Health innovation is becoming riskier, more idiosyncratic and often more expensive, so the market develops to allow alternative sources of finance in addition to the traditional private and public equity. Here we provide an overview of various models of financing for research and early stage ventures.
IP-based investment funds invest into intellectual property (IP), mostly patents. This way, innovative firms or investors can monetise their IP and use the funds generated to grow their venture. Thus, IP-based investment funds neither provide equity nor debt, but acquire intellectual assets of a company.
Crowdfunding: reward-based, donation-based, lending-based, and investment-based (equity) crowdfunding.
Longevity bonds: financial instruments, longevity-linked securities.
Corporate social responsibility: green and blue bonds, financially passive, socially active funds, impact securitisation, risk-sharing impact bonds. Investors are increasingly conscious of the social and environmental consequences of the decisions that governments and companies make, with health concerns becoming more pronounced as a result of the Covid-19 pandemic.
Megafunds: financing biotech via a portfolio entity which can finance its activities by issuing debt, and which will reduce aggregate risk by diversification. By employing financial engineering techniques such as securitisation, megafunds can raise even greater amounts of more-patient capital. Return rates of such funds are lower than the typically expected VC return, but are attractive to pension funds, insurance companies and other large institutional investors.
Research-backed obligation (RBO): in addition to risk/return properties, these may have useful hedging properties.
Other sources and investor types include corporate venture capital (CVC), family offices, university-managed or university-based funds.
To summarise, there are various routes for financing are available, with the industry becoming more creative with the development of the market that now includes regenerative medicine and P4 (preventive, predictive, personalised and participatory) health innovation. However, in addition to finance, such projects often require a lot of data, and having an access to large datasets essential for innovation becomes the next level of challenge the industry needs to resolve.