Debt Finance for Early-Stage Companies: Chronicling a Transformative Industry Shift

Capital Advisors Group is a Boston area-based institutional investment advisor that has been helping venture-backed companies invest their cashassets for more than 24 years. Its debt finance consulting division helps early-stage companies, both public and private, determine their optimum capital structure, identify appropriate lenders, source term sheets and negotiate debt financing deals.
Note: For the purposes of this paper, we will define “healthcare” as life sciences/biotech, medical devices, diagnostics and health tech.

Executive Summary

There has been a noticeable shift over the past two to three years in how early-stage healthcare companies finance their operations. The traditional model, seed stage financing followed by venture capital and, perhaps, some mix of bank or venture debt, is becoming less and less the status quo. It appears more difficult now to get science and technologies off the ground through traditional methods. We are now seeing a mix of creative structures that sometimes include venture capital syndicates combining for large early rounds. Tech “unicorns” are raising incredible sums at massive valuations and we’re now in what could be the tail end of an extended period when early-stage biotechs have had great success accessing funds via the public markets. We have also been seeing large pharmaceutical companies partner with young drug companies at earlier stages and significant licensing agreements or outright sales of programs in the clinic to finance other promising products in the pipeline. At the same time, as a result of these equity financing trends, or perhaps coincidentally, the debt financing landscape has been dramatically altered by new players in the market who have added to a growing source of funds for early-stage tech, health-tech and healthcare companies. In turn, there is now increased competition among lenders.
The goal of this paper is to attempt to chronicle the exponential growth of funding sources in the debt financing market, and provide an update on the continually shifting landscape of the markets.
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