Key Takeaways
- With a foggy economic outlook, yesterday’s fundraising playbook might not cut it.
- Sectors like biotech show resilience and growth opportunities in the next few years, but companies will likely need to weather macro-economic challenges.
- Life science investors often have operational experience, which can give founders access to valuable advice.
Times are changing. For many early-stage life science companies, navigating funding through an uncertain market raises questions. What attracts investors as they decide whether to fund a life science startup? Do recent market shifts call for new tactics for managing investor relations? What should founders expect when working with investors?
To answer these questions, it’s helpful to look through the eyes of investors like Eric Gomez, a healthcare venture capital investor at Mubadala Capital Ventures. I met with Eric to discuss his perspective on startup fundraising, particularly in challenging markets.
How investors evaluate life science startups
Life science and healthcare funds focus on different types of startups, which can vary by stage of financing, stage of development, therapeutic area/business vertical, or other factors. Founders who are mindful about a fund’s sweet spot, regardless of market conditions, can maximize their probability of finding the right investor match for their company.
For example, Mubadala Capital Ventures’ healthcare venture capital fund seeks out two kinds of founders:
- Ambitious scientists: “They’re post-doctoral students or professors at the front lines of emerging science,” Eric explains. “They have fantastic ideas for platform technologies supported by insights from their own research, and they’ve published in high profile journals.”
- Veteran drug developers: Eric describes these as “operators who have been in the industry for decades” and have decided that it’s the right time to start their own company. “They’ve identified an opportunity from first-hand experience working in pharma or biotech, and they call upon friends from the industry to assemble a technically very competent team.”
Some funds may focus on a specific fundraising round or clinical stage. At Mubadala Capital Ventures, the healthcare team focuses primarily on Series A and Series B investments at the preclinical stage, but they keep flexibility for earlier or later companies with outstanding science. Alternatively, some funds might prioritize former founders who are starting a new venture. Purpose-driven funds could also prioritize founders from underrepresented communities. 
Eric Gomez, Ph.D., Principal of Healthcare Investments, Mubadala Capital Ventures
Selling a highly technical concept to the right investor at the right time can be difficult. Researching life science investors and other alternative sources of capital can help founders avoid spending time chasing options that might not suit their company. After identifying the investors who overlap your interests and values, it’s important to know how to present your company succinctly while still giving enough details to have meaningful conversations.
What’s changing in difficult market conditions
The overall startup investment landscape is different now than it was just a year ago, including for the life sciences industry. Pendulum swings in the market often mean that investment strategies — and, by extension, companies’ business strategies — also pivot.
Eric notes that many investors have reconfigured their approach toward how well a company’s technology is progressing and which milestones they’ve hit. “In this environment, many biotech investors have raised the bar on the amount of scientific derisking that’s palatable to them. They’re also asking themselves if the startup will hit enough meaningful milestones with the current raise to justify a valuation step-up at the next raise, especially if venture capital dealmaking stays challenging. This might mean founders need to take on more dilution for more runway sooner than they had anticipated,” says Eric.
The trick, then, is to figure out which milestones are appropriate for a company at a given stage of development from a technical and financial perspective. Measuring milestones ultimately depends on each company’s unique circumstances and each investor’s strategy. The ideal milestones provide a value inflection, which allows the company to raise their next round at a step-up in valuation. This is important from an investor’s perspective because cash flow can be negative for so long. According to Eric, “What it comes down to is the value of the platform, the products, and the proof points that have been achieved for those products.”
“During downturns is when resilient founders are tested and great companies are formed because that early resilience becomes a part of company culture.” — Eric Gomez
While recent economic shifts have caused some investors to raise caution, Eric points out that the opposite can also be true; other investors are funding aggressively as valuations drop. “A lot of investors believe times like these bring tremendous opportunity,” he notes. “During downturns is when resilient founders are tested and great companies are formed because that early resilience becomes a part of company culture.”
In difficult environments, funds with long-term outlooks like Mubadala Capital Ventures are also likely to turn more attention toward supporting their current portfolio because external financing can be more difficult to secure. Founders often turn to inside investors to extend runway when their company is close to a meaningful inflection point that would help them seek new funding from outside investors. After all, existing investors are most familiar with the company and share a vested interest in helping it succeed.
Short-term turbulence, long-term opportunity
The current market presents immediate challenges, but the industry is on a positive trajectory. At Silicon Valley Bank, we see immense growth potential in life sciences over the coming years. That’s also the case for Eric, who anticipates major opportunities in a few key sectors, including:
- Structure-based drug discovery
- Computational biology platforms
- Covalent, multivalent, degrader, and peptide chemistry
- Synthetic biology applications in biomanufacturing, biofuels, and DNA data storage
- Aging and longevity therapeutics
The companies that have an advantage in these spaces, in Eric's view, are those with a blend of privileged scientific insights from academia combined with experienced life science operators. Such companies are rare, but the ideal team composition calls for both tech talent and in-depth scientific knowledge. Alongside a founder’s technical expertise, Eric also looks for strong soft skills like storytelling.
An investors’ own experience can add value in hard times
Eric's distinct background and expertise led him to venture capital. Like many investors in this space, his passion for life science innovation stems from a combination of scientific training and the desire to have a meaningful impact in healthcare.
After developing scientific roots through his undergraduate at MIT and Ph.D. in bioengineering at Rice University, Eric's interest in startups grew. Together with his professor and fellow graduate students, he tried to create a startup in the gene therapy space. Later, he joined a precision oncology startup that pitched to Life Science Angels (LSA). Eric describes this experience as the catalyst for his passion in the startup economy.
“I was a scientist. I was an introvert,” Eric recalls. “In my first job, the chief financial officer and really all of the leadership team took me under their wings and showed me the importance of soft skills, which are key for an investing role that depends heavily on relationships.” To keep honing his passion, Eric started gaining firsthand experience building companies and identifying the types of talent and technologies that give startups star potential. By the time he began venture at Mubadala Capital Ventures, he had valuable reference points across science, business and finance to help find and nurture new companies.
Empathy inspires mutual appreciation and builds stronger partnerships between founders and investors.
These experiences have helped Eric understand what it’s like from a scientific founder’s perspective, from conducting specialized research to dealing with new business growing pains. Empathy inspires mutual appreciation and builds stronger partnerships between founders and investors. Regarding how investors can empower and enable founders, Eric says, “Just be kind. Grab a coffee with them, talk through their vision, and act like you’re both players on the same team. That’s one of the most powerful ways to build trust and work together.”
Whether you are an entrepreneur or an investor, finding the right mentors and partners can help enhance your career. At Silicon Valley Bank, part of our role is to provide guidance throughout the ecosystem. Despite economic shifts, we see ample opportunities for founders to connect with investors and raise capital in the life sciences and healthcare industry. This market could be the time when the best companies of tomorrow will be funded.
Running a startup is hard. Visit our Startup Insights for more on what you need to know at different stages of your startup’s early life. And, for the latest trends in the innovation economy, check out our State of the Markets report.