfolio are companies across a broad spectrum in healthcare. You can read more on their website.

You can find Petra Capital when you search for lower middle market private equity firms. The firm is focused on healthcare and less specifically on life science or biotech. With a fund of around $200M it is not in the top healthcare investment firms, but if your start-up is in the lower middle market this might be the investment firm for you. Good to know, Petra Capital is willing to take a control or non-control ownership position and is in the list of INC. Founder friendly investor 2022 & 2023.

Scale-ups that are already generating significant revenue can search for middle market healthcare private equity firms. KKR healthcare is an example of such an investment firm. The company invests in established, but smaller companies with an enterprise value between $200M and $1B. There is also a KKR healthcare growth fund for high-growth companies. KKR works with companies in biopharmaceuticals, medical devices, life science tools and diagnostics, and health care services and IT. Read more about KKR.

Medical device start-ups and scale-ups can contact Med Tech VC. A Med Tech investment can typically be applied for seed start-ups or companies looking for their first venture capital investment. They require from a start-up strong data that supports their business idea. This can be for instance a prototype or (pre)clinical data. Looking at their portfolio, you see companies in therapeutic and diagnostic devices. Read more: https://www.medtechvp.com/.

With over $7B of managed assets, Archimed is one of the largest biotech investors. Biopharma is a separately mentioned sector of healthcare they are active in. The same applies for life science tools, and in vitro diagnostics. This investment firm is interested in small and mid-size companies. Looking at their Biopharma portfolio, you will find companies in chemistry and manufacturing. Read more on their website.

When you first look at the Venrock website, you see the broad scale and spectrum of their investments. However, the company has a venture healthcare and public healthcare section. Here you find companies in therapeutics, health tech, medical devices, and life science.

The word vivo is in biotech known from in vivo and ex vivo, and the name already indicates the orientation of Vivo Capital. It is a biotech investor working with companies in biopharmaceuticals, specialty pharmaceuticals, and medical devices. Their portfolio provides insight into the companies they may be interested in, many of them working on the development of novel therapeutics. Learn more about Vivo Capital.

Drug developers looking for a biotech investment should check Sunstone Life Science Ventures. This is one of Europe’s top life sciences private equity firms. Since 2007 this biotech investor alone has supported over 100 clinical trials, divided in Phase 1-3 and resulting in 5 new approved drugs! Sunstone is available for EU and UK-based early-stage biotech companies developing new therapeutics. Sunstone has several healthcare private equity funds, some funds are strictly for certain sub industries. Read their requirements here: https://sunstone.eu/investment-strategy/.