problem
statement

Are there novel financing strategies, products, and/or organizational structures that can be developed to fund categories of health-related projects that are commonly deemed to be unfundable?

motivation

Many technology-based goods and services that could improve the human condition are under-funded and thus under-produced in our current economic system.

Factors that Contribute to Projects Being Unfundable
There are myriad factors that can contribute to individual projects being deemed unfundable:

Lack of Scientific Knowledge: If the science underlying a potential treatment, cure or preventative measure is not well understood, it is less likely to attract funding. Entrepreneurs and investors carefully consider the probability of success when deciding whether to invest time and money into a project, and projects based on poorly understood science are of course considered high risk.

Misalignment of Research and Commercial Incentives: Many science and technology-based companies originate in universities or government labs but struggle to secure private funding after initial research grants expire. The misalignment between research incentives and commercialization goals, along with restrictive technology transfer agreements, can hinder the flow of capital to promising innovations.

Regulatory Risk and Uncertainty: Uncertainty surrounding the regulatory approval process, especially concerning safety and efficacy requirements, can deter investment in medical devices and drugs. Payers often hesitate to cover preventive services due to difficulties in demonstrating their future value and the lack of immediate financial benefits.

Financial Return Concerns: Some sectors, despite their potential societal benefits, may not offer the financial return profiles or clear exit strategies that attract venture capitalists. Technology-based companies frequently need significant funding early in their development for research, prototyping, and pilot projects. This front-loaded capital requirement can deter traditional investors who favor shorter investment horizons and quicker returns. This can be exacerbated when there is a lack of previous successful exits in a sector, making it difficult to assess potential returns.

Limited Funding Sources: Technologies in their early stages, particularly those that haven't crossed the "valley of death" between basic research and commercial viability, often face funding challenges. Traditional venture capitalists and even angel investors often view such projects as excessively risky. This is compounded by decreasing federal research funding and healthcare reforms that constrain hospital research budgets.

Long Development Timelines & High Capital Requirements: Ventures characterized by complex scientific and technology foundations typically require significant capital and lengthy development timelines. This mismatch between the time-to-market and the preferred investment horizons of traditional asset managers (typically on the order of three to seven years) creates a funding gap.

Lack of Scale-Up Funding: Certain applications require substantial investment to build the first instance of their technology at scale. The absence of funding mechanisms for this "first-project finance" creates a major obstacle to scaling up and demonstrating the viability of DeepTech innovations.

Past Failures & Negative Perceptions: The relatively high rate of failure seen in complex scientific and technology-based ventures leads to high rates of investor skepticism. This challenge can be particularly acute in areas that have been through past boom-and-bust cycles such as CleanTech.

Corporate Risk Aversion: Corporations, despite possessing significant resources and potential expertise, often prioritize improving existing solutions rather than pursuing radical innovations.

Alternative Financing Approaches
Despite all these challenges, it is important to note that the concept of "unfundable" is not absolute. Projects deemed unfundable in one context or time period may become fundable as scientific knowledge advances, regulations evolve, and investor preferences change.

In addition to traditional venture capital, there are a range of existing alternative financing approaches for science and technology-based innovations. These alternatives aim to address the specific challenges and funding gaps:


Venture Debt: This approach offers debt financing to venture capital-backed companies, even those lacking positive cash flow or substantial assets for collateral. Venture debt can be structured as:

  • Growth Capital: Term loans to supplement or replace equity rounds, fund mergers and acquisitions, or provide working capital.
  • Accounts Receivable Financing: Allows companies to borrow against outstanding invoices, helpful for businesses with predictable revenue streams.
  • Equipment Financing: Leases for purchasing necessary equipment, particularly relevant for companies with high capital expenditure needs.

Venture debt can extend a company's runway, enabling them to reach critical milestones, achieve profitability, or navigate unexpected delays.

