From the desk of Anne Woods, Managing Director, Life Sciences
The start of a new year naturally leads to discussions and predictions about what to expect in the coming months. For the life sciences sector, these conversations start during our annual trek to San Francisco to connect with investors, innovators, and friends. And if the weather was any indicator, 2024 shouldn’t be anywhere near as cloudy as 2023.
From the Four Seasons to Johnny Foley’s, I heard many reflections on 2023 and a tone of cautious optimism for 2024. Investors were pleased to see that deals were getting done, while many of the founders were feeling positive that they made it through 2023 and still have cash in the bank. As we look ahead, there were a few trends that emerged over the last 18 months that will continue to reverberate and drive decision-making for the life sciences sector in 2024.
Right Place at the Right Time
Driven by macro trends, tourist investors (i.e. non-traditional investors who don’t have experience investing in life sciences) shifting away from the sector, and weakness in the public markets, life science investing is well off the peak we saw in 2021. Both dollars and deals were down significantly. However, plenty of deals were still done in 2023—and if you happened to be a company developing a therapeutic tackling obesity, antibody–drug conjugates (ADCs), or radiopharmaceuticals, you found yourself the most popular kid in the playground. Look no further than Inversago, POINT Biopharma, and Abdera Therapeutics to see how Canadian innovation is and will continue to fuel returns for investors.
The flip side to this story is the impact to medical devices or non-therapeutic options in treating obesity. We expect any companies working on medical technology in this space to have an uphill battle competing with a seemingly endless pipeline of new therapeutic options. While the interest in obesity isn’t going anywhere anytime soon, expect to see some hiccups and surprises in 2024.
Do More with Less
More than half of the deals that were done in the US and Canada in 2023 were insider rounds. For many, the valuation hangover made a priced round an unattractive option. Gone are the days of raising capital without having hit a significant value inflection point. Venture capital investors looked critically at their portfolio of companies and continued to provide support to the most promising with one important caveat—any capital invested must drive value. For many companies, that meant cutting expenses. This has been a painful exercise for companies who had previously expanded their teams to pursue multiple programs or build their next-generation technology.
Austerity will continue to be a theme in 2024, and the ability of a company to show capital efficiency will be a key driver behind their ability to raise their next round. Canadian companies will once again be well-positioned here because we have a reputation of being much more capital-efficient that our US counterparts.
Show Me the Data
In 2020 and 2021, two-thirds of the companies that went public were either pre-clinical or phase one. Capital was being raised on ideas, not evidence. We have seen a return to fundamentals, with capital flowing to companies who have compelling data. We also saw a significant number of larger early rounds because investors know they need to provide enough runway for a company to hit a value creation event before they can go back to the market for their next round.
In 2024, expect to see some investors that would typically invest in early-stage companies taking advantage of lower valuations of later-stage companies that they either passed on or couldn’t get into during the previous raise. A dearth of opportunities to get good deals on de-risked assets is not great news for pre-clinical companies in 2024.
Success(ion)
All of this is going to lead to some drama around the boardroom table. Valuations, executive talent, and the approach to spending investor dollars will be on most agendas. As the market resets, there will inevitably be good companies with great talent that are going to either consolidate or fail.
When the executive teams flow back into the talent pool, board members will ask themselves if they should bring in top talent that they weren’t able to access in 2021. Beyond talent, there will be assets and technology looking for a new home. Will 2024 be the time to acquire, or remain focused on the current pipeline?
The toughest conversations of all will be about valuations. At some point, companies that have raised insider rounds will have to bring in new investors and agree on a new valuation. We saw deals in Canada and the US fall apart in 2023 because investors and founders could not align on valuations. Success in 2024 will be reserved for founders who don’t get caught up in valuation, find investors that provide expertise alongside capital, and most importantly, know when to ask for help.
RBCx backs some of Canada’s most daring tech companies and idea generators. From our stable of start-ups and corporate ventures to partnering with trailblazing VCs across the country, we turn our experience, networks, and capital into your competitive advantage to help drive lasting change. Speak with a RBCx Advisor to learn more about how we can help your business grow.
