For biotech startups, finding funding is one of the earliest challenges they will face.
An early biotech startup has a lot of expenses. Even if the founders don’t take a salary, the startup must pay for lab space, equipment (unless provided by an incubator), reagents, consumables, contracts with CRO’s, secure software, and the salaries of any employees. This can cost tens of thousands of dollars per month, making it untenable to “bootstrap” a biotech startup in the same way that software companies can.
Instead, biotech companies have to start with some money. One of the major methods to do this is to apply for grants such as the SBIR and STTR.
🔬 Related: What are SBIR/STTR Grants?
In this article, we will discuss the other major funding mechanisms to bring in money to an early-stage startup:
We will also discuss the main tool which founders can communicate the value of their startup to investors: the pitch deck.
Before defining angel investment, who are angel investors? These are individuals who have enough personal wealth and/or income to be accredited by the Securities and Exchange Commission (SEC) and have chosen to invest some of that money into young companies.
Angels, as these individuals are often called, tend to invest in the earliest stages of company development, taking on more risk than venture capitalists may be comfortable with. Angel investments themselves tend to be on the relatively smaller side, in the range of tens of thousands to hundreds of thousands of dollars. They also usually happen in the “seed” or “pre-seed” investment stages. These are the earliest rounds of investment, when friends and family may also choose to invest.
Often, wealthy individuals will choose to invest in their own industry or former industry (if retired). They use their expertise not only to decide which startups have the greatest potential for success, but also to provide mentorship and advice to the founders. Thus, they both “pay it forward” to the next generation of entrepreneurs and increase the chance that they will get a return on their investment.
Since angel investors don’t generally have the same level of staff support as venture capitalists, they sometimes form groups. These networks of angel investors may share deal flow, schedule startups to pitch to the entire group rather than to an individual, and utilize resources such as web portals for applications. For a biotech startup, this can be especially helpful since it generally requires more money to get off the ground than it would for startups in other industries. By applying to pitch to many angel investors at once, they might be able to bring in a few angel investors instead of just one at a time.
Although angels tend to invest early in the company, they sometimes will participate in follow-on funding or provide a quick “bridge” between rounds. Startups can sometimes underestimate the cost of a project or run into unforeseen circumstances, but by approaching an angel investor who provided funding in an earlier round, they might have a better chance to receive additional investment than by trying to find a new investor.
🔬Related: Where to Find Life Science Investors
One of the most commonly discussed forms of investment is venture capital. Venture capital is a form of private equity in which firms provide funding to startups in return for equity. The money that venture capital firms use to invest generally comes from high net worth individuals, investment banks, or other institutions. This money is organized into a fund, from which the venture capital firm draws to make their investments on behalf of the fund’s contributors. A hallmark of venture capital is that it invests in high risk startups, rather than other forms of private equity which tend to focus on larger, more established companies.
Venture capital became popular during the technology boom in Silicon Valley and since then has spread to industries like biotech as a method of funding early stage companies. Biotech venture capital firms (VCs) are found in high concentrations in the Boston and Silicon Valley areas, but more and more established VCs in other industries are turning toward biotech.
Most VCs, though willing to invest early, do not invest in pre-seed or seed stage companies. They often wait until the company raises their Series A financing round, as this represents a significant decrease in risk for the VC, while still being early enough that the VC will receive a large chunk of equity in return for their investment. Correspondingly, the amount that VCs invest is greater than the amount raised in those earlier rounds. VC’s will frequently invest millions to tens of millions of dollars into the right biotech company.
VCs, like angel investors, like to help the companies they invest in to be successful. It is common for VCs that make significant investment to request a seat on the company’s board of directors in addition to equity. This way, the VC can keep track of the company’s progress and have a direct decision making role. Sometimes, for a startup that is either floundering or that requires specific expertise, a member of the VC might take a more hands-on role at the company, as a c-suite executive, perhaps. Or, the VC might utilize their network to help the startup find another person who can fill that role.
As VCs tend to have large amounts of funds, they often participate in follow-on funding for the companies they have invested it.
