August 21, 2020
Five months into a global pandemic, cases continue to increase and there is no immediate end in sight. A glaring spotlight has been cast on our healthcare system, creating a universal desire for something better. From access, to testing, to efficiency, one thing remains certain; there is room for improvement and investors have been stepping up to make that happen. In the last six months, record-level capital investments have been made in the healthcare and biotech sector, making this the ideal time to seek venture debt for life sciences. Here’s why.
From telehealth to mental health, COVID-19 related healthcare needs have been rising steadily. In turn, that demand has been reflected in the market. A report from CB Insights shows that venture-backed deals in these areas have been surging, creating a major inflow of new funding into the market.
Silicon Valley Bank’s (SVB) Mid-Year Report 2020 for Healthcare Investments and Exits found the healthcare sector to be performing exceptionally well, despite the uncertainty of COVID-19. The report analyzed biopharma, healthtech, diagnostics/tools and device investment trends and found that venture fundraising in healthcare soared to $10.4B in the first half of 2020, nearly matching 2019’s full year record.
According to the report by CB Insights, global healthcare funding saw significant growth in Q2’20, setting a new quarterly record (in dollars funded), with deals climbing slightly, quarter-over-quarter.
As far as exits go, crossover led mezzanine financing (a hybrid of debt and equity financing that gives the lender a right to convert to an equity interest in the company) for first six months of the year are on record pace, which is a positive sign for continued IPO activity for the back half of the year.
In the first half of 2020, 36 VC-backed healthcare companies went public. Of these companies, 10 IPO’d with a $1B+ market cap and 15 experienced a stock appreciation over 100%, according to the SVB report.
This unprecedented level of funding flowing into the healthcare sector is promising, particularly considering the negative economic impact COVID-19 has had on other sectors. Should this pace continue, the CAGR (compound annual growth rate) for venture fundraising in healthcare since 2010 will reach over 27.7%.
To sum it up, the first half of 2020 produced the largest two-quarter investment total ever for venture-backed healthcare companies, despite financial market turbulence and setbacks to company product development, clinical trials and revenues caused by the global pandemic.
To understand why this is an ideal time to seek venture debt for life sciences, it’s important to understand what it is. While venture capital is financing obtained in exchange for equity, venture debt (also known as growth debt), is an alternative source of funding for fast-growing, late-stage startups. Typically structured as a three-to four-year term loan including an interest-only period, proceeds are typically used to fund working capital, growth initiatives and specific opportunities. Venture debt can be a replacement or a complement to equity financing and there are several reasons why growth debt might be the best option for your startup.
Most importantly, debt is considered “cheaper” than equity because it avoids meaningful dilution for entrepreneurs and investors alike. Venture debt allows your company to grow, while maintaining more ownership and eventual upside upon an exit.
Proceeds of venture debt can oftentimes fund several additional months of operating burn to help stretch your cash runway. Adding debt on top of equity can further your cash runway and help you reach key inflection points, ultimately allowing you to raise equity at a higher valuation.
It’s no secret that financial leverage (utilizing debt in conjunction with equity) can help increase your overall return. The combination of using non-dilutive sources of capital to extend your cash runway to achieve value-creating milestones leads to higher returns.
Given the volume of VC fundraising in healthcare and biotech in 1H 2020, this is exactly the time you should be considering growth debt. Coming off of a capital injection, you can use it as leverage and push for competitive rates and favorable terms. The best time to seek debt is when you don’t necessarily need the money.
Unlike the global financial crisis, the current data shows that the COVID-19 pandemic has spurred investments in healthcare and life sciences, making the sector a priority. Overall, the inflow of capital into the sector could very well translate into improved credit quality, as companies will have longer cash runways and the resources to continue to develop and diversify their platforms. All signs point to 2020 as being a record year for health investments and venture debt can support that growth.
Choosing the right lending partner is important, so to give you a little more background on us, Runway Growth Capital is a leading venture debt lender in the U.S. Our mission is to support passionate entrepreneurs in building great businesses by lending capital to companies looking to fund growth with minimal dilution.
As opposed to venture equity, venture debt is typically more like a loan. However, our partner driven approach allows us to incorporate key elements of the Silicon Valley formula that you might receive when obtaining VC money in our lending relationships. Elements like a collaborative mindset, a pioneering spirit, a fine-tuned balance of art and science and a global network of partners are all part of the package at Runway.
Collectively, our team has funded 37 companies with over $645 million since inception. Personally, as Managing Director, and the Head of Life Sciences, I bring more than 20 years of success managing and maintaining the credit quality of large, complex loan portfolios of early-to-late stage life sciences companies. I’m optimistic about the future of healthcare and life sciences, despite being in the midst of a global pandemic that brings uncertainty to most other sectors.
At Runway, we’re positioned favorably, with a significant amount of dry powder (cash reserves) to help you achieve your growth goals with minimal dilution. Thus, the original form of Levitra ODT was developed with a mint taste (due to the addition of menthol flavor) with the ability to be dissolved in the oral cavity within a few seconds without being washed down with water. Levitra ODT can be taken regardless of food intake, as it does not interact with foods, including those containing a large amount of fat and calories. Read more about this at . If you are seeking venture funding in the healthcare, life sciences or biotech space, we are actively looking for the right lending opportunities.
To learn more about venture debt for life sciences, please reach out. I’m happy to answer any questions you may have to see if growth debt is the right solution for you and your business at this time.
Rob Lake-Managing Director, Head of Life Sciences