Investing in a life science startup can be a lucrative opportunity, but it requires careful evaluation to weigh the potential reward against the level of risk. Members of VIC Tech's affiliated VIC Investor Network co-invest with VIC Tech, which provides a high level of due diligence on every deal. They also have VIC Tech helping protect their investor interests over the investment's life cycle (Protecting Early Investors in Capital-Intensive Life Science Companies). However, if you are an individual investor doing your own diligence on early-stage life science investment opportunities, there are several key considerations to keep in mind:
1. Evaluate the team: The life science industry is complex, and it requires a team with a diverse range of skills, including scientific expertise, business acumen, and industry experience. You should assess the team's credentials, experience, and track record to determine if they have the necessary skills to drive the company's success. For university spin-outs, it's common to see much greater scientific strength than life science commercialization experience on the team. However, that is rarely a formula for success — you need both! Your evaluation should include reviewing the team's educational background, professional experience, and track record in their respective fields. Evaluating the team's leadership skills and communication style is also important. For example, are they providing regular updates to shareholders? Are they the right team for the current stage of company development? The team that is right during the product development stage may not be the same team needed for commercial launch or revenue growth stage. Additionally, understanding the team's motivation for starting the company and their vision for the future can provide valuable insight into their commitment and long-term goals for the startup.
2. Analyze the technology and intellectual property protection: You should review the intellectual property and trade secrets to determine if the technology can lead to a sustainable competitive advantage in the market. The analysis should include an assessment of the novelty of the technology, its potential to disrupt the market, and its competitive landscape. Is there patentability (i.e., protection for the novel aspects of the technology) and freedom to operate (i.e., ability to bring forward products that do not infringe on others patents). For a small company with a technology that will ultimately compete against those in multi-billion dollar companies or potentially be acquired by such companies, having as strong as possible fence around the intellectual property is essential to ultimately realizing high value. At VIC Tech, we prioritize strong patent protection over trade secrets since our typical exit strategy is a sale to a multinational life science company that will place a more substantial value on patents than trade secrets.
3. Review the market opportunity: You should research the size of the total market opportunity and the early addressable market opportunity along with a feature-by-feature comparison with competing technologies -- both those on the market and, to the degree possible, those in the pipeline (which can be found through technical journal reviews, patent filings, etc.). This evaluation should include an in-depth analysis of the target market, including the size, growth potential, and competitive landscape. Additionally, understanding the customer's needs, preferences, and willingness to pay provides critical insights into the market opportunity. Neglecting to research and understand market adoption drivers thoroughly is a common cause of startup company failure. It is also important to assess the startup's marketing and distribution strategies and evaluate its potential to gain market share.
4. Assess the financials: For pre-revenue companies, you should evaluate the startup's burn rate, runway, and fundraising plans to determine if it will have sufficient capital to achieve its goals. Additionally, understanding the startup's capital structure, including any outstanding debt, can provide valuable insights into the company's financial stability.
5. Evaluate the regulatory landscape: Life science startups are subject to a complex regulatory landscape. You should evaluate the regulatory requirements for the startup's technology and assess the potential risks and obstacles. This information will help you determine if the startup has a clear path to market and if it can navigate the regulatory landscape effectively.
6. Conduct legal due diligence: Review the startup's legal documents, including its organizational structure, contracts, and agreements. This evaluation should include an analysis of the startup's articles of incorporation and bylaws. Additionally, understanding the startup's contractual obligations, such as partnership agreements or licensing agreements, can provide valuable insights into its legal obligations. It is also essential to evaluate potential legal risks, such as litigation or regulatory issues, and assess the startup's legal strategy for mitigating them.
While the steps listed above are described in a generic manner, the type of life science company for which you are doing the due diligence makes a difference. For example, medical device and biopharma companies have different risk profiles, with biopharma companies generally considered to have a higher risk profile than medical devices. However, biopharma startup investment opportunities may have a higher upside in many cases.
For medical devices, the market opportunity evaluation should focus on market adoption drivers, the size and growth of the medical device market segment, and the competitive landscape and regulatory environment. Investors should evaluate the potential for recurring revenue streams from the sale of consumables or servicing of the device. Biopharma companies, on the other hand, require a market opportunity evaluation that focuses on the size and growth of the target disease area, as well as the unmet medical need for the disease and the competitive landscape for existing treatments. Investors should also evaluate the regulatory environment for drug development and any potential barriers to market entry.
Medical devices are generally considered to have a lower risk profile than biopharma companies because they typically undergo less rigorous regulatory approval processes, and there is usually less variability in their clinical outcomes. However, there are still risks associated with medical devices, such as product liability, manufacturing issues, and changes in reimbursement policies.
Biopharma companies typically have a higher risk profile due to the complexity of drug development and regulatory approval processes and the high failure rates in clinical trials. Biopharma companies face risks such as failure to demonstrate safety and efficacy, clinical trial delays, and regulatory hurdles. However, successful drug development can result in significant returns on investment. Successful drug development can ultimately result in blockbuster drugs generating billions of dollars in revenue. There is also the potential for product line expansion and licensing opportunities that can result in additional revenue streams.
While life science companies represent high impact, high return opportunity investments, comprehensive due diligence must be conducted to understand which companies carry a strong reward to risk ratio. That is typically best done with a strategic investor partner or as part of a due diligence team that brings experience in each of the due diligence areas described above.
VIC Tech reviews an enormous number of life science technologies annually in a systematic review process that searches for the best intellectual property foundations for prospective new companies that we might form. See Behind the Curtain: Opportunity Assessment at VIC and Opportunity Assessment: How To Vet So Much Tech for additional discussion on our opportunity assessment process.