Regional Approach to Tackling the Funding Gap
As the traditional model of funding initial-phase life sciences companies appears to be either broken or struggling, a number of states and regions are stepping in to address this critical investment gap. An example is a program in southeastern Pennsylvania. Philadelphia and its surrounding metropolitan area offers start-up life sciences companies a rich asset base, an experienced, educated workforce, and proximity to multinational pharmaceutical companies and first-rate research facilities. In fact, according to a 2005 report by The Milken Institute, the greater Philadelphia region employs more than 53,000 people in the sector and over 300,000 in related industries.
Even with this robust infrastructure, life sciences entrepreneurs and start-ups in Philadelphia, like their counterparts around the country, face serious challenges in finding seed capital. Pennsylvania thus established a comprehensive initiative just over four years ago to create a continuum of investments for emerging businesses throughout the state. The program dedicated $100 million from its tobacco settlement funds to create three regionally-focused life sciences “greenhouses.” The initiative also awarded $60 million to three venture funds to provide the next stage of capital.
With the money, the Philadelphia greenhouse developed a $20-million seed fund. To date, it has stacked half of that on regional companies that are now advancing new therapeutics, biomedical devices, diagnostics, and platform technologies through commercial proof of concept. From its first investments in the spring of 2003 through to 2005, this model has tripled the annual number of venture funds in the region.
This public/private model offers some strategies for other regions in their investment decisions for start-ups. Some of the lessons learned from southeastern Pennsylvania include:
• A company should have multiple opportunities for success to offset the inherent risk of failure in the life sciences.
• Use of tranche investments and a convertible note structure can mitigate some of the risks of seed-stage financing.
• Key milestones that will make a company attractive to the next stage of investor must be carefully defined.
Another important strategy for funding life sciences start-ups is to use a region’s network of experts, consultants, and contract research organizations to enhance capital efficiency.
Early-stage companies in the Philadelphia region are fortunate because the area provides an extensive network that supports larger biopharmaceutical and device companies. While other areas of the country may not have as many resources, a region’s academic institutes, hospitals, and other biomedical services often represent untapped assets.
To help ensure financing success, it is critical to take every opportunity to nurture alliances between start-ups and these regional entities.