The UK must plug the funding gaps in life sciences venture

In this guest blog, Christine Hockley, Managing Director at British Patient Capital, outlines the substantial long-term investment needed to scale innovations.

Historically, US venture capital returns were perceived by many to be substantially higher than UK funds. However, new data from the British Business Bank’s UK Venture Capital Financial Returns 2024 report gives cause for optimism. The report shows that, in fact, UK VC funds are keeping pace with US funds, generating similar returns.

In addition, the findings on UK life sciences are particularly encouraging, with the sector outperforming the market for realised returns. The UK’s long heritage in life sciences means we have world-leading scientific expertise and a strong pipeline of innovation. This presents a huge opportunity for the UK and it’s vital we capitalise on this to deliver future growth.

But considering the sector typically requires extensive upfront R&D before commercialising, we must provide the funding needed to nurture our most promising research projects and scale them into high-growth companies.

A sector ripe for investment

Life sciences has been a leading area of innovation in recent years, with over £450 billion of investment raised by companies over the past 10 years, representing 18% of all VC funding globally. Demand for healthcare solutions continues to increase and the industry has fast-growing sub-sectors in areas such as therapeutics, drug discovery, and digital health.

Our life science teams know first-hand the exciting innovation that is ripe for investment. In the last few months, we have invested into Purespring Therapeutics, a pioneering London-based gene therapy company focused on transforming the treatment of kidney diseases, and biotechnology company Nuclera, which is accelerating protein expression and purification workflows. These businesses are addressing significant medical challenges with large potential markets.

This demand is having an impact on global venture capital returns, with pooled Distributions to Paid In capital (DPI) multiple of 1.14 for 2002-2019 vintages; higher than the overall market of 1.02. Notably, this trend is not just driven by outlier funds, with the median life sciences fund generating a DPI return of 0.87, compared to 0.73 across the wider market.

Overcoming fundraising challenges 

While there are huge opportunities in life sciences, the sector also still faces several challenges. Ventures in life sciences are capital-intensive and rely on long-term investment due to the significant clinical and regulatory requirements involved in taking a product to market, which can be off-putting to investors and fuels perception that the sector is risky.

However, the need to hit these milestones can also be an advantage in providing investors with a clear exit route. Life science companies can receive big mark ups in their valuations upon hitting these milestones, unlike standard tech companies whose valuations generally increase steadily in line with growth metrics, such as number of customers. This can be attractive to specialist investors who have a deep understanding of the sector and can successfully uncover value.

Looking to 2025, the outlook is optimistic. Nearly three-quarters of UK fund managers are expecting exit conditions to improve over the next year – a sentiment that is likely to improve transaction flow. But there’s no denying that there is still a gap in funding, especially at the later stages.

One way in which we can encourage greater funding is by working closely with the wider investment community in the UK. That is one of the reasons why the British Business Bank will establish the British Growth Partnership, subject to regulatory approval, encouraging more UK pension fund and other institutional investment into the UK’s fastest growing, most innovative companies. The initial fund will seek to raise hundreds of millions of pounds, including a commitment from the British Business Bank, to invest in some of the highest potential opportunities in the Bank’s venture capital pipeline, including high-potential life sciences companies.