Architects of Innovation: How Corporations are Using Seed Funding to Build the Future of Medicine
By: Babak Nemati, Ph.D.
Introduction
What happens when the world’s largest corporations decide to place their bets not on established markets but on the raw, unproven ideas of the future? Imagine the potential when a company like Pfizer throws its weight behind a fledgling technology—something as experimental as mRNA—long before it’s ready for prime time. Fast forward a few years, and that gamble isn’t just paying off; it’s saving millions of lives and reshaping the global healthcare landscape. This is the high-stakes world of seed investing in life sciences, where the risks are enormous, but the rewards could redefine industries. Yet, for corporate venture arms, the game isn’t just about chasing the next big breakthrough; it’s aboutstrategically positioning themselves to lead the charge in innovations that will define the future of healthcare.
But while traditional venture capitalists often dominate the conversation around seed investments, large corporations are uniquely positioned to capitalize on early-stage opportunities in life sciences. These companies aren’t just chasing financial returns; they’re strategically investing in the innovations that could define their industries for decades to come. For corporate venture arms, seed investments aren’t just about betting on the next big thing—they’re about ensuring that they’re the ones who bring it to market.
I. The Growing Importance of Seed Investing in Life Sciences
The life sciences sector has always been a hotbed of innovation, but the COVID-19 pandemic underscored its critical importance to a degree few could have anticipated. In 2021, venture capital funding in life sciences hit a record $81 billion, largely driven by the urgency of developing vaccines, treatments, and diagnostics. Though funding levels have since moderated, the sector remains resilient, with over $58 billion in venture capital raised in 2022—a testament to the continued appetite for life sciences innovation despite broader economic headwinds.
What’s particularly interesting is how seed-stage investments have remained robust. In fact, seed financing in life sciences was relatively stable from 2021 to 2022, even as later-stage funding became more cautious. This stability is crucial because seed investments are the lifeblood of innovation in life sciences, supporting the earliest, most speculative stages of development where traditional financial metrics often fall short.
But why should large corporations, with their vast resources and established businesses, wade into these murky waters? The answer lies in the strategic value that seed investments offer. Unlike financial VCs, who primarily seek outsized returns, corporate venture arms are in it for the long game. They invest in seed-stage companies not just for potential financial windfalls but to secure a front-row seat in the next wave of technological breakthroughs that could redefine their industries.
II. Strategic Advantages for Corporations in Seed Investing
Seed investing offers corporate venture arms several distinct advantages over their purely financial counterparts. First and foremost is the ability to align emerging innovations with long-term strategic goals. For example, Johnson & Johnson’s JLABS has become a cornerstone of its innovation strategy. By providing seed funding and resources to startups working in areas like oncology and infectious diseases, J&J ensures that it stays at the cutting edge of medical research. These early investments don’t just open the door to potential future products—they help shape the direction of the entire field.
Another strategic advantage lies in leveraging existing infrastructure. Unlike many financial VCs, corporations can offer more than just capital. They can provide startups with access to their vast resources, including research and development facilities, clinical trial networks, and regulatory expertise. Pfizer’s early support for mRNA technology is a case in point.
By backing BioNTech in the early stages, Pfizer didn’t just invest in a promising technology—it provided the critical infrastructure needed to rapidly scale mRNA vaccines once the COVID-19 pandemic hit. This symbiotic relationship enabled Pfizer to bring the first mRNA vaccine to market in record time, solidifying its leadership in the global pharmaceutical industry.
Moreover, seed investments allow corporations to diversify their portfolios across multiple therapeutic areas and technologies, thereby spreading risk while remaining at the forefront of innovation. Bayer’s strategic investments in gene therapy startups exemplify this approach.
By placing early bets on a range of gene-editing technologies, Bayer has positioned itself as a leader in personalized medicine, a field that promises to revolutionize healthcare but requires long-term commitment and significant risk tolerance.
III. The Economic and Strategic Rationale for Corporate Seed Investments
Corporate venture arms often have the luxury of longer investment horizons compared to traditional VCs, who typically seek exits within a few years. This longer-term perspective allows corporations to invest in early-stage companies with the understanding that meaningful returns may not materialize for a decade or more. This approach is particularly well-suited to the life sciences, where the path from discovery to commercialization can be lengthy and fraught with regulatory hurdles.
Bayer’s strategic focus on gene therapy is a prime example. The company has invested heavily in early-stage biotechs that are developing cutting-edge gene-editing technologies. While these investments may take years to pay off, they align perfectly with Bayer’s long-term goal of becoming a leader in personalized medicine. By investing early, Bayer not only gains a financial stake in these potentially transformative technologies but also ensures that they develop in a way that aligns with its broader strategic objectives.
