2 Ways To Encourage Clinical Trial Investor Funding

By Sergey Jakimov and Artem A. Trotsyuk, Ph.D., LongeVC

Clinical trial outcomes are now front-page news. Where in previous decades they may not have been seen as newsworthy, clinical trials that make it through approvals — at any stage — can generate significant mainstream interest. In our experience, this growing attention on biotech startups is one of the reasons we saw fellow VCs invest more than $20 billion last year. For founders of biotech and health tech companies, the availability of more funding is good news, especially on the precipice of beginning a critical trial phase.

However, we know that R&D teams and investors are not always aligned on cost and risk. Biotech companies accept risk as an inherent part of their work. Groundbreaking research requires experimentation; not every trial will produce the desired results. But for investors, high risk levels can outweigh even the most promising early results. According to a BIO report, only 7.9% of trial candidates from 2011-2020 received Phase 1 approval. For comparison, VC-backed startups reach closer to a 25% success rate. Some venture capital firms go so far as to avoid the clinical trial phase entirely, focusing on later-stage companies with already-secured approvals.

This approach, however, risks preventing some biotechs from getting to the clinical trial phase at all. Facing the high (often prepaid) costs of clinical facilities, GMP manufacturing, CROs, and other partners, a company won’t even start a trial until they’re certain they have the budget. To run out of funds during the trial leads to a costly and painful invalidation of data and protocols (not to mention more lost time — if the company can even restart after this point). This risk-averse approach, however, can cause even more collateral damage to the biotech. We see that failing to raise, or delaying the fundraising, for clinical trials can put biotechs years behind in their plans — a difficult situation to resolve as founders balance both raising enough funds to feel secure starting the trial and committing funds early as part of prepayments to their service providers.

A solution to bridging the funding gap here is to make clinical trial risk more palatable for investors. At LongeVC, we’ve seen two promising new funding models that balance risk with reward: trial-specific fundraising and staged funding release. Biotechs should consider these as part of their overall funding strategies.

Tactic 1: Designated Funding For Clinical Trial Completion

Fundraising with a specific clinical trial focus can help secure necessary financial resources. Biotechs can consider raising a new funding round or bridge loan with clinical trials as the top (or sole) objective. By earmarking the funds’ purpose, they offer a clear investment opportunity for VCs or angel investors.  

Companies must develop extensive road maps for this to work. Investors expect detailed reporting, and their due diligence processes heavily weigh the following factors:

• Timing: How long will the clinical trial phase last? What is the expected market entry timeline? What are the potential delays?
• Markets: What markets will you be pursuing? Why these markets? What is the regulatory approval process like for these geographies? Do you have or can you find connections to help streamline the country-specific review process?
• Application: Who is the target audience? What is the estimated value of your product? Are there competitors and, if so, how does your research compare?
• Unexpected outcomes: What is the likelihood of trial success? What have you identified as possible alternative findings? How will your company adapt if you do not achieve the expected results?

Investors will ask these questions whether you mention clinical trials or not. Getting ahead of the due diligence Q&A process shows you’ve already run the numbers and makes funding your plan more palatable.

This strategic planning offers benefits beyond investor pitching. It should form the basis of any business development approach, regardless of clinical stage.

Tactic 2: Staged Funding Following Trial Milestones

Similarly, biotechs can attract clinical research support by offering staged funding opportunities. Investors can commit more funds following a “clinical trial payment schedule,” where they release funding only as a trial hits its milestones. For biotechs with extended trial periods, this approach can secure continuous liquidity and safeguard company operations during the clinical phase.

A staged clinical trial funding model further decreases investor risk. As with trial-specific funding, biotechs must present an extensive company strategy with the addition of a “payment schedule” and alternative funding designations. It can provide extra comfort and visibility to investors that if, for some reason, the trial doesn’t progress (on that specific application), there is already another avenue identified. They won’t be “locked in,” and funds can go toward other trials or development areas.

However, a successful plan for this model requires company agility. Accepting conditional funding requires an expanded discussion of the unexpected outcomes considerations above. While pivoting is a normal part of the research process, anticipating unexpected outcomes and explaining these isn’t always easy. This type of risk management planning always benefits businesses — the investment opportunities are a bonus.

As investors, seeing this content in a pitch deck would signal to our team that the company is operating with a strategic mindset. It is not prudent to keep all eggs in one basket for most biotech companies, and alternative outcomes need to be considered at the earliest stages. Agile planning is also a positive characteristic we look for in founders and startup teams.

Choosing suitable investor targets to approach is also essential for both approaches. While each VC firm and angel investor maintains a “comfortable” risk level for portfolio companies, specialist investors possess a deeper understanding of their target fields. For example, biotech-focused funds understand research trials’ inherent risks. They often employ experienced researchers to evaluate company pitches within a scientific context, comparing industry-specific risks to each other rather than biotech risk to more traditional investment areas.

Excitingly, more major VC firms are entering biotech, with firms like Goldman Sachs establishing new hundred-million funds targeted for early-stage biotech research. Many specialist firms enter the field with a high-risk, high-reward mindset, with great payouts. Successful exits have landed investors significant returns, with the top 20 biotech deals in 2023 generating $75 billion in value.

Done correctly, new clinical trial funding models can benefit both investors and biotechs. Biotechs will benefit from diversified funding streams, sustained liquidity, and resource access. Investors also can reap rewards from potential payouts upon successful market entry. It’s a symbiotic relationship that will deliver life-changing research results for all.

About The Authors:

Sergey Jakimov is a founding partner of LongeVC, a venture capital company supporting early-stage biotech and longevity-focused founders and startups. Sergey also founded a company that offers a toolkit for data discovery and patient engagement, along with other deep-tech ventures.

Artem A. Trotsyuk, Ph.D., is a partner at LongeVC, an early-stage investment firm specializing in biotech and longevity. Alongside this role, he also serves as Stanford University’s AI Ethics fellow and advises biotechnology companies and startups.