As large pharmaceutical companies and biotechnology companies have downsized their research and development departments, they have simultaneously increased their interest in innovative startups. It turns out that big companies are great at moving a drug from clinical trials to the market, but not as good at taking risks on new innovations. Instead, they are more and more leaving the risk-taking to biotech entrepreneurs and then moving in to acquire them later. Therefore, partnering with a large biotech or pharma company can be a great way for a startup to receive funding, resources, and advice.
🔬Related: Tips for Partnering with Big Pharma
Finding big pharma companies is not difficult, but finding the right person within the company to initiate partnership talks can be fore challenging. Sometimes business development personnel from a large company will proactively work to find interesting startups. They might participate in “partnering sessions,” where a third party organization sets up meetings between startups and business development representatives, or attend “demo days,” where multiple startups present their technologies. However, sometimes the right person for a biotech startup to connect with is actually involved in research and development. If a startup can provide a solution to a problem that a large company’s researcher is facing, that researcher may become the startup’s advocate to initiate partnering talks.
Deals with big pharma and biotech companies are often structured so that the startup receives some funding to pursue a particular line of research that will inform the large company whether the startup’s technology is worth their investment. Then, upon completion of the milestone, the startup may receive additional money. The large company might also provide access to resources such as capital equipment that the startup can’t afford. If the startup successfully completes the milestones that demonstrate reduced risk to the large company, then talks can turn to acquisition. For many startup biotech companies, the ultimate goal is to be acquired by a large pharmaceutical company that has the internal resources and infrastructure to bring their technology to market.
Sometimes, the traditional models of funding may not give the startup a chance to reach it potential. There are a number of other ways for these biotech startups to acquire the capital they need through unconventional funding sources.
From Labiotech: “The VC model often fits drug development companies, where the outcome is either the drug gets approval and makes a big return, or it fails. Companies offering services, selling tools or developing diagnostics might start making revenues earlier, but it will take longer for them to make the 10-fold return that most VCs seek."
Unconventional funding sources include:
🔬 Read more about the Unconventional Funding Sources for Biotech and Medtech Startups.
Each of these sources requires a different approach and has unique pros and cons associated with it. Startups should look at these options alongside federal grants and VCs in order to maximize their funding potential.
A pitch is when a startup tries to convince an angel investor, venture capitalist, or large pharma/biotech company to invest in them. The term comes from “sales pitch,” and at its core that is an apt description. The ability to sell a startup to an investor is an integral part of an entrepreneur’s skill set, and one which many develop as they go along.
Although there are some differences between what makes a good pitch for different types of investors, there are some qualities that any successful pitch will need to have. In the current startup world, pitching is usually done through the use of a “pitch deck.” This is a presentation which is structured to provide the essential information to a prospective investor, while also presenting a compelling argument as to why they should invest.
The modern pitch deck is fairly short--10 slides or so--and contains specific information. Investors want to know who the founders are and what education and experience they have that will make the startup successful. Although some scientists make the mistake of focusing solely on their technology, investors are often equally interested in understanding the problem that the technology is designed to solve and how much that solution could be worth. Pitch decks therefore should include information about the size of the market for the technology, plus whether there are competitors. A deck should certainly describe the technology, but rather than describing the mechanisms involved, it should show how the technology is innovative and how it offers a significant advantage over the status quo and/or any competitors. Investors also want to understand how the startup plans to utilize the money they are raising. Will the money be used to buy a piece of equipment, run preclinical in vivo trials, or hire additional staff? All these points are useful for investors to understand so they can determine whether or not they think the startup will be able to return their investment in the future.
Besides the pitch deck, pitching also involves a certain amount of networking, interpersonal skills, and good communication. Investors are not just putting money into a company, they are putting money into the founders. Therefore, connecting with an investor through a mutual friend or acquaintance is a great idea--the investor is more likely to view you in a positive light if their friend has good things to say about you. The interaction between an investor and an entrepreneur is also important. Investors know that if they invest, they are going to interact with the founders and will probably want to give some advice. Therefore, if the founder seems easy to get along with and coachable, the startup is more likely to be funded than if the founder is grouchy and stubborn. Communication plays into all of this, so a founder who can explain their technology clearly to an investor who may not be an expert in that area is more likely to succeed.
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