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February 2014

Fundraisings of early stage life science companies can be complicated affairs, not just from the point of view of negotiating and settling the legal and other documentation, but also from the point of view of actually securing the funds from investors in the first place. Fundraisings of early-stage life science companies are often of a higher value than fundraisings for other types of technology companies due to, in a large part, the resources that are needed to research, develop and trial their products, ensure that they comply with government regulations and the projected cash burn associated with these. Fortunately, there are a number of ways for early stage life science companies to raise funds and in this section we discuss the typical sources of funding for an early stage life sciences company.

The typical sources of funding

Early stage investment

Whilst in the initial stages of the life-cycle of a technology company, founders may look to family, friends and private high net worth (often referred to as "angel") investors to invest in the company in a 'seed' round, though this is less typical of life science companies due to the often significant cash injections needed to research, develop and trial their products. As a result, founders typically look to professional corporate investors to provide the rump of the capital required to kick-start an early stage life sciences business, with friends, family and angel investors often co-investing a smaller amount of capital alongside the corporate investors. 

Types of investors

The investor spread for life science companies is wide and varied, and is made up of a range of investors, from business angels to specialist life sciences investors (both charitable and non-charitable organisations) to corporate ventures.

Angel investors

Angel investors are high net worth individuals who invest individually or as members of an angel group/network. They come from a variety of backgrounds and have a range of specialisms. It is not uncommon for angel investors in life science companies to have a science background.

Venture capital funds

These are often in the form of limited partnerships (managed by a general partner) which make up a varied source of investments from private funding, pension and insurance funds as well as a range of government and EU schemes established to promote investment. Funds may be available from universities, to support academics in the development and commercialisation of new products and technology. There are a number of specialist life science venture capital funds who dedicate a large proportion (or sometimes all) of their funds into investments in life science companies, with some even having a particular life sciences specialism/focus which requires them to invest in a specific therapeutic area, or at a specific stage of drug discovery and development.

Charities

Certain charities are also known for investing in life science companies and often have specific terms related to their investments which need to be adhered to and provided for in the relevant documentation to ensure that their investment is aligned to their charitable objectives. 

Corporate ventures

It is also common to see leading life science companies entering into corporate venture deals with early stage life science companies.  Some of these companies have specific venture capital arms, which invest with the aim of achieving a return in areas of current or future strategic interest to that company.  It is likely that such companies will have an annual budget for such private investments and will often be looking to invest substantial sums, but in return will be seeking active investor participation, as well as potential partnership opportunities.

Other sources of funding

Other sources of funding that may be available to life science companies are venture debt(i.e. specialist providers that provide debt to life science and other technology companies that typically carries an equity element entitling the provider to purchase shares in the company) and government funding (see below)

Government funding and tax incentives

The government, as part of its 'Strategy for UK Life Sciences', is in the process of introducing a suite of fiscal measures to stimulate innovation and growth for start-ups and SMEs through to large global enterprise. The government has already taken steps to incentivise early-stage investment through funding assistance to innovative and high-growth companies at important stages of their development, together with committing further monies over the next few years across various sectors of the economy. 

There are a variety of other tax incentives which also encourage investment in life sciences companies (see Tax Issues in Life Sciences).

See What types of funding are typically available for an early stage life sciences company?

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