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Key challenges to scaling up early-stage investment in the life sciences

Sinclair-Dunlop-Epidarex CapitalAccess to venture capital and effective fundraising tactics are key to building health science companies on both sides of the Atlantic.

The equity funding gap is a value-creation opportunity driven by the lack of access to sector-specific and early-stage financing. Venture capitalists are critical to the growth trajectory of early-stage life science companies, particularly in the case of first-time entrepreneurs and academic founders. Unfortunately, there remains a shortage of skilled, “company-builder” investors accessible to entrepreneurs commercialising novel science. Effective funding ‘eco-systems’ can include business angel networks and regional economic development agencies that provide grants, as well as university ‘proof of concept’ programmes. However, a lack of ‘deep-pocketed’ funds with the capacity to lead Series A financings can cause early-stage companies, including university spin-outs, to struggle to stay on track and ahead of the competition. A scale-up in the number and size of local, sector-specific funds is needed across markets outside of the major hubs, on both sides of the Atlantic. 

A critical success factor in any life science investment is the management team. The sourcing, development and retention of experienced talent has a direct impact on technology development and investor returns. A significant challenge, particularly in under-ventured markets, is a shortage of serial CEOs with a track record of fundraising at scale. This skills gap varies by region due to the ‘clustering’ that underpins regional imbalance in both the US and UK. Yet less-ventured markets are often rich with specialist skills and domain expertise, typified by pharmaceutical and biotech veterans. For example, the North of England and Scotland have a significant opportunity to harness this expertise in areas such as drug development and to bolster the investor-readiness of local life science start-ups. What these first-time entrepreneurs may lack in company-building experience can be supplemented with appropriate investor and Board support. Early-stage investors should expect to allocate further resource to help portfolio companies raise follow-on rounds of capital.  

A start-up team’s familiarity with sources of support across the life sciences sector is critical, particularly non-dilutive (governmental, academic, charitable) funding that may be available prior to raising venture capital at scale. Entrepreneurs should invest the effort necessary to determine the fit, or lack thereof, with specific venture funds. This often requires extensive networking with prospective investors, to better understand a fund’s sub-sector interests and life cycle. Sending a ‘cold’ pitch to a venture fund via its website is unlikely to capture any investor’s attention, whereas introductions by a mutual contact are more likely to secure a face-to-face follow-up. New entrepreneurs should also be cognisant of timing, given that most VC teams have limited capacity to simultaneously review a multitude of incoming opportunities. Therefore, a brief introduction of the core technology, often prior to formal fundraising and followed by regular updates, can be more effective in ultimately securing venture investment.

 A. Sinclair Dunlop is Managing Partner at Epidarex Capital.

Learn more: An abridged version of this article features in the LSX C-Suite Challenges in Life Sciences Survey 2018, published in September 2018. The full report is available to download for free via the link below. You can also read the survey findings focusing on investment and IPOs in our white paper extract:

DOWNLOAD THE FULL REPORT

REPORT IN FOCUS: INVESTMENT AND IPOS 

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A. Sinclair Dunlop
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