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The life sciences sector is buzzing with innovation. Start-ups and scale-ups are developing promising medicines, therapies, and medical devices that could fundamentally change healthcare. But alongside the scientific and technical challenges, there is another stumbling block that requires the necessary attention: financing.
How do you finance a years-long and risky development process? How do you prevent delays and keep control of budgets when testing, partners, and market conditions are constantly changing? And how do you ensure that your shareholders and future investors maintain their confidence? In this article, we list the most important financial challenges and share practical examples and tips from our own experience in supporting life sciences companies.
Young life sciences companies often face one major challenge: finding sufficient capital. Because it often takes years before revenue is generated, entrepreneurs must secure multiple rounds of financing to keep their business afloat.
The financing landscape is also competitive: many entrepreneurs seek finance in the same pool of investors and subsidies. A strong story and a well-developed financial plan makes all the difference here.
Due to the expertise that is required in this sector, the majority of medtech and biotech start-ups are founded by scientists or medical specialists. While their knowledge lies in innovation and technology, they often focus less on finance. Issues such as budgeting, reporting, financial planning, and structuring financing rounds are crucial to realizing the company’s ambitions. Usually, these activities are often overlooked in the early stages.
As a company grows and investors become involved, this shortcoming becomes increasingly acute. A CFO role or external financial support helps to get a grip on the figures and to make realistic plans that give investors confidence. For these early-stage companies, a fractional CFO is the ideal fit. The company benefits from key expertise without paying the full-time fee.
Another typical feature of the life sciences sector is the long and expensive development process. From testing to certification, and from clinical studies to market approval, it can take five to ten years before a medical product actually generates revenue or licensing income.
Considering the risk in developing a medical product, it makes it nearly impossible to finance the entire development and certification at once. It's crucial for these companies to work in phases and with so-called value inflection points: clear milestones that create new value and trigger interest for the next round of financing.
What do these challenges look like in daily practice? We give three examples.
A first practical example concerns a life sciences customer who was confronted with a shortage of essential materials during product development. A choice had to be made: wait for delivery or consider a redesign and the corresponding verification tests.
Our financial analyses provided management insight into the impact of both choices: the longer lead time of a redesign versus the waiting time for materials.
Ultimately, the company opted for a redesign, which not only solved the problem but also led to a better and more sustainable product.
Another company built flexibility from the outset by budgeting for multiple scenarios. They included budget reserves to test alternative development routes. As soon as it became apparent that a particular route was not feasible, they were able to switch to a sidetrack immediately.
This approach proved to be very effective: it prevented delays, gave investors confidence, and gave the company more control over its financial future.
A third example shows the importance of flexibility and scenario thinking. In this case, a company operated in a difficult financial climate. Investor appetite for this type of technology was low, which made raising capital difficult.
Instead of sticking to a single route, the company developed multiple investment scenarios: a large, medium, and small plan. Each scenario had a clear impact in terms of implementation, required resources, and budgets.
Depending on market sentiment and investor willingness to participate, the most appropriate plan could be chosen each time. This enabled the company to stay on course and still secure financing.
The role of the F.INSTITUTE was crucial in this regard. From a CFO role, we supported management in addressing the financial consequences of each scenario. This included choices regarding the scope of clinical studies, deployment of personnel, in-house facilities versus outsourcing, and the associated budgeting. By providing insight into these scenarios in advance, the company was able to act flexibly and credibly towards investors.
If you recognize these challenges and want to get your finances in better order, we have a few tips for you.
Think about the dot on the horizon from the outset. Even if the route is still uncertain, make sure you have a long-term vision and let other entrepreneurs in biotech and medtech inspire you.
This will help you create a realistic blueprint and manage expectations towards investors and your first employees.
Make sure you have control over your budget and financial strategy. Nothing is more annoying than surprises for investors or messy board meetings. Set up processes in a way that you have timely insight into your financial position, both at the company level and per project or subsidy.
Communicate challenges early on so that you can work with stakeholders to find solutions.
If you would like to explore this topic further and understand what it can mean for you, don’t hesitate to reach out to us. We are always happy to discuss your goals!