The biotech market has been growing rapidly over the past two decades, and is expected to be worth nearly $2.5 trillion by 2028. Meanwhile, the pace of technological developments and innovation have reduced barriers to entry, leading to an influx of aspiring biotech startups eager to bring their products to market. But despite the increase in available capital, early-stage biotech companies are battling harder for their share of funding. In this article, we explore the challenges, strategies, and best practices in early-stage biotech funding.
Challenges for biotech companies seeking funding
As many public investors increase their share of the biotech funding market, total biotech financing is on the rise. While the conditions may seem favorable, for those seeking funding for an emerging biotech company, there are three major challenges that may stand in the way.
Relevancy
Achieving and maintaining buy-side relevancy is critical to getting the attention an early-stage biotech company needs to access funding. But considering that the number of U.S. biotech companies climbed from 2,377 in 2012 to 6,653 in 2021, it’s easier said than done. As more companies emerge, startups need to come up with creative ways to stand out from the competition. Messaging and positioning are key elements to this strategy, but many younger companies have small, focused teams with limited business experience and fewer connections to sources of capital. Amplifying this challenge, early-stage companies often have little data to support their concept, as projections can’t be built from comparable companies or past intra-company experience.
Early-stage investment
To build a solid investor base, biotech startups must become a “core” position – a significant holding that is held long term — for at least a few established buy side investors. However, core positions are typically established through structured biotech financings like IPOs, follow-on offerings and increasingly, late-stage private crossover financing rounds. And since most funds only have a finite amount of core positions, the only way a new core holding becomes available is if another is sold.
Even though investors are increasing the size of their portfolios, capital is being deployed into existing positions instead of into new, large investments. As the number of early-stage biotech companies increases against a (relatively) fixed amount of core positions, the demand for funding outpaces the supply of core positions available. To secure the early-stage investment that will propel a company forward, management teams must find alternative funding sources to support the company long term.
Narrow audience
Due to their complex nature, long path to profitability, and significant degree of clinical, regulatory, and commercial risk, early-stage biotech companies have a narrower audience of institutional investors compared to companies with more traditional business models. Going beyond the traditional life science dedicated funds, few generalist fund managers look at smaller cap life science companies — unless they have a growth strategy with high risk tolerance and longer timelines to hold positions through maturity.
Opportunities in biotech fundraising
Despite the many challenges that early-stage biotech companies may face when fundraising, there are plenty of opportunities for companies to stand out. For those management teams without a significant degree of public company experience and network of connections, there is a greater chance of success when enlisting help from an experienced external partner that specializes in biotech.
Thought leadership
People buy from those they trust and respect — investors are no different. Companies that recruit industry experts to advisory boards or partner with key opinion leaders can build authority, improve product positioning, and establish strong connections within the industry. Coupled with strong data, an especially compelling story with a clinical roadmap and a pathway illustrating the significant potential for commercial success will help achieve this end.
Attract early investors
Since core positions in the public market are generally established through IPOs and secondary follow-on offerings, now more than ever, companies need to attract early investors through late-stage private/crossover financing rounds before an IPO. This gives investors who traditionally purchase shares at market value a chance to secure significant ownership in a growing company at a discount to the eventual IPO price.
Create demand
Building a strong investor base as a private company can help create opportunities to become a core holding for a variety of potential key funds. With the help of thought leadership and long-term support from an experienced IR and IPO advisory team, companies can leverage their existing investor base to attract additional investors. Scarcity creates demand, and high-profile public investors often follow early investors whose reputations are built upon serious due diligence processes and proven track records.
Foster relationships
The best way to build long-term support for a company is for management to earn the respect and support of investors. This requires effectively communicating a business plan to the investor community that management can execute against. Over the course of multiple interactions between management teams and potential investors, consistency in messaging and execution can be the driver behind a decision to invest. It is important that leadership demonstrates strong investor relations skills in these circumstances, but it can also be valuable to work closely with a seasoned external IR firm to further drive investor connectivity. The right partner can help you cultivate strong relationships with a broad range of buy-side investors.
Outreach
Early-stage biotech companies trying to raise additional capital need a multi-faceted approach that requires careful planning and coordination. This includes specific institutional investor targeting, attending medical and scientific meetings, publication strategies, and sell-side investor conferences. For smaller companies with limited business experience and few connections, this proves to be a major challenge.
The importance of finding the right partner
As the competition for biotech funding continues to heat up, it’s essential to find ways to stand out. The right partner can help emerging companies improve their messaging, solidify their offering, expand their reach, and attract the right investors.
Guidance
Management is key to the investment process. Experienced IR and advisory firms have relationships with both buy and sell side professionals and know exactly what works and what doesn’t. The earlier a company can get in front of investors, the sooner it can start building credibility and securing financing. The right firm can help younger startups get in front of investors in the early stages of development, helping to build relationships that could be prosperous in both the short and long-term.
Messaging
A management team with a deeply credible reputation is often sought after for advice about other topics by investors. An IR and capital markets advisory firm can help companies establish themselves as thought leaders, strengthening the connection to the investment community and the respect derived from it. They can also provide guidance on positioning the company for an institutional audience and highlight the real value drivers to make the opportunity compelling to early investors.
Network
Maintaining a current view of the life science investor topography is imperative. IR and capital markets advisory firms often have comprehensive networks of relationships in all regions of the U.S. Beyond banking partners and traditional life science funds, they cast a wider net to include smaller funds, family offices or generalist fund managers that have a mandate for private funding. Included in this expanded audience are the burgeoning mezzanine growth funds, raised by marquee life science VC firms, that are making initial investments in new companies at later stages of development. These networks also include alternative funding sources ex-U.S., such as international VC funds looking for U.S. life science exposure as well as European family offices, both of which have become more prominent in U.S. life science private investing rounds.
Outreach
With help from an experienced strategic IR and capital markets advisory firm, biotech startups can outsource their outreach strategy to a partner who knows the landscape best. The right firm can help you maximize brand awareness, communicate company news and messages more effectively, increase your audience, and ultimately, attract more investors.
Final thoughts
Raising early-stage biotech funding is more difficult than ever, and with an influx of new companies as well as a growing number of public ones, it only stands to become more challenging. To raise visibility, leadership must focus on message refinement, institutional positioning, and investor connections. For younger firms with small teams and limited business expertise, this poses an additional challenge. Engaging an established IR and capital markets advisory firm with experience in biotech fundraising can help biotech companies reach their full potential.
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