Keeping Your Life Science Startup Out of the "Valley of Death"

First Republic Bank
January 12, 2022

  • Only .02 percent of preclinical drugs actually make it to the marketplace, prompting early-stage investment challenges for life science startups.
  • If you're looking to grow your startup, it's crucial to find ways to escape this so-called "Valley of Death." 
  • From cultivating key business relationships to seeking legal protections, here's how to overcome the Catch-22 with your life science startup. 

For every 5,000 drugs in preclinical development, five of them will reach clinical trials. And from there, only one will advance to the marketplace — accounting for a success rate of just .02 percent.

Put simply, the odds seem stacked against those looking to take an early-stage therapy through to commercialization. This is juxtaposed against the recent surge of growth and funding the life science industry has been experiencing over the past few years, poising the sector for continued growth in the months and years ahead.

Why this contradiction? Blame the “Valley of Death,” the steep drop-off that happens when translating academic success to first-round financing. As a paper from Translational Medicine Communications described it in 2019, this chasm is where life scientists don’t want to be — and yet too often, they find that their preclinical studies fail to reach the clinic. One reason is funding and organizational structure: Researchers may have a good idea that gets thwarted by negative cash flow and an immature business model that hasn’t yet found its premarket footing.

There are several contributors to this problem, including fundraising issues. Many early-stage life science startups encounter a Catch-22 when investors require more extensive (read: expensive) data before they’ll take on the risk. In other words: VCs don’t want to invest without more evidence — and researchers can’t deliver more evidence without investment.

While COVID-19 created some conditions favorable for emerging biopharma companies, such as an influx of fresh capital and media exposure on new vaccine research and technology, it also introduced constraints such as delays in clinical trial execution. The pandemic also created barriers to in-person events and networking, which are crucial tools for relationship-building between potential investors and early-stage companies.

As life science startups navigate these and other financial barriers that await in the Valley of Death, here’s what they should do to keep preclinical products on track. 

Expand the Orbit of Influence   

Networking helps early-stage life science companies build business relationships before they need them so that they can have someone in their corner when the time comes. These connections can ultimately become a funding source, but they also serve as a litmus test for new projects. As startups expand their orbit of influence, scientists are more likely to find a tribe that champions their genius while poking holes where holes need to be.

“There are usually two lanes for life science startups,” says Nishta Rao, Managing Director, Life Sciences at First Republic Bank. “One is the serial entrepreneur who’s well-established with a shortlist of committed investors. The other is that early-stage, first-time founder who has to do much more work to get to any sort of inflection point.”

For the latter group, Rao has some suggestions for scientists to power up their networking:

  • Build an advisory board. Surround yourself with thoughtful and competent advisors, either informally or through an incubator or university program.
  • Embrace videoconferencing. Amid COVID-19, investors have been more comfortable with Zoom calls — which can, in turn, create more efficiency for startups.
  • Let yourself be vulnerable. Don’t be afraid to ask for advice and constructive feedback from venture capitalists, biopharma CEOs and other entrepreneurs. And to further strengthen your IP, Rao has one more tip:
  • Engage with a top-tier IP attorney. Find legal counsel to ensure your best interests are covered. An experienced life sciences legal team can navigate you through contracts, liabilities and much more.

Rethink the Funding Model 

There’s no hard-and-fast playbook that all startups must follow to secure initial funding. At times, there may be opportunities to explore new funding models researchers hadn’t yet considered, Rao says:

  • Don’t write off industry investment early on. Most startups apply for funding through the Small Business Innovation Research (SBIR) programs as an easy and non-dilutive opportunity to kickstart fundraising, however, don’t discount the potential of simultaneously starting conversations with the venture and industry communities. You might be surprised how a combination of academic grants and industry fundraising reaches your goals faster. 
  • Engage with an experienced business development advisory. Many academic researchers engage with experienced fundraisers and business strategists to boost their business operations.
  • Engage with a trustworthy bank. Reach out to a partner with deep life sciences experience to help you adjust your funding model based on your research goals and upcoming milestones.

Make the Business Ecosystem Scale-Ready 

Many considerations go into scaling a business, from bookkeeping and investments to hiring, marketing and so much more. And yet, certain situations can jeopardize even the most solid business plans, from changing market trends to unexpected costs.

To optimize the scale strategy, Rao has these tips:

  • Build your management team. “A life science startup's gestation period from start to finish is very long, so you should start thinking of your scaling strategy now,” Rao said. “After all, you think about FDA approval long before you actually get there, why not your own leadership? The earlier you consider these factors, the better off everything will be.”
  • Augment your skillsets. Work with partners to supplement any skills you may be lacking — from financial and marketing experts to talent search specialists.  

Climbing Out of the Valley

With so many challenges facing life science startups, it would seem like the odds are stacked against scientific entrepreneurs despite the rapid growth and opportunity facing the industry. But rest assured: Every good idea has potential, and with the right mix of networking, fundraising and business and legal know-how, life science entrepreneurs can push that potential to extraordinary places.

“It’s about understanding not just the science but also the business, operational and commercialization needs,” Rao said. “It’s very important to start out right. If you don’t, it will take more time and resources down the road.”

Ready to talk with a life sciences banking expert? Contact us to take the first step.

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