Friends and Family (Offices) Step in to Funding Drought

Not too long ago, it didn’t take much for someone with an idea for a new medical device to rake in the early-stage funding. Investors have been a bit more discerning over the past decade, to say the least, and by and large they remain so, according to K&L Gates’ Michael Hedge, who’s been around long enough to […]

Not too long ago, it didn’t take much for someone with an idea for a new medical device to rake in the early-stage funding. Investors have been a bit more discerning over the past decade, to say the least, and by and large they remain so, according to K&L GatesMichael Hedge, who’s been around long enough to remember the heady days of the early 2000s.Hedge_Mike

But Hedge and his partners at the firm, which ranked in the top 10 in Lake Whillans’ recent Life Sciences Law Firm Index, have seen some signs of life, as the Irvine, Calif.-based Hedge’s clients are forced to “scratch and claw” to find financing. But they aren’t necessarily finding it where they expected.

What’s the funding environment for life sciences companies right now?

sponsored content

A Deep-dive Into Specialty Pharma

A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.

The fund managers in life sciences have deployed a lot of capital, and understand that those companies they’ve deployed it to are going to need additional capital for clinical trials and to reach the market, to get to that milestone where they can exit. They’re saving some of that dry powder for some of the companies they’ve already invested in. It’s not just ready to go into new companies who want to hit the market. I’ve got several clients that have tried or are trying actively to access the public market, but the bar is much, much, much higher than it was even 12 or 18 months ago. I’m not optimistic that you’re going to see a robust market there rest of the year but you never know: It just takes a couple to get through the door.

Are you seeing any movement?

In the device space, I’ve actually seen a little loosening up of ability to fund in the past 6-12 months. I’ve seen more device companies get funded earlier than I have say over the past five years.

RELATED: M&A The Last Refuge for Biotechs Seeking Funding

What’s behind that loosening?

When I say loosening, it’s relative: It was a choke-hold before but now it’s let up a little bit, just some money flowing in. Part of it is regulatory. It’s still difficult, but I think there’s been a concerted effort to try to get the FDA to be a little more amenable to working with companies to get their products through the approval process. If you go back to the late ‘90s, so many people were getting funded with such ridiculous business plans. With the shutdown from ’05 and ‘06 to the last couple of years, you’re seeing fewer companies go to that space, so those that are staying are more of the real companies: the experienced entrepreneur who’s done it before. The quality of the companies is a little bit higher. You’re also seeing the fact that a lot of the large strategics have venture arms now, where maybe they didn’t 15 years ago.

Are there other new and important sources of financing?

Friends and family and high-net worth have become more of a funding source. Here in Orange County, there’s been a number of companies that have actually raised a fairly substantial amount of capital, at least on a relative basis, through non-institutional financings. It’s an alternative that’s generally considered painful for an entrepreneur because they have to knock on a lot more doors: You’re going to have to have about 15 to 20 to 30 investors. It makes it much more difficult and painstaking to get that done. In some cases you’ve seen family offices come into the space, although I think that’s still fairly rare. You have to find a family office that is very interested in the technology: maybe there’s a personal touch, someone in their circle afflicted with a disease that this product is meant to treat. Companies have sort of had to scratch and claw to find different ways to finance.

RELATED: Biotech’s New Money Is Out in Force at JP Morgan 2016 (and Why It Will Be There in 2026)

What about the much-ballyhooed potential for crowdfunding?

I haven’t really seen the crowdfunding do much for life science companies. It’s very, very new in terms of the regulations the SEC’s adopted. I’ve had some clients talk about it. There’s certainly some drawbacks to it from a legal perspective that some of the entrepreneur aren’t fully up to speed on. It’ll be interesting to see if that creates another source of capital. I doubt it will, but I’ve been wrong before.

The JOBS Act really hasn’t had quite the impact that some expected.

With the IPO market, maybe it’s helped a little bit. I think I had one client that sort of set up an offering for general solicitation, just sort of in their back pocket in case they needed it. They set up the mechanism of validating the accredited investors and all that, but they ended up not having to go that route. I don’t think I’ve actually had a client go through the general solicitation.

                                                                                                                                       

Lake WhillansThis column is by Lake Whillans Litigation Finance. To learn more about us, and litigation finance generally, visit us at our website at lakewhillans.comTwitter, or LinkedIn.