finance lab

Funding The Unfundable

Many technologies that could improve health are underfunded, and therefore underproduced. Often the reason is not that they lack value. It is that their value arrives in a form, on a timeline, or to a party that existing financial instruments were not built to recognize.
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The Digitalis Finance Lab is organized around a foundational question: how do we fund the unfundable?

It is a financial question because finance is itself a technology. To manage risk and move money from savers and investors to the people and organizations that need it, societies built instruments that pool risk and capital across many, diverse participants. The insurance contract is one. Social Security is another. Each took a risk that no individual could carry alone and made it something that could be shared, priced, and paid for.

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Peter L. Bernstein in his history of modern Wall Street describes finance as follows:

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The anticipatory function Bernstein describes is also where the limits lie. Markets fund what they can price, and they price what they can foresee. Where outcomes are uncertain, horizons long, or returns diffuse, the same machinery that makes hard assets liquid leaves other work without a price at all. The Digitalis Finance Lab is particularly interested in how that sorting, which favors some categories of technology (therapeutics, for example) over others (research tools), shapes innovation and health.

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Why is it Unfundable?

There are myriad factors that can contribute to individual projects being deemed unfundable:
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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 and Reimbursement Risk: 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 Expectations: Some sectors and technologies, 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 so-called "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 the budgets of research institutions.

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.

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Unfundable is Not a Fixed Category

None of these conditions are necessarily permanent. A project deemed unfundable in one context or period may become fundable as the science advances, regulations evolve, and investor preferences change. The more useful observation is that the change need not be waited on. A new contract, instrument, or organizational structure can alter which risks are priced, how long capital can wait, and who shares in the return.

A range of alternatives to conventional venture capital already address parts of the problem:

Venture debt: Venture debt, accounts-receivable financing, and equipment financing extend the runway of venture-backed companies that lack positive cash flow or substantial collateral, helping them reach milestones or absorb delays.

Public and philanthropic capital: These funders are driven more by mission than by margin, though increasingly they look for a path to long-term sustainability. They include disease-focused foundations such as the Cystic Fibrosis Foundation and the Leukemia & Lymphoma Society; state and federal programs such as Pennsylvania's Ben Franklin Technology Partners, the Ohio Third Frontier, and the federal SBIR and STTR programs; philanthropic angel funds; and the seed funds, incubators, and translational programs of institutions and states, such as the Florida Institute for the Commercialization of Florida Technology, the Johns Hopkins Science+Technology Park, and the Johns Hopkins-Coulter Translational Partnership.

Outcome-based arrangements: Payment tied to predefined outcomes, including payer coverage within a clinical study to generate evidence, and coverage with an outcomes guarantee through rebates, tiered pricing, or cost-effectiveness guarantees.

Crowdfunding and revenue-based financing: Small contributions from many backers for very early or mission-driven work, and capital in exchange for a share of future revenue rather than equity.

Which of these alternatives fits a given situation depends on the specific details of the venture: its stage, its technology risk, the readiness of its market, and the preferences of the capital available to it. Where none fits, the Lab's work begins.

The Lab's Work

Each of the Lab's programs takes a category of work that conventional capital passes over and asks what structure would change its status. Current lines of inquiry include:
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Translational research at universities: The Academic Innovation Participation Platform proposes funding the stage between laboratory validation and commercial readiness through a portfolio of capped revenue participation interests.

Design for underserved communities: In collaboration with the Digitalis Design Lab, the Financing Design program examines instruments such as pooled community funds, cost-savings-backed structures, and subscription and crowdfunding models for design work that is too small for institutional capital, too slow for philanthropy, and too specific for grants.

Public-interest investment vehicles: Could a fund for high-risk, high-reward technologies with a clear public-interest component, such as the ability to lower healthcare costs, be structured as a public-private partnership in which private investors share in the resulting Medicare savings? Would that attract enough private capital to reduce the need for public funding?

Rules and policy: Are there rule or policy changes would make previously unfundable projects fundable?

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Curation