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Early-stage biotech companies have a smaller audience of institutional investors than companies with more traditional business models due to their complex nature, long path to profitability, and a significant degree of clinical, regulatory, and commercial risk.
Fremont, CA: Over the last two decades, the biotech market has grown rapidly and is expected to be worth nearly $2.5 trillion by 2028. Meanwhile, the rate of technological advancement and innovation has lowered entry barriers, resulting in a flood of aspiring biotech startups eager to bring their products to market. Despite an increase in available capital, early-stage biotech companies are having a more difficult time getting their fair share of funding. We will look at the challenges, strategies, and best practices in early-stage biotech funding in this article.
Challenges facing biotech companies seeking funding:
Securing Early-stage Investment
Biotech startups need to become a "core" position – a significant holding that is held long term – for at least a few established buy-side investors in order to build a solid investor base.
On the other hand, core positions are typically established through structured biotech financings such as follow-on offerings, IPOs, and, more recently, late-stage private crossover financing rounds. And, because most funds have a limited number of core positions, the only way for a new core holding to become available is to sell another.
Despite the fact that investors' portfolios are growing in size, capital is being deployed into existing positions rather than new, large investments. As the number of early-stage biotech companies grows in comparison to a fixed number of core positions, the demand for funding outstrips the supply of available core positions. Management teams should find alternative funding sources to support the company long-term in order to secure the early-stage investment that will propel it forward.
Early-stage biotech companies have a smaller audience of institutional investors than companies with more traditional business models due to their complex nature, long path to profitability, and a significant degree of clinical, regulatory, and commercial risk. Beyond the traditional life science dedicated funds, few generalist fund managers consider smaller cap life science companies unless they have a growth strategy with high-risk tolerance as well as longer time horizons to hold positions through maturity.