Facing a dearth of funding because life sciences investors don’t understand your medical project? Your plight has a name: the “valley of death.”
“All venture capitalists likely agree that curing cancer is a great idea; however, even sophisticated life sciences investors lack the scientific knowledge to assess which novel candidates are most likely to succeed medically or commercially.”
At the same time, university academics — the people most likely to develop the vital intellectual property such as better cancer therapies and diagnostic tools — lack venture capital business experience.
The result is what’s come to be called the valley of death — a dearth of funding to validate discoveries. Up to 90 percent of research projects fail before they’re tested in humans; and, according to a report by the Milken Institute, for every 5,000 compounds tested, only five make it to clinical trials.
Three levels of funding every research entrepreneur needs to know about
Phase I funding — which allows up to $250,000 for an academic idea, such as decoding the genetic sequence of a protein or studying targeted drug delivery by using magnetic nanoparticles — is available from federal funding and foundations.
For example, the Small Business Innovative Research (SBIR) and Small Business Technology Transfer (STTR) are seed funds created by Congress to help transform government-funded research into businesses; these invest about $2.5 billion in grants, annually, in more than 6,000 companies.
The states are getting involved, too: New York recently announced a $650 million initiative aimed at boosting life science research in that state. However, such funds are highly competitive and increasingly hard to secure.
Thankfully, though, the search for funding has created its own ecosystem: Instrumentl helps scientists get grants, while Experiment secures crowdfunding. Other sources provide services to keep costs low: Science Exchange connects scientists with experts; and Transcriptic is a cloud-based biotech lab testing experimental drugs, while Gingo Bioworks designs custom microbes for customers.
Phase II seed funding of up to $1 million is used to assess if a discovery can be commercialized. Phase II is now also available via grants and incubators — such as Y Combinator, IndieBio, StartX and QB3 — although it’s harder to procure than Phase I cash.
Phase III funding, the round where ideas are validated with up to $10 million in funding, is the very center of the valley of death, because it’s the biggest test for early-stage companies. This is the do-or-die stage for companies, and most of them fail. (Those that survive find it easier to get Phase IV venture/growth funding of $7 million to $100 million to commercialize operations.)
Amazingly, if these Phase III companies can secure funding, they typically require less than $10 million for early clinical data to prove whether something is worth pursuing. Importantly, even failures can produce valuable intellectual property that can be commercialized or leveraged elsewhere.
Sadly, though, most of these Phase III companies do die, not because their ideas are bad, but because they fail to secure enough funding. They face a Catch-22, whereby most investors invest only in medical companies where a previous investor has already committed.
Investors’ fear about being first
Investors, it turns out, move in herds; attracting the first one is nearly impossible, but getting five makes the process smoother. That fear to commit stems from the fact that most investors do not have the ability to vet scientific deals. Science is inherently highly technical, and many investors feel intimidated.
Some bridge that gap with venture capital and scientific specialization. For example, my fund, ScienceVest, focuses on science-tech and life-science companies. Healthfundr invests in health IT, FundRx in healthcare and Propel X in tech startups with breakthrough technologies.
Then, there’s the growing number of impact investors globally that are committed to the United Nations’ Sustainable Development Goals, a dynamic that should drive more dollars to impact investing in the coming years. Among this growing impact-investing community are such VCs as FiftyYears, Lux Capital, Dr. Jenny Rooke, Breakout Ventures, IndieBio and Playground Global.
The life sciences and frontier-tech companies that are making an impact are the ones that are most likely to make it to an initial public offering or an exit for their investors — more so than are traditional tech companies. A good example is cancer drug maker Stemcentrx and its recent $10.2 billion sale to AbbVie Inc.
Then there’s the university vs. non-university differential: 8 percent of companies that were started in U.S. universities go public, compared to a “going public rate” of just 0.07 percent for U.S. firms founded outside of universities. The National Council of Entrepreneurial Tech Transfer calculates the difference between being birthed in a university, vs. elsewhere, as 144 times more likely to go public.
A report by Cambridge Associates suggests something else, saying that it’s a good idea for investors to fund newer VC managers: Over the last decade, between 40 percent and 70 percent of total gains were claimed by new and emerging managers.
So, what else should founders facing the valley of death do? Three tips.
- Connect with the people, programs and investors that can help them overcome challenges, whether those challenges be funding or making a vital commercial partnership. Tap networks such as Twitter, Angel List and LinkedIn to connect with current and former founders/investors of similar companiesable.
- Maintain a time line of the resources needed to pass meaningful milestones, and use services such as ScienceExchange, GenScript, Catalent and PCH to keep costs low. Use such tools as the Investment Readiness Level to ensure that conversations with potential partners and investors will be meaningful.
- Keep trying. Program managers at the National Institutes of Health, the National Science Foundation and other agencies will respond quickly to let entrepreneurs know whether they might qualify for up to $1 million in non-dilutive funding. Venture capital outfits, from Y Combinator and IndieBio to ScienceVest or Khosla Ventures, can also help.
These are exciting times. Two examples:
- Biopharmaceuticals made from strings of complex living proteins are now the fastest-growing class of medicines. Among other things, these drugs treat autoimmune disorders such as rheumatoid arthritis, diabetes and cancer. Of the top 10 therapeutics today, seven are biopharmaceuticals and these drugs will eventually become more common. In fact, they comprise a $170 billion global market that already is growing 15 to18 percent annually.
- The age of personalized medicine was behind President Barack Obama’s “moonshot” to cure cancer. The American Cancer Society estimated that 1.69 million Americans were diagnosed with cancer in 2016 and that 596,000 U.S. people would die as a result. However, one of the biggest obstacles to curing cancer is connecting researchers with funding, allowing great ideas to travel the long road to market.
Hopefully, as more investment in personalized medicine and medical technology is established, that moonshot won’t come crashing down into the valley of death. Greater investment will bring about improvements for everyone, just as cost-reductions in chips, cloud computing, mobile devices and storage have already brought personal computing to billions of people.