The market for investment in biotechnology and pharmaceutical startup companies is tough at the best of times. Executive teams have to content with the broad valley of death that lies between enthusiasm for a company with early preclinical results in mice and enthusiasm for a company with initial human clinical data. Satisfying regulators, setting up Good Manufacturing Practice (GMP) manufacture of a drug, and producing that clinical data is exceptionally expensive, and the reality is that relatively few investors fund companies in the late preclinical stage, even when the market is good. As soon as the market sours, investors pull away from preclinical companies near entirely.
The longevity industry emerged outside the established biotechnology venture capital community, and most companies were largely funded by family offices, angel investors, and other entities that do not tend to act like venture capital. They tend to make a single investment and are done, and have somewhere between no representation or very limited representation on the company board of directors, whereas venture capital funds tend to make ongoing investments as a company moves forward, make larger investments, and do tend to have board seats. They also have much more experience in manipulating terms and contracts to their favor.
The market for biotechnology and pharmaceutical investment has not been good for several years now, for the longevity industry and everyone else. Preclinical companies with acceptably good technologies have been dying through the simple mechanism of failing to find investors willing to fund their work and consequently running out of runway. So it goes for every industry when times are bad. But even the relatively successful longevity industry companies are now being forced into very unfavorable terms by later stage professional investors in order to fund their initial clinical trials and further progress towards regulatory approval.
I am aware of a number of investment deals conducted this year by ostensibly successful longevity biotechnology and pharmaceutical companies (with clinical trials in process, with Big Pharma deals, with good results for their technologies) in which the early investors were essentially wiped out, had their stake in the company dramatically reduced. There are a number of established ways in which this can happen legally, and the structure most often seen is some variant of Pay to Play with compulsory conversion of shares and a pull-through provision. Existing stock is converted into new stock under very different terms. Early investors are asked to contribute a new investment under pro rata terms, and their stock largely eliminated (cut down by 5 to 1, 100 to 1, some other large number) if they do not do this. One viewpoint is that this is simply the realization of a loss of value that has already happened due to a poor market. Another view is that it is fair to call this theft and extortion, a very uneven distribution of that loss of value. Either way, early investors typically have no leverage in this situation, and any attempt to fight the imposed terms legally would cost more than is lost.
This squeezing out of early investors as a matter of course, whenever later stage investors can get away with it, is short-sighted, I feel. The investors who typically force such provisions on a company, and the executive teams who accept in exchange for some preservation of their stake in the company, are burning long-term relationships for short-term gain. No executive who goes along with this will ever receive early stage investment again from anyone involved in one of their Pay to Play exercises. Further, people talk. At the community level, once it becomes known that early stage biotech investors in the longevity industry are often eliminated in later rounds by predatory institutional investors, there will be little early stage investment. Who funds the preclinical work? Not the later stage investors. Where will their future deal flow come from? Who knows. This is not good for the industry, and not good for anyone involved.
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