A VC Checklist for Life Sciences Investing

Some key considerations for investing in Life Sciences & Therapeutics companies.

While most life sciences companies seek venture funding, few generalist VCs actually go through diligence on these companies. This leads life sciences rounds to often only contain sector-specific funds and investors, with very few (if any) generalist investors. Many sector-agnostic VC’s, A-Level Capital included, have found that life sciences DD is very different from SaaS, fintech, or even AI DD because of the high technical knowledge gap surrounding the markets and product offerings.

As someone who’s part of the team at A-Level Capital and also at Sands Capital Ventures on their life-sciences focused funds, I can confirm this distinction. However, I can also confirm that all VCs would be fully capable of evaluating life sciences companies if they just knew what to look for. I’ll outline some of these key life sciences DD considerations below, and I encourage all investors to open their minds to these more science-heavy companies!

First, let’s make the distinction between life sciences and med-tech companies. We’ll define life sciences businesses as therapeutic or biologic companies with a heavy molecular science basis. Med-tech companies, by contrast, may be medical devices used in the healthcare profession or in hospitals, but with less of an emphasis on an underlying scientific mechanism. In this piece, we’ll focus on the former, life sciences companies. However, if you’re interested in med-tech considerations and the FDA process, check out this piece by fellow A-Level team member Steven!

Science Project vs Business Venture

There is no shortage of interesting research coming out of academia. However, many academics have the misguided notion that a venture is always the final step of research, and many life sciences accelerators actually require that a team spin their research into a company by year two. PI’s and postdocs in successful labs also feel pressure to start companies predicated on their recent publications. Unfortunately, not all such research projects have viable, venture-backable business models.

Weeding out the promising companies from the mass of academia-produced life sciences startups is a daunting task, and is an area where traditional DD methods are best leveraged. Some things to consider:

Market Opportunity

Size the market! Some good considerations for calculations are below:

• Total Addressable Population (TAP): disease segmentation, incidence rate, diagnosis rate, treatment rate
• Total Addressable Market (TAM): competitive pricing, dosage frequency

Health Economics

• This is a critical and overlooked area. Often, companies can have a treatment that works perfectly, but for a very rare disease. As a VC, you have to think about whether insurers would cover a drug that only helps a fraction of the population — hint, this is unlikely. Perhaps a company would need solid efficacy data to compensate for a smaller TAP.

Team

• Is there a strong life sciences and research background on the team? What about business and R&D folks? Do they have the connections, even if they’re at an early stage, to scale later down the line?

Biological Background, Literature, and Clinical Trials

Life sciences companies grow around their unique biological approach to a problem. These approaches are detailed, outlined, and verified in scientific journals, which need to be critically reviewed to the same degree as a pitch deck or financial projections. While seemingly intuitive, I found this deep literary dive into a company’s scientific publications to be the starkest difference between traditional VC diligence and life-science VC diligence. Some areas to dig deep into are:

Biological background

• This includes the mechanism of action, the specific signaling pathway/molecule, the disease space, etc.

Rationale behind the experimental design.

• Self-explanatory. Understand their thought process, why they chose their target, if their methods are biologically intuitive, etc.

(if relevant) Rationale behind the use of AI/ML

• What ML model was used? Why?
• Sensitivity vs specificity considerations. Which are they optimizing for and what does that mean in the real world? Are these values similar on Train, Val, and Test datasets or do we speculate overfitting?

The Clinical Studies!!!

• A company will usually detail their clinical study in a paper. What was the size of the study? Often, the size is too small for results to be generalizable.
• What about sampling methods and populations sampled? Was there a placebo group? Does the length of the study make sense for their research?
• What about the data? Are they reporting all the numbers that they should?? This is perhaps the MOST IMPORTANT part of life sciences DD.
• Go through every single figure and flowchart — you’ll find more information there than in the words.

Primary/Stakeholder Research

An often forgotten and crucial part of life-sciences DD is interacting with the endpoints of the pipeline: physicians and providers.

Physicians

Conduct primary research calls with physicians in the field!

• Explainability!! Probe around whether the physician is comfortable with the drug concept or if they need additional information. Physicians are very reluctant about technology that they can’t rationalize when making a diagnosis or prescribing decision, so explainability is KEY. A black-box type therapeutic, no matter how efficacious, will never be prescribed by a clinician.
• Does the physician seem willing to prescribe this treatment or advocate it to insurers?
• If not, is it because of competitors? Efficacy concerns? Branded vs non-branded products? Formulary or ease of use concerns?? The latter might require conversations with PBMs (Pharmacy Benefit Managers) as well.

Providers

Here, I would ask the company what their strategy for coverage is and use that to inform your primary research. For example:

• Are they an aesthetics business and don’t anticipate coverage?
• Do they anticipate public coverage? If so, look deeper into the health economics of their solution.
• Do they have any private providers in mind/are they already covered? If so, start your conversations there to verify what you’ve heard from the company.

Competitive Landscape/The Drug Pipeline

There are two kinds of competitive considerations to take into account with life sciences diligence.

Traditional VC Competition

The first is competition in a traditional VC context, i.e. alternative startups in the space, larger pharmaceutical companies with similar manufacturing capabilities, etc. Analyze this the same way as normal.

Competition in the Drug Pipeline

The second consideration, competition in the drug pipeline, is more unique to life sciences diligence. Many indications, especially newer ones, may have no drugs on the market but many in the development pipeline, i.e. Phase I/II/III clinical trials.

• The drug pipeline for a particular indication can be landscaped using a tool like BiomedTracker. Tools like this provide information on competing drugs in manufacturing, their target and mechanism, and their likelihood of FDA approval relative to the average. Try to get a good understanding of all the drugs in development for your target indication, and where the company you are evaluating falls within that pipeline.
• Look at drugs that have suspended their clinical trials. Are any of them similar to your company?
• Are there any existing drugs with a similar mechanism of action to the company you are evaluating? These drugs could currently be targeting a different disease but easily gain approval and expand into your target indication.

Funding and Milestones

Sometimes, we may have absolute faith in a life sciences company. They may check all the boxes outlined above, and you may believe strongly in the product and the market. One last key point of consideration is how much this company is planning on raising.

Raise Amount

• While true for most companies, commercialization pathways are especially important in life sciences because of how pre-defined the milestones are. It’s imperative for a VC to make sure that this company’s financing can carry them to their next milestone, whether that’s getting through another clinical trial, hitting a revenue goal, being covered by “X” insurer, etc.
• No matter how promising a life sciences company is, not hitting those specific commercial milestones with their runway can lead to total failure. This is very different from SaaS models, where not meeting goals is disappointing but not fatal. Be sure to do your own financial projections that take into account the cost and length of these clinical trial processes and commercialization pathways.

Final Thoughts

Congratulations, you’ve made it through the checklist! I hope that these key considerations shed some light on the black box of life-sciences venture investing. I encourage you to source a life-sciences company and ask some of these questions yourself! Here at A-Level Capital, we love our life-sciences companies and are excited to see more traditional VC investors, ourselves included, bridge the technical divide between more generalist investments and the life sciences space.