The Breakthrough Conundrum

The post-recession move away from traditional early stage investments by venture capital firms has been examined recently in life sciences publications and conferences. The 2014 National Venture Capital Association Yearbook reports that through 2013, VC investments in early stage life sciences companies fell from levels in previous years. VC investments in life science are on track in 2014 to exceed 2013, yet investment in early stages still lags.

This investment climate is particularly challenging for start-up companies with a breakthrough technology. At a recent entrepreneurial showcase event, discussions focused on how to get VC funding and how to partner with large companies pointed out that in spite of claims by VCs that funds are designated for investments in innovative technologies, it is difficult to get funding for a breakthrough technology.

Many groups, including angel investors, traditional VCs, and corporate VCs, say they want to invest in or acquire breakthrough technologies, but upon review of their recent investments indicate that they do not. So, the life sciences entrepreneur is left to decipher whether the VCs are risk averse or the fund managers do not understand a breakthrough technology when it is presented.

A breakthrough technology is typically a high risk investment that may be difficult to comprehend, even to the most scientific-literate investor. Many breakthrough technologies are disruptive technologies that may change an existing market or create an entirely new market, making them inherently difficult to value.

Participants at the recent showcase commented that if you don’t recognize the potential of an innovative technology, it is easier to just say no than to try to understand and evaluate it. With an incremental improvement in a product or technology, however, the immediate impact is easier to understand. The evaluation process is also faster and less complicated.

Getting funding for a breakthrough technology requires patience to keep presenting and explaining the technology, until you have a technical description that ignites the “ah ha” moment in the audience and lands your company an investor who gets it. You must have a compelling story that clearly describes the technology and how it will fit into the existing market space. Realistic total market values and market share projections within existing markets as well as projections for potential future markets demonstrate your company’s understanding of current market forces.

In addition, you have to build trust. Over the years, many investors have told me they invest in people, not specific products or technologies. A good track record in other ventures is beneficial, and a strong network can foster key relationships as well.

BIP can help you estimate the market potential for breakthrough technologies. Contact us today to discuss our process for evaluating a breakthrough technology.

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