Another compelling reason for corporations to engage in seed investing is the potential to create strategic partnerships. Early investments can pave the way for future collaborations, joint ventures, or even acquisitions, offering corporations a competitive edge in securing cutting-edge technologies before they mature. Roche’s seed investment in Flatiron Health is a case in point. What began as a modest investment in a startup focused on oncology data eventually evolved into a strategicAnother compelling reason for corporations to engage in seed investing is the potential to create strategic partnerships. Early investments can pave the way for future collaborations, joint ventures, or even acquisitions, offering corporations a competitive edge in securing cutting-edge technologies before they mature. Roche’s seed investment in Flatiron Health is a case in point. What began as a modest investment in a startup focused on oncology data eventually evolved into a strategic partnership and, ultimately, an acquisition. Today, Flatiron’s data-driven approach to cancer treatment is a key component of Roche’s oncology strategy.
Perhaps most importantly, early-stage investments give corporations the ability to influence the development of new technologies. By getting involved at the seed stage, corporations can help shape the direction of innovation, ensuring that new therapies, diagnostics, and technologies align with their long-term market needs. This level of influence is invaluable in an industry where the pace of change is rapid and the stakes are incredibly high.
This approach to seed investing isn't just about financial returns—it's about strategic foresight and influence. By engaging with startups at their earliest stages, corporate venture arms can shape the trajectory of new technologies, ensuring they align with long-term goals and market needs. This kind of early involvement positions corporations not just as investors, but as architects of innovation, guiding the development of the next generation of life-saving therapies and groundbreaking diagnostics. As we look ahead, the challenge becomes balancing the inherent risks of seed investing with the enormous potential rewards. Navigating these challenges requires a careful strategy, one that we’ll explore in the next section as we delve into the complexities and considerations that come with corporate seed investing.
IV. Challenges and Considerations in Corporate Seed Investing
While the potential rewards of seed investing in life sciences are immense, the path is fraught with challenges that corporate venture arms must navigate carefully. The allure of backing the next big breakthrough must be tempered with the realities of the sector, where uncertainty is high, timelines are long, and the path to commercialization is anything but straightforward.
Valuation Challenges: Understanding the True Worth of Innovation
One of the most significant hurdles in seed investing is accurately valuing early-stage life sciences companies. Unlike more mature startups with established revenue streams, seed-stage companies often have little more than a promising technology and a visionary founder. This makes traditional valuation methods inadequate, if not entirely irrelevant. The challenge is compounded by the long development timelines typical in life sciences, where years if not decades, can pass before a product reaches the market.
To navigate this complexity, corporate venture arms must develop expertise in assessing not just the financial prospects of a startup but also its scientific merits, regulatory pathways, and market potential. For example, a company working on a novel gene therapy might be valued not just based on its current assets but also on the projected future impact of that therapy once it clears clinical trials and regulatory hurdles. This requires a deep understanding of the science behind the innovation and a keen sense of how market dynamics might evolve over time.
Balancing Risk and Reward: A Delicate Act
Seed investing is inherently risky. Many early-stage companies fail, and even those with groundbreaking technologies can stumble due to regulatory challenges, clinical trial failures, or shifts in market demand. For corporate venture arms, the key is to balance these risks with the potential for high rewards. This often means building a diverse portfolio of seed investments across multiple therapeutic areas and technologies, thereby spreading the risk while remaining positioned to capitalize on emerging trends.
Pfizer’s approach to seed investing in mRNA technology is a case in point. By investing in
BioNTech’s early-stage research, Pfizer was betting on a technology that was still largely unproven. Yet, this investment was part of a broader strategy that included other bets in vaccines and gene therapies, all of which positioned Pfizer to respond quickly and effectively when the COVID-19 pandemic hit. This kind of risk management requires not just financial acumen but also a strategic vision that aligns investments with the corporation’s long-term goals.
Internal Buy-In: The Politics of Innovation
Securing internal buy-in for seed investments can be a challenge in itself, particularly in large corporations where different business units may have competing priorities. Convincing these stakeholders of the long-term strategic value of a high-risk, high-reward investment requires a nuanced approach. It’s not just about demonstrating potential financial returns; it’s about showing how the investment aligns with the corporation’s broader mission and future market position.
Consider Bayer’s foray into gene therapy. Internally, there may have been skepticism about the viability of investing heavily in a field with such uncertain outcomes. However, by framing these investments as critical to Bayer’s future leadership in personalized medicine, the corporate venture arm was able to secure the necessary support. This kind of alignment between seed investments and corporate strategy is crucial for ensuring that these high-risk bets receive the backing they need to succeed.
