First published in our Biotech Review of the year – issue 8.
As its name suggests, seed investment refers to when a small amount of capital is invested into an innovative start-up or spin-out earlier in its product development than usual investment strategies would advise. Typical of the venture arms of larger pharmaceuticals, or smaller entities active at a commercialisation level in the sector, this seed capital isn’t necessarily intended to generate returns, at least not immediately.
A behind-the-scenes reveal
Instead, seed investment allows strategic investors to get a first look at innovations and technology ahead of the lengthy and capital-intensive timescales typical of the sector.
Seed investors often offer deal terms that include enhanced information rights or rights of first refusal for new products or technology in return for their investment – providing the much-needed capital to benefit smaller labs and researchers while they themselves are kept abreast of the most cutting-edge developments. The arrangement is mutually beneficial: pioneers get vital funds to bring products to market, and larger companies are able to tap into the innovative, trail-blazing work of cutting-edge start-ups.
As a trend that pre-dates the pandemic – alongside the rising interest of private equity in the life sciences sector, the growth in collaboration and the increased importance of the spin-out – an increasing volume of seed investment is a sign that investment into the life sciences sector is becoming ever-more sophisticated.
Looking for a bullseye
Particular targets for seed investment are spinouts from larger companies or universities, both in the largest life sciences market – the US – or in the UK, which sits comfortably as the second largest market in the West. These market positions are indeed largely thanks to the strong university medical research in both nations, whether based on the US life sciences breadbasket of Massachusetts, or the UK’s ‘Golden Triangle’ between Oxford, Cambridge and London.
While seed investor interest in the US and UK seems set to remain, we are seeing changes in terms of the areas of technology attracting the most attention. 2019 saw all eyes on the fields of cell and gene therapies, unsurprising given the ongoing excitement over CRISPR gene editing that largely defined the decade. However, 2020 begun as the decade of the COVID-19 pandemic and, accordingly, interest has inevitably shifted toward medical devices and diagnostics.
Similar trends have emerged alongside the rise of seed investment, from the life sciences accelerators launched by Merck and the Frances Crick Institute, to the IPO boom of 2019-20. Innovation is at an all-time high and, from the first incorporation to listing publicly, companies now have greater options in where to find capital and guidance.
As a result of their scientific focus, smaller biotechnology companies can react nimbly to evolving science in product development. Acquisition and partnership in this segment of the market allows the larger players to capitalise on this agility, while providing a springboard for many a start-up or spinoff’s trajectory. We look forward to seeing it continue into 2021.