Natural selection: What should life science start-ups bear in mind when seeking funding?

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Here, Giovanni Rizzo, PhD, MBA, chief of Innovation Division, Z-Cube, reveals what life science start-ups should bear in mind when looking for funding.

It is an often-repeated statistic, that 90% of all start-ups fail within the first year,1 however, it is in everyone’s interests that the most innovative and creative life science start-ups succeed.

An ageing population, the need to invest in new-generation, digitalised technology, a rise in patient demand of service and value for money, will see life sciences drive a medical revolution as the scientific discoveries of recent years are translated into patient treatments and products.2

Learning from other industries is one way to improve the chances of a start-up’s success. A recent study found that 33% of founders who are mentored by successful entrepreneurs went on to become top performers. This is more than three times better than the performance of other companies.3

In the UK, roughly 60 new life science start-ups are formed each year with University spin-offs accounting for 34% of these.4 This finding highlights that start-ups in life sciences are very often composed and set up by visionary academics who, unfortunately, would probably not hesitate to describe themselves as inexperienced with the practicalities of setting up a business such as composing a robust business plan, sourcing a reliable supply chain, managing partners, tax and staffing issues. Yet all these key business activities need to be fleshed out and accounted for if early stage companies wish to impress investors and secure funding.

A recent report by MindMetre Research confirms that a lack of key skills is a turn-off for investors as it found that private equity houses believe that some key business skills such as IT management and marketing are generally sub-par in the businesses they acquire.5

This environment, which sees early-stage often academic start-ups struggling to get funding, translates into a Catch-22 situation, where the only people knowledgeable enough to innovate are denied access to funding because they lack business experience and only firms that have already received funding are able to access more. Such an environment is damaging to the whole life science sector as it stifles innovation, discourages entrepreneurial initiative and ultimately suppresses important developments that could improve patient health.

Life science early-stage start-ups should, therefore, consider wisely what type of support is offered by different types of investors, being careful not to underestimate the importance of access to mentors and advisors that can show them the ropes when it comes to the practicalities of setting up a business. So, while the initial draw to a particular accelerator programme might be the availability of funding, not all programmes are set up to provide structured growth opportunities and counsel.

Reports show that the global life science sector is set to grow to the value of $447.5 billion by 2020,6 but early-stage life science start-ups are often largely cut-out of this bounty with large-scale M&A activity accounting for most investment. The European life science start-up panorama is in fact blighted by a critical inconsistency: businesses typically tend to get funding when they have reached relative maturity, and yet they are unable to reach maturity without significant funding. To solve this, many businesses are going public too early by commentators’ standards at the risk of undervaluing their business.

Raising money for a new company also relies on a person’s ability to relate their vision and network, but securing the right exposure — being in front of the right people at the right time — is no easy task with many businesses finding this is one challenge too-many.

Choosing an accelerator that operates in the right niche can help the start-up connect with advisors and peers that understand the business, its processes and can help devise a plan for future growth that avoids many of the obstacles and pitfalls that typical of the industry. The right match accelerator will expose your business to investors that are a good fit to your business and can help it to grow to maturity and to becoming even more valuable.

References:

  1. Forbes, 90% Of Startups Fail: Here's What You Need To Know About The 10%
  2. PwC, the economic contribution of the UK Life Science industry, March 2017, http://www.abpi.org.uk/our-work/library/industry/Documents/The_economic_contribution_of_the_UK_Life_Sciences_industry.pdf
  3. Techcrunch, Mentors are the secret weapons, March 2015, https://techcrunch.com/2015/03/22/mentors-are-the-secret-weapons-of-successful-startups/
  4. Life Science Network, Life Science Startups in the UK, 27th December 2016.
  5. MindMetre Research, Mind the (skills) Gap, June 201
  6. EP Vantage data