We spoke to James Sinclair at Trade Finance Global, experts in debt funding about the complexities behind raising funding in the life sciences space.
How can science companies raise funding?
Scientific organisations are often faced with tremendous barriers to entry when bringing new products to market. Aside from regulation and complexities around rigour and technicals, raising funding is often difficult as the amount required is much higher than with ecommerce or fintech startups.
That said, investment into life sciences continues to increase, according to Beahurst, private equity is the most prominent backer of science companies and continued to grow last year (in percentage terms) versus companies outside of this space:
What types of funding are available?
Broadly speaking, life sciences companies raise funding through three means; grants, debt and equity. Grants mean no return on investment for the funders, and include academic institutions, non-for-profit research organisations, and private funders. Debt funding will normally require some element of security (e.g. repurchasing a company’s PCR machine and leasing it back to them in return for cash with interest). Equity funding (often at venture capital or private equity level) could involve a considerable cash injection into a business in return for a significant stake in a company. Equity funders could also include crowdfunding whereby a pool of sophisticated investors take a stake in a company in return shares (in the hope that the company will perform exceedingly well and they will reap the benefits of their investment when they sell their shares later on). An example of equity crowdfunding was WITT energy’s £750k raise (where in fact they managed to exceed this and have raised a stellar 315% versus target (just over £3.2m).
Life sciences can be interesting when it comes to debt funding. For example, if your company might need to raise funds to cover the funding gap between paying a supplier and delivering to end customers, invoice factoring might be a handy way of bridging this cash flow gap. Science businesses will often face large cash flow gaps given that they may need to fulfil large orders to customers and need to purchase goods from suppliers and hire technicians to work on the product for a short period of time. To make it easy, Trade Finance Global have put together a handy infographic to explain the different types of invoice finance.
Asset finance is another form of debt funding that could help life science businesses purchase expensive equipment that is required to do testing. For example, a DNA testing lab for farmers (to test for diseases within their livestock) may require expensive PCR equipment which could be in excess of £500k. An asset financier can purchase the equipment on your behalf, worry about deflation of this and include it in their own capital expenditure (CAPEX) balance sheets rather than your comapny taking on that burden. What’s more, it means that the company might not need to give away equity but still grow and fulfil larger orders. Asset finance works in about 2-3 different ways, which you can read about here.
Finally there’s trade finance. Enginering companies might often need to purchase physical stock or goods from a supplier, and have an end-customer – for example, a firm might purchase raw materials from China to produce their cleaning tools for beer kegs and beer lines to sell on to restaurant chains. The international supplier of raw materials might not raise an invoice and quite typically, want payment up front. Trade finance allows for funders to step in as intermediaries and can take on the risks and payment themselves as a third party. Trade finance is a growing instrument, and Trade Finance Global have produced a guide to trade finance here.
On the other end of the scale, there are several VC and PE funds who will fund life sciences companies, given the high potential returns (despite the risks). Last July, Immunocore raised around £206m in equity funding from a few investors as it plans to grow its treatment lines for curing cancer through targeting T Cell receptors.
Often, raising funding to grow a science company, be that through standalone science or research projects, is tricky, given the added barriers to entry of higher capital costs, higher chance of failure and complexities in techniques and solutions. But as a business owner, asking yourself ‘What exactly do I need funding for?’ can help break down the problem – to address working capital problems, easing cash flow, funding an early stage idea, or perhaps a small research project.