This post is the second in our five-part series, Navigating Life Sciences Transactions, where our team of attorneys provides essential strategies and insights for successful life sciences transactions.

What Investors Look for in Early and Late-Stage Funding Rounds and How Regulatory Compliance Impacts Valuation

For early-stage life sciences and health tech companies, raising capital is about more than demonstrating scientific promise. Investors are increasingly focused on regulatory preparedness, reimbursement strategy, and risk allocation—factors that can significantly impact valuation and long-term viability.

Fundraising is also evolving. With increased selectivity from investors, founders must be strategic about how they structure financing rounds, especially when using convertible notes, SAFEs (Simple Agreements for Future Equity), and priced equity rounds. Poorly structured early-stage financings can create challenges in later rounds, making it harder to attract institutional capital.

What Investors Are Prioritizing in Today’s Market

1. Clear and Credible Regulatory Strategy

Investors expect a defined regulatory roadmap early in the fundraising process, particularly for companies developing biopharmaceuticals, medical devices, AI-driven diagnostics, and digital therapeutics.

• Regulatory ambiguity is a dealbreaker. Investors want clarity on whether a company is pursuing a 510(k), De Novo, PMA, or Breakthrough Device Designation for medical devices, or an IND/NDA/BLA pathway for pharmaceuticals. Uncertainty in how a product will be regulated adds risk and can stall investment.
• Regulatory engagement adds credibility. Companies that have conducted FDA pre-submission meetings, secured a Breakthrough Designation, or obtained investigational exemptions demonstrate a proactive approach to decreasing the risk of regulatory uncertainty, and signal to investors that at least some of the cost associated with the regulatory road mapping has already been incurred and the funds raised can go towards moving the company forward rather than starting at square one.
• Reimbursement strategy is as critical as regulatory approval. Investors are increasingly evaluating whether a clear path to payer coverage exists, particularly for digital therapeutics and AI-enabled healthcare solutions, where reimbursement mechanisms are still evolving.

2. Structuring Early-Stage Financings to Avoid Dilution Risks

Life sciences startups often rely on SAFEs, convertible notes, and early-stage equity rounds to fund early R&D and regulatory efforts. However, poor structuring or documentation of these instruments can create valuation and dilution issues in later rounds.

• SAFE vs. Convertible Notes: Understanding the Tradeoffs
  • SAFEs are attractive because they avoid debt obligations, but without valuation caps or appropriate discount rates, they can lead to excessive dilution when converted. Moreover, because these obligations are not yet equity and not debt, without proper cap table management, many companies fail to accurately record and maintain the SAFEs issued and/or neglect to factor them into future capital raising decision-making.
  • Convertible notes allow companies to raise capital as debt that converts to equity later, but founders must manage interest accrual, maturity timelines, and note stacking to prevent unintended dilution or default risk.
• When to Move to a Priced Round
  • Seed-stage companies typically rely on SAFEs and convertible notes, but Series A investors often prefer priced rounds that provide a clearer capital structure and investors’ rights.
  • If SAFEs and convertible notes are stacked without thoughtful planning, they can create cap table complications that make later-stage fundraising less attractive to institutional investors. Institutional investors generally prefer an easily-followed, “clean” cap table in order to evaluate how they can fit into the overall business and obtain their return.

3. Data Privacy, Cybersecurity, and Compliance—A Growing Investor Concern

For digital health, AI-driven diagnostics, and connected medical devices, investors are becoming more cautious about data security risks and regulatory compliance.

• Data ownership and access must be clearly defined. Companies developing AI-driven solutions should ensure agreements specify who controls training data, patient records, and algorithm-derived insights. Regulatory and IP disputes over data usage can create obstacles to commercialization.
• Cybersecurity is a growing liability. Investors expect companies to adhere to FDA cybersecurity guidelines for medical devices, HIPAA privacy standards, and state-level consumer data protections—especially for products handling sensitive patient data.
• AI in clinical decision-making faces additional scrutiny. Companies developing AI-assisted diagnostics and predictive tools must consider FDA Software-as-a-Medical-Device (SaMD) regulations and the potential for Federal Trade Commission (FTC) enforcement actions related to AI model transparency and accuracy claims.

4. Avoiding Common Fundraising Pitfalls

Some of the biggest obstacles to raising capital aren’t about the science—they’re about deal structure, compliance, and market strategy.

• Overlooking regulatory and reimbursement risks. Failing to address how a product will secure both market authorization and payer adoption raises investor concerns.
• Unstructured financing rounds leading to cap table mismanagement. Startups that over-rely on uncapped SAFEs, stacked convertible notes, or poorly negotiated early-stage rounds may struggle to raise later-stage capital on favorable terms. Similarly, startups that fail to make use of the various cap table management solutions available these days end up stumbling during later rounds due to a lack of planning around earlier fundraising vehicles and how they fit into the larger picture as the company grows.
• Failure to demonstrate commercial viability. Even at early stages, investors want to see engagement with key opinion leaders (KOLs), potential payer partners, or health systems to validate market demand and path to adoption.

The Bottom Line

Raising capital in life sciences is about risk reduction and strategic planning—not just about proving scientific potential. Investors are more selective, and companies that proactively address regulatory strategy, financing structures, and commercialization hurdles will be better positioned to secure funding.

• Regulatory clarity and payer strategy are now major valuation factors. Investors want more than just a scientific breakthrough—they want a clear path to market and clear idea as to how their funds will get your company there.
• Structuring and documenting early-stage financings correctly matters. While SAFEs and convertible notes provide flexibility, they must be managed carefully to prevent excessive dilution, investor misalignment in later rounds, or alienation of institutional investment.
• Data privacy and cybersecurity concerns are becoming investor priorities. Companies in AI, digital health, and connected devices must proactively address regulatory and compliance risks to maintain investor confidence.

With SXSW Interactive bringing together founders, investors, and industry leaders, this is the right time to discuss how life sciences startups can position themselves for successful fundraising in a rapidly evolving regulatory and investment environment.