Biotech Start-up Investment 101
Investing in biotechnology start-ups used to be the domain of VCs, Business Angels and professional investors, but specialized equity crowdfunding platforms like Capital Cell have democratized this lucrative and socially conscious sector, allowing anyone with a computer and a bit of extra cash to invest alongside professionals.
Here, we tell you how to get started, beginning with a bit of background on equity crowdfunding and biotechnology before moving on to why and how to invest in biotech start-ups.
What is equity crowdfunding?
Equity crowdfunding involves investing in a company in exchange for ownership (equity) via a participative online operation that includes many other investors. It allows companies to raise funds from small investors on an unprecedented scale while giving these small investors access to the high-risk, high-return investments that used to be the exclusive domain of professional investors.
How are equity crowdfunding and start-ups connected?
Companies must meet certain minimum financial requirements to be listed on the stock exchange, which are out of reach of the average start-up. Equity crowdfunding fills the funding gap for start-ups and allows investors to get in early and put their money into potentially ground-breaking new products and ideas.
What are the advantages of equity crowdfunding?
The great thing about crowdfunding is that it requires no specialized knowledge of investing, and you need nothing but an internet connection and a small amount of capital to get started (ticket sizes typically range from €500 to €1,000). These smaller capital requirements make it much easier to diversify your portfolio, which, of course, spreads out and reduces the risk involved.
Another advantage of equity crowdfunding is that it allows you to invest in start-ups, which means you know exactly who and what you are investing in (unlike a large corporation). Not only that, but you can choose both the people and the product you want to invest in, which allows you to support the causes you believe in, whether it be female founders or socially conscious products.
Why invest in biotechnology?
If you want to invest in a sector that is not only hugely profitable but has a major positive impact on society, investing in biotechnology is the way to go. We'd go so far as to say that nowhere is the opportunity to make money while making a difference greater than in this rapidly growing field.
Biotechnology has become one of the most profitable investment sectors around, representing 25% of global Venture Capital investment and providing investorswith average annual returns of close to 20% for over a decade. And this is just the average. Capital Cell investors have seen returns on investment of close to 100x (for the sale of the company Ducentis) and even higher returns are not unheard of.
So what is biotechnology?
The term biotechnology comes from the words biology and technology and can be defined as the use of biological systems to create useful products. Biotechnology takes living organisms (e.g. bacteria) or biological components (e.g. DNA) and combines them with engineering, electronics and information technology to create new products or improve existing ones.
While applications range from agriculture and industry to the environment, nowadays, the vast majority of new biotechnologies are developed for use in healthcare and medicine.
Why invest in medical biotech start-ups?
When you invest in medical biotechnologies, you’re not just investing in a product that makes your life more comfortable or convenient, you are changing people’s lives for the better. Your investment could potentially be funding a cure for cancer, or the technology that helps a paralyzed person walk again.
Not only that, but your investment has the potential to change the direction of healthcare. Women’s health, for example, is one of the most underfunded and under-investigated areas of medical research, with conditions like infertility and endometriosis receiving shockingly little attention. Your investment can change that, ensuring that women’s health gets the funding and attention it deserves.
Why not just invest in Big Pharma?
Of course, if you want to invest in biotechnology, there’s nothing to stop you from investing in Big Pharma on the stock exchange, or in EFTs and Mutual Funds. However, you lose the selectivity and transparency of start-ups, such as being able to invest in a medical condition that is close to your heart, or support the founder of your choice. What’s more, start-ups are where the money is, for reasons explained below.
The biotech revolution
The start of the 21st century saw a revolution in biotechnology, as technologies like gene sequencing and editing platforms became faster, cheaper and more widely available. This has led to a proliferation of start-ups in the biotechnology sphere, as more and more researchers venture out of the lab to transform their scientific ideas into viable products.
The start-up takeover
These start-ups are proving to be more efficient and productive than Big Pharma’s own R&D departments, with the result that large pharmaceuticals are increasingly shifting their attention to the acquisition of start-ups. The number of FDA approved drugs that originated from smaller biopharma companies has been steadily increasing over time, reaching over 60% in 2018.
Making the big bucks
This is where the early-stage investor can make a lot of money. Pharmaceutical companies can afford to buy start-ups for hundreds of millions, and still save compared to developing the drug themselves. So if you happen to be one of the small investors that got in early, you could add a couple of zeros or more to your initial €1,000 investment.
When you invest in medical biotechnologies, you’re not just investing in a product that makes your life more comfortable or convenient, you are changing people’s lives for the better.
What should I keep in mind when investing in biotech start-ups?
As we have seen, investing in biotech start-ups can be extremely profitable, but there are also risks involved, some inherent to the start-up ecosystem, and some specific to the biotech sector.
Low liquidity and delayed profitability
Bear in mind that these are early-stage companies, sound like a company listed on the stock market, you have to wait until it is acquired by a larger company or goes public to get your money back. The development of a new drug or medical device is a complex and lengthy process, so don’t expect to get your money back for at least five years.
Variable profitability
The profitability of biotech start-up investment is also extremely variable, which is why diversification is so important. Not all start-ups make it, so you will lose your money on some of your investments. Luckily, as long as you diversify, the profits you make from the successful companies will more than make up for your losses.
Risk vs reward
The development of a new drug goes through various stages, starting with pre-clinical research (discovery, lab and animal studies), followed by clinical testing (on humans). The earlier in this development process you invest, the greater the potential for profits, but the higher the risk. Pre-clinical start-ups in particular, are high risk investments, as no results on humans are available yet.
Market and regulatory considerations
Finally, all new drugs and medical devices require regulatory approval before they can be released on the market, so this is an important factor to take into account. Intellectual Property protection, such as patents, is also important to ensure market exclusivity, and needs to be considered in the analysis of a potential investment opportunity.
Where can I find biotech start-up investment opportunities?
Crowdfunding platforms can be general or specialized. While there is nothing wrong with investing on a general platform that offers awide variety of investment options apart from biotechnology, their due diligence processes tend to be less robust and thorough than the specialized ones.
Specialist biotech investment platforms
Because biotech investment requires some understanding of the science and the sector, it is advisable to invest with a specialized platform that does your homework for you. Platforms like Capital Cell ensure much higher levels of analysis and deal filtering (including our own network of scientific experts), thus increasing the quality of the investments offered to mitigate risks and improve the chances of success.
Women in biotech and biotech investment
We’ve already outlined how investing in biotech start-ups can help shift the focus of medical research toward women’s health, but there is another way we can empower women in the biotech space, and that is by investing in start-ups with female founders and women in management positions.
Female founders in the biotech space
With the percentage of venture capital funding for female-founded businesses in the low single digits, equity crowdfunding is a great way to even the playing field. And while it is still a male-dominated sector, the percentage of women in healthcare and biotechnology is considerably higher than in most sectors.
Female investment representation in biotech
It is interesting to note that the percentage of female investors on the Capital Cell platform is around 20%, which, although low, is around twice the female Business Angel investment rate in Europe.
Some investments tips to get you started
Based on the above, here are our top tips for investing in biotech start-ups:
- These are low-liquidity investments with delayed profitability, so only invest money you don’t need and don’t invest more than 20% of your income.
- Invest in a minimum of 10 companies and diversify your portfolio, to reduce risks and increase yourchances of profitability.
- Combine investments from different therapeutic areas, in different stages of development, and of different types, to find a risk-reward balance that suits you.
- Many countries offer tax benefits for start-up investments, so check whether the company you decide to invest in qualifies.
- Biotech investment requires some background knowledge, so invest on a specialized platform like Capital Cell, that does your homework for you.
This article is powered by Capital Cell.
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