V. Future Outlook: The Role of Seed Investing in Corporate Strategy
As we look to the future, the role of seed investing in corporate strategy is poised to become even more central. With the pace of innovation accelerating, particularly in fields like artificial intelligence (AI) in drug discovery and gene editing, corporations that embrace early-stage investments will be well-positioned to lead in the next era of healthcare.
Emerging Opportunities: AI and Gene Editing
Emerging areas such as AI-driven drug discovery and gene editing offer fertile ground for seed investments. These technologies have the potential to revolutionize the life sciences, but they are also in their infancy, with many unknowns and challenges ahead. For corporate venture arms, the opportunity lies in getting involved early, helping to shape these technologies and ensuring. For example, Novartis has made significant early-stage investments in digital health and AI, recognizing that these technologies will be central to the future of medicine. By supporting startups in these areas, Novartis is not just betting on the next big thing; it’s actively that they evolve in ways that align with the corporation’s strategic goals (Early stage investing t…)(q1-2023---life-sciences…).
Building an ecosystem that will be crucial to its long-term success in data-driven healthcare (Moss Adams).
Building an Innovation Ecosystem:
Beyond Financial Returns
The ultimate value of seed investing for corporate venture arms extends beyond financial returns. By fostering early-stage companies, corporations can help build a broader innovation ecosystem that benefits not just the corporation but the entire industry. This ecosystem approach creates a virtuous cycle of innovation, where early investments lead to new partnerships, joint ventures, and acquisitions that drive further growth and innovation.
Amgen, for instance, has effectively built an innovation ecosystem through its venture arm, Amgen Ventures. By investing early in companies developing novel therapies and biotechnologies, such as its seed-stage investment in Editas Medicine, Amgen has positioned itself at the forefront of CRISPR technology. This strategic move not only provided Amgen with access to groundbreaking gene-editing innovations but also allowed the company to influence the development of these technologies, ensuring they aligned with Amgen’s long-term goals in personalized medicine and biotechnology. This approach has enabled Amgen to create a robust ecosystem that fosters innovation while maintaining a competitive edge in the market.
Roche’s investment in Flatiron Health is another prime example. What began as a seed investment in a promising startup eventually grew into a strategic partnership and, finally, an acquisition. Today, Flatiron’s data-driven approach to oncology is a key pillar of Roche’s strategy in cancer care. This kind of ecosystem-building is increasingly becoming a core component of corporate strategy, offering a roadmap for how seed investments can be leveraged to achieve long-term leadership in the life sciences.
As corporations continue to refine their approach to seed investing, they will need to balance the inherent risks with the potential rewards. But for those who get it right, the payoff will be more than just financial. It will be the ability to shape the future of healthcare, driving innovation that not only saves lives but also secures a competitive edge in the ever-evolving life sciences landscape. The strategic merits of seed investing are clear: it’s not just about finding the next blockbuster drug, but about laying the groundwork for a future where your corporation leads the charge in the next wave of healthcare innovation.
This article was extensively informed by the publications of Moss Adams, The Silicon Valley Bank, Savills Research, and McKinsey & Company. For more of our latest articles on corporate innovation models, please visit www.sicorporation.net.
When contemplating a formal external innovation strategy, meticulous preparation is paramount think of it as orchestrating a symphony where every note must be in harmony. The resources required extend beyond financial investments to human capital. Successful integration hinges on assembling a multidisciplinary team capable of evaluating opportunities from multiple perspectives technical feasibility, market potential, and strategic fit.
Firms like Strategic Intelligence (SI) can offer invaluable expertise and support in this endeavor. Methodologies for scouting and evaluating new technologies are crucial. Systematic approaches involve outreach campaigns, securing high-quality deal flow, and conducting rigorous comparative analyses. The goal is to sift through myriad opportunities and identify those with the highest strategic relevance.
About the Author
Dr. Babak Nemati, President and CEO of Strategic Intelligence, Inc. (SI), is an experienced leader in the life science industry with over 30 years of experience. His experience includes serving in C-level positions in emerging biotech and medical device companies. Previously, he held key roles at Johnson & Johnson, including Director of Surgical Oncology, where he was instrumental in developing strategies and executing licensing and acquisition transactions.
As the founder of Strategic Intelligence, he leads corporate venture and business development advisory services. SI helps companies that want to grow one or more of their businesses, are frustrated with the pace of internal R&D and are open to leveraging external innovation. SI has successfully managed the externally facing functions of seed funds for leading companies like Alcon and Johnson & Johnson, providing strategic innovation and venture advisory.
He previously served as a Venture Partner at XSeed Capital Management and is currently a Commercialization Advisor for DARPA, a Catalyst Advisor for UCSF Medical Center, and an Innovation Technology Committee Member for the University of Washington's Department of Ophthalmology.
Contact: bnemati@sicorporation.net
