Why investors are misled in preferring software to life science startups

Stoic Venture Capital

Life science companies are losing millions of dollars in investment that is instead allocated to software because investors misunderstand the benefits of investing in the sector, a prominent venture capital fund says.

Stoic Venture Capital Partner Dr Geoff Waring said private investors were wrongly deterred from pursuing life science companies and this was leading to millions of dollars-worth of lost opportunities for the industry.

Software start-ups attract around 70 per cent of venture capital investments, compared to life science which attracts around 15 per cent and other categories such as hardware, clean energy and advanced manufacturing which attract even less, Dr Waring estimates.

“Investors tend to prefer software companies over life science because of an erroneous belief that life science requires more capital per product so the returns will be more attractive,” he said.

“Offsetting this is the ability of life science discoveries to be platform technologies. One successful clinical trial can make it easier to launch other products derived from the underlying technology.”

Mesoblast, a listed cell therapy company is an example. If one application is approved by regulators, it will be easier to get approval for the wide range of diseases treatable by their stem cell therapy platform.

Similarly, a life science drug that enhances immunity will be able to both prevent and treat multiple diseases.

Dr Waring said there are many new health companies springing up that would become ever-more critical to communities because of our ageing population.

“More people are living longer, with one or more chronic or complex health conditions,” he said.

“Health technology has huge potential to improve patient experience, outcomes and quality of life and this makes it very valuable for all stakeholders.”

Dr Waring said the multiple stages of clinical trials for gaining regulatory approval were milestones for evaluating health tech companies.

Too many investors are deterred by erroneous assumptions including that there are few exit opportunities in a pathway to market for a drug or treatment that could take 10 years to reach the market.

“A preference for faster returns is a key reason why investors shy away from health technology,” Dr Waring said. “People believe it will be a decade before they get their money back.”

“But there is a common exit opportunity at the end of phase 2 trials, before any revenue is generated, which can be as low as a three-year holding period.

“A software company might wait seven years to get their revenue to a level where it is acquired.”

“If investors manage the risk of individual technologies by diversifying across companies, health care is less affected by downturns, has very strong patent protection and scalable production that present valuable solutions for both communities and investors.”

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