- Andreessen Horowitz has been consistently adding life science companiesto its roster,
- YCombinator put out an RFS for breakthrough technologies,
- Breakout Labs has long been active in funding science-focused ventures,
- Lux Capital closed a fresh $350M fund exclusively for science startups,
- Google Ventures just published their investment thesis titled: “Medicine’s Transistor Moment”.
However, for many VCs, the mention of investing in science startups can conjure up bad memories. Significant capital requirements, politics, and lengthy go-to-market timelines turn many science startups from “good idea in theory”, to “bad idea in practice”.
As VCs continue to build-out their perspectives for science startups, there are three key things that they should be thinking about: 1) Investment in platforms ahead of technologies, 2) Consideration of hybrid capital structures, and 3) Consideration of alternate pathways to exit.
1. Platforms first, breakthrough technologies second
Investors interested in science startups must broaden their scope to not only consider investment in breakthrough technologies (like new drug-delivery systems, advanced materials, and more efficient batteries), but also inplatforms enabling their development.
Many of the science startups surfacing in the most recent tech boom have been platforms built to streamline, automate, and remove process frictions at various parts of the scientific value chain, or “science stack”. These include startups that make the funding process, doing experiments, and sharing of the results, faster and cheaper.
As these platforms (and others to come) mature, investors not only generate returns from investing in the new infrastructure of science, they also set the stage for bringing costs down across the entire value chain.
This opens the door for investors to take more bets on startups developing new breakthrough technologies — while getting diversification and keeping overall investment check sizes small. Getting to capital efficiency, is the only natural hedge against the significant technical risks embedded in pure-technology plays.
This is why focusing on platforms first, before technologies, is important.
2. Hybrid capital structures
Given that developments in science and technology have broad social impacts — it will inevitably catch the attention of government and philanthropic stakeholders.
For investors, this practically means being aware of the philanthropic, government, and investment capital in play at all times. Each type of capital has its own objectives, constraints, and risk-return profile. No one entity can operate in isolation, as the decisions made by one, affect everyone else.
As we’re seeing in other social-impact verticals like recidivism, homelessness, and education, this can actually be an advantage in accelerating the pace of change — if creative solutions to blend these three types of capital are explored.
Take recidivism social impact bonds (SIBs) for example. Governments pay for successful recidivism outcomes; from cost savings generated by the social programs executed by non-profits; seeded by investment capital and philanthropic guarantees. SIBs in this example, are essentially risk-transfer programs that allow for the government to co-invest with the private and philanthropic sector to accelerate a particular social impact.
Similar ideas can be applied for science startups in cases where the risks embedded are too high for investors to bear alone —and require some de-risking using other types of capital. This would be most relevant for the development of breakthrough technologies struggling with the idea to impact gap.
VCs can potentially expand the scope of their investment opportunities if they bring mission-aligned partners (like philanthropic organizations or government) to the table with their unique capital base to create win-win partnerships.
For example, larger foundations could partner with science-focused VCs to co-invest by providing first loss capital, program related investments, or strategic grants. For investors, this would balance out the risk-return profile — making startups developing high impact technologies more “investable”. For foundations, their capital would be “levered up” and directed towards science that has a bias for translation into real societal impact.
3. Alternate pathways to an exit
Many science platforms, like the ones described in the graphic above, will be suited for public offerings — with business models that are fairly similar to other software startups.
However, not all science startups are positioned to exit via traditional pathways like an IPO. For example, startups developing breakthrough technologies may not neatly fit into this bucket.
A new technology may be a good product but not necessarily a good standalone business; the infrastructure needed to scale up a technology may require robust supply chain relationships; or the founders/inventors of a technology may not want to pursue entrepreneurship full-time.
Investors looking to capture the most value from their investments must be flexible and willing to explore alternate exit options. This could include: investing more heavily in corp dev relationships, strategic partnerships with established supply chain players (think Quirky’s model), and/or training managers to step in and build out new businesses.
Science startups have all the makings for VC involvement. They go after big problems, with big markets, and are high risk.
Those developing their investment perspectives for science should look for opportunities to fund enabling platforms ahead of technologies, experiment with hybrid capital structures, and explore alternate pathways to exit.
Addressing the environmental, social, and health challenges that our generation faces in the next 50–100 years requires bold risk taking. The good news is that we’ve never before been in a sustained investment climate where so much risk-capital is available and searching for the “next big thing”. We should take this opportunity to deploy this capital productively.
As a friend of mine liked to often say: “an investment in science, raises all boats”.