Why Do So Many Angel/VC Investors Misunderstand Life Sciences Investing?
By: Colorado BioScience Association Date: 04/18/2022
Guest Post by Peter Adams, Executive Director, Rockies Venture Club
I am often surprised when I meet investors who claim that they invest in just about anything but life sciences. Last year healthcare was the second largest segment in venture capital investment (behind internet technologies), and this is for a reason – great investor returns.
At RVC we define “life sciences” broadly, and admittedly, some of our life sciences sector doesn’t even have any actual life sciences in them. We include drugs, medical devices, diagnostics, digital healthcare, and healthcare. Investments in these sectors comprise as much as 35% of our overall investment portfolio. We like this space because of the high return potential and the thriving life sciences community here in Colorado that creates and supports life sciences companies.
There are two main reasons why I hear investors say they stay away from life sciences investing:
1) They think it takes too long to exit. While it is true that taking a drug from the lab through Phase 3 clinical trials can be costly and time-consuming, startups and their investors rarely go for the full ride. Part of our due diligence process includes an analysis of what I call the “off-ramps” for companies where they can plan for exits relatively quickly after investment. Unlike tech companies, medical companies do not need to build huge markets with giant and expensive sales forces in order to generate large investment profits. In some cases, once the company achieves 510K clearance for medical devices or Phase 1 trials for therapeutics, they are ripe for acquisition. Ironically, we have had more early exit strategies from life sciences companies than from other types of investment.
2) They think FDA is an unpredictable black box and it will take hundreds of millions of dollars to achieve clearance. There is a shred of truth to this, but investors need to understand that there are many different types of FDA approval and many can be achieved with under $1 million in investment and as little as six months. A good due diligence process will uncover the true FDA risks and opportunities. And again, early-stage investors often don’t need to buy into the full course of FDA risk and can take early exit options along the way.
When I compare life sciences investments with tech investments, both have a basic technology component which, in many cases, is just a matter of getting the work done. Evaluating deals in life sciences does require some understanding of how the industry works, but does not necessarily require a deep understanding of peptides or b-cells, for example. Engaging in the community with organizations like CBSA and RVC provides access to expertise that can lead to great investment opportunities.
Join us for Colorado Life Sciences Night, hosted by Rockies Venture Club and Colorado BioScience Association. Register today!