Public & Philanthropic Funding: Public and philanthropic funders typically are driven more by “mission” than they are by “margin.” But increasingly in today’s funding climate, groups are keen to undertstand some path to long term sustainability for technologies and organizations they support. Examples of these funders include:

  • Disease-Specific Foundations & Philanthropists: Entities like the Cystic Fibrosis Foundation and the Leukemia & Lymphoma Society, alongside private foundations and individual philanthropists, can provide funding for early-stage medical innovations aligned with their missions.
  • State & Federal Programs: Initiatives like Pennsylvania's Ben Franklin Technology Partners, the Ohio Third Frontier, and federal SBIR and STTR programs offer grants and funding opportunities for translational research and early-stage ventures.
  • “Philanthropic Angel Funds”: These funds, backed by individuals with both a financial and personal interest in a technology's medical applications, can provide seed funding for projects struggling to attract conventional investors.
  • Institutional Seed and Innovation Funds: Recognizing the limitations of relying solely on clinical revenue, institutions are increasingly establishing dedicated funds to support early-stage projects and bridge the gap to external funding.
  • Business Incubation Facilities: Organizations that provide entrepreneurs with space, equipment, and mentorship to transition from concept to reality, often with financial support from the community and partnering institutions.
  • State-Level Commercialization Institutes: Organizations like the Florida Institute for the Commercialization of Florida Technology assist with company formation, showcase innovation, and offer seed funding through programs like the Seed Capital Accelerator Program.
  • University-Specific Initiatives: Universities like Johns Hopkins establish programs and facilities, such as the Science+Technology Park, to foster the growth of new businesses based on their intellectual property.
  • Translational Funding Programs: These programs, often supported by foundations or state initiatives, bridge the gap between research and commercialization. The Johns Hopkins-Coulter Translational Partnership is one example of such programs.

Other Alternative Financing Mechanisms: Some other less common financing mechanisms include:

  • Outcome-Based Financing & Risk Sharing: These approaches link payment for a technology or service to the achievement of pre-defined outcomes.
  • Coverage as Part of a Clinical Study: Payers provide interim funding for a technology's use within a clinical trial, generating data to reduce decision-making uncertainties.
  • Coverage with Outcomes Guarantee: Payers and manufacturers enter contractual arrangements where payment is contingent upon achieving pre-agreed health or financial outcomes. This can involve various mechanisms such as rebates for non-achievers, tiered pricing based on outcomes, or cost-effectiveness guarantees.
  • Crowdfunding: Platforms that allow individuals to contribute small amounts of capital to support a venture. This approach can be particularly valuable for very early-stage projects or those with a strong social mission.
  • Revenue-Based Financing: Investors provide capital in exchange for a percentage of future revenues. This model aligns investor incentives with the company's growth and can be more attractive to companies that prefer to avoid equity dilution.

The various alternatives described above highlight the importance of considering the specific needs and context of each venture when evaluating alternative financing approaches. Factors such as stage of development, technology risk, market readiness, and investor preference all play a role in determining the most suitable financing strategy.

curation

PAPERS

A Flexible Design for Funding Public Goods

Vitalik Buterin, Zoe Hitzig, E. Glen Weyl / arXiv / August 16, 2020

“We propose a design for philanthropic or publicly-funded seeding to allow (near) optimal provision of a decentralized, self-organizing ecosystem of public goods.”

AI and Finance

Andrea L. Eisfeldt & Gregor Schubert / NBER / October 2024

“We provide evidence that the development and adoption of Generative AI is driving a significant technological shift for firms and for financial research.”

Schumpeterian Profits in the American Economy: Theory and Measurement

William D. Nordhaus / NBER Working Paper / April 2004

“The United States economy has benefited from rapid technological change over the last decade. The present study inquires into the fraction of the benefits from new technologies that have been captured by innovators (these being Schumpeterian profits) as compared to the fraction that have been passed on in lower prices.”

ARTICLES

How to start an advance market commitment

Nan Ransohoff / Works in Progress / May 31, 2024

Advance Market Commitments allow us to buy technology from the future to support its development: vaccines, carbon capture technology, and even spacecraft. Here’s how you can start your own.

What makes technology research commercially viable?

Ben Reinhardt / Spectech Newsletter / November 19, 2024

“[A] general version of the question about startup viability could be framed as ‘when is research commercially viable?’ or more jargon-y ‘when will the market make sure research will happen and when is it a market failure?’”

next steps

1

Is it viable to raise a “Public-Interest Investment Fund” to support high-risk, high-reward technologies that have a clear public-interest component such as the ability to lower healthcare costs. For example, could a private-public partnership structure for this fund, allowing private investors to participate and share in potential Medicare (public) savings,  attract enough capital to reduce the need for public funding?

2

Are there rule or policy changes that would enable funding for previously unfundable projects?

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