The Capital Landscape for Early-Stage Life Science Ventures

As an early-stage start-up, regardless of industry, understanding the players in the investment landscape is important. Over the past several years, the types of investors interested in early-stage life science ventures has diversified, with investors that would normally invest at later stages now often looking to fund companies at earlier stages of commercialization.1  The following is a cross-section of the key players.

Angels – The term "Angel" investor was originally used to describe individuals who would finance Broadway productions and was co-opted in the 1970's to refer to individuals who would invest in early stage ventures. Angel investors are often successful entrepreneurs who invest their personal money in early-stage ventures. In addition to funding, Angels often provide important mentorship and guidance to ventures. Although Angel investors are often experienced and wealthy, this is not always the case. Some of a company's earliest "Angel" investors will be friends and family, who often provide seed money for early-stage ventures.2

Angel Groups – Rather than invest independently, Angels sometimes choose to join an Angel Group, which is a community of Angels that can take a variety of forms. Depending on the level of formality the group chooses to adopt, an Angel Group could be an informal association (similar to an investment club), a not-for-profit organization or a for-profit organization. According to the National Angel Capital Organization, investment in life sciences constituted 20% of the overall number of investments and 8% of the overall investment amount in dollar terms by Angel groups.3  A number of Angel groups in Canada reportedly have at least a partial life science investment focus that includes healthcare and services, medical equipment and technologies and biotech and pharmaceuticals.4

Family Offices – Family offices are private firms that are money managers for wealthy families. In practice, these offices often consist of either a single-family office, where the firm manages the business affairs of one family, or a multi-family office, where the firm manages the business affairs of multiple families such that the wealth management services are shared. While traditionally family offices that made investments outside the public markets tended to invest in intermediary funds, a growing trend has seen family offices making direct investments in private companies.5

Venture Capital – Venture capital describes a type of private equity where private money is invested in high-risk/high-reward ventures. Although this overly broad definition also describes other types of investment, such as Angel investment, the term Venture Capital is generally used to refer to venture capital funds specifically. A Venture Capital firm usually describes a specific organization where a management company runs one or more funds, with each of the funds typically structured as a limited partnership fund. In a limited partnership fund, the key players are the limited partners, often high net worth individuals and institutions who contribute the capital to the fund, the general partners, who make the day-to-day investment decisions and generally are paid carried interest on the fund, and the management company (the VC firm) that runs the day to day operations and is responsible for managing overhead and staff, among other duties.

Private Equity – Like venture capital firms, private equity firms are engaged in deploying private capital that is contributed by high net worth individuals and institutions, including pension funds. While venture capital firms are focused more specifically on providing growth capital, private equity firms engage in a number of different investment strategies. These strategies include growth equity and venture capital, but also include leveraged buy-out models in which the private equity firm makes a return using a number of approaches including an initial public offering, a merger or acquisition or a recapitalization of the company. Interestingly, a recent MergerMarket report predicted an increase in private equity activity in healthcare over the course of the next year.6

Private Foundations/Not-for-profit Organizations - Venture philanthropy has increased in popularity in recent years, particularly in the United States. Rather than invest money in research alone, some foundations and not-for-profit organizations have been expanding their reach by funding clinical trials and other aspects of research and development.7

Corporate Venture Capital – Over the past number of years, large pharmaceutical and biotechnology firms have established corporate venture capital arms that provide funding to many early stage life science companies. Corporate venture capital funds are intended not only to provide financial returns to the corporation, but may also provide strategic value to the established corporation.
 

                                                                                         

1 Dennis Ford & Barbara Nelson, The view beyond venture capital, Nature Biotechnology (19 December 2013).
2 Raising capital can trigger complex regulatory requirements. If you are looking to raise capital, you will want to consider obtaining legal advice to ensure that any securities distributions are compliant with the regulations.
3 National Angel Capital Association, "2015 Report on Angel Investing Activity in Canada: Scaling Up Angel Capital to Drive Canadian Innovation" (July 2016) at p 32, online.
4 See the National Angel Capital Organization's Public Member Directory, online.
5 Russ Alan Price, "Why Single-Family Offices Are Moving To Direct Investments" (8 February 2016), online.
6 MergerMarket, "The Future of Healthcare M&A" (September 1, 2016), online.
7 Dennis Ford & Barbara Nelson, The view beyond venture capital, Nature Biotechnology (19 December 2013).