Right now seems like a great time to be at the helm of a biotech startup. There’s more money going into U.S. companies from venture capitalists than ever. A record high, in fact: CB Insights reported that in Q2 2018, investors poured $23 billion into startups. And things are particularly bright for biotech startups, which pulled in $2.8 billion in funding in the first two months of 2018 alone. So, if you’re an entrepreneur figuring out how to finance a biotech startup, is going the VC route always the best bet?
Not always, no. It takes quite a lot to be able to secure funding from a venture fund—but especially in a demanding space like biotech. Even though biotech is a hot field, financing a biotech startup is nuanced and involved. You’ll also need to make a decision on what kind of financing to seek depending on the stage of your company’s development.
We’ll go over a few options for how to finance a biotech startup and offer a few things to consider about your company’s positioning before you start seeking out capital. Even if you’re sure you’re going to raise at some point, you’ll still want to review all of your options. You don’t want to leave free money on the table, that’s for sure.
If you’re in charge of your own profit and loss (income statement), we don’t have to tell you that biological technology is an expensive business. Like, very expensive.
Unlike a consumer products company making, say, edible food dyes, or even a software company developing a new communication platform for dentists, proof of concept and prototyping costs are sky-high in biotech. To even just perform initial R&D, you need to own or have access to industrial machinery, labs, chemicals—whatever it is that you’re looking to do and specialize in. And, additionally, you have to pay a premium for highly experienced and trained team members.
So, for anyone looking to hand you cash—whether it’s an investor looking for equity or a small business lender looking for an interest payment—you’re going to go through a great deal of due diligence. Because, bottom line is that you’re going to need a lot of capital to even get things off the ground. And much of the value of your company will be in intangible assets (aka your intellectual property), which are difficult to value.
As you might imagine, though, biotech is incredibly well positioned to make an impact not only financially, but socially, too. Successful biotech companies are leveraging modern technology that’s changing as quickly as we can learn it to create breakthroughs in medical treatments and therapies, drug testing and development, genomics, biofuels, and so much more.
Many companies that have successfully secured biotech funding not only secure financing from multiple sources but also generate returns for those involved. In their article about financing life sciences companies for Nature Biotechnology in July 2011, authors Bruce L. Booth and Bijan Salehizadeh write, “To make a baseball analogy, life sciences has a higher batting average but lower home-run percentage than technology.”
You have a few different financing options you can pursue as a biotech startup. As you’re researching how to finance a biotech startup, once thing you’ll find is that you might be able to access lots of different types of funding. And, the larger your circle of connections, the more access you’ll have to opportunities.
You’ll be pleased to find out that there’s a lot of available grant funding for biotech startups. This is especially excellent news for earlier-stage companies that are still in R&D phases, and need foundational capital to kickstart their business.
Depending on your specific research trajectory, you might be eligible for grants from government agencies including the U.S. Department of Agriculture, National Science Foundation, Department of Energy, and National Institute of Health. Each grant has different eligibility and submission requirements, plus different awards. Grants are not only highly prestigious but also an amazing growth engine for your business—and you won’t have to give up equity or pay back interest.
Similarly, you’ll find that many established corporate biotech companies (like Pfizer) or larger nonprofits (Prevent Cancer Foundation) sponsor different size grants for biotech startups at different stages. Many are just for post-graduates or post-docs, but some are for health professionals, too. You just have to dig to find the right one for you.
If you’d like to pursue financing your biotech startup with at least some funding from grants—which we’d certainly recommend at least trying your hand at—understand that it’ll involve a lot of research. Grants are highly competitive, so make sure you’re qualified for the grants you’re applying for and working hard on your application. It might take time, but even scoring one will make a big difference.
We recommend using Science’s biotech grant search tool to begin.
Many biotech startups originate from research kicked off within universities. (A good example that might surprise you: Major-market drug Lyrica for the treatment of chronic pain and epilepsy was developed at Northwestern University.) If your biotech company is the product of a university innovation or sprung from an academic incubator, you might have some financing options.
Several universities have started or are in the process of developing funding to invest in growth and acceleration of companies with academic ties. You might be able to not only receive financial backing but also tap into valuable university resources by getting involved with these programs. Look into any potential opportunities at your specific university if you think this might apply to you.
If you’re in early stages, you might want to directly seek private investment from experts in the biotech space. Especially if you’re trying to raise money before you have a lot of hard data, and you need capital to be able to support R&D, you’ll want to approach someone who deeply understands your space. That way, you don’t have to spend a lot of time explaining what you’re doing and asking for trust. And, if anyone’s going to take a risk on a business that’s really just an idea, it’s going to be someone who intimately knows the hypothesis you’re betting on.
This makes sense if you’re raising pre-seed money—but also if you’re seeking out angel investors, too. Plus, the more people you can have on your side in your space to give your startup the stamp of approval, the better outlook for your capital raises.
Now, it’s time to get to venture capital. As you might expect, many biotech startups pursue financing from venture funds.
As we briefly mentioned before, biotech is capital intensive by nature, and the R&D process is prolonged, too. When VCs consider their investments, they need to know that they’re investing in a highly promising prospect with a strong potential for return. They also know they have a big enough piece of the pie that their time and advisory work will be worth the sweat. Often, that means that VCs hold out until biotech startups have some hard data under their belt and are raising larger rounds. Otherwise, the juice won’t be worth the squeeze, so to speak.
A little down the line, though, VCs are okay with putting in a large amount of capital and paying a slightly larger price to enter at a higher valuation if they deem an investment an exciting opportunity. That might mean you won’t be able to access major VC for biotech startup financing until, perhaps, series A instead of a seed round. But don’t get discouraged—keep your head down and get the results you need to secure your funding down the line.
As any kind of startup, it’s difficult to go to a lender and apply for traditional small business financing like a term loan or business line of credit. Most lenders require some kind of business financials to evaluate. Usually, that means you’ll need to have at least a little time in business and some history of how you behave with your business debt (usually in the form of a business credit score).
Of course, new businesses don’t have that.
One kind of business financing you might be eligible for, depending on your time in business, revenues, and what you need the cash for, is equipment financing. As a self-collateralizing loan, equipment financing is easier for many newer businesses to access. If you need to finance the purchase of gear, equipment, machinery, or anything similar (as opposed to general working capital), you can apply to a lender with an equipment quote and very good personal credit. If approved, you can use the money to purchase the equipment you need. The equipment serves as collateral.
Also, as you’re thinking about small business startup loans, don’t forget that a business credit card can be a powerful tool, too, especially in your most nascent days. A 0% intro APR business credit card can give you a nice buffer with several months (up to 15, in some cases) where you can spend and not accrue interest.
Once you identify the type (or types) of funding you think will be best to finance your biotech startup, make sure you put your best foot forward. It’s important to come to any potential investor, grant application, or lender with all of your paperwork together. And, it’s important to do it at the right time.
If you’re raising venture capital, an important part of your process will be valuing your company. Your valuation is the measure of your company’s worth—and it’s important for investors to be on the same page with you in order to feel comfortable with not only putting money in, but also taking equity in exchange. Without a realistic valuation, they’re not going to own enough of your company to make an investment worth it.
That’s why coming to the correct valuation is essential. You’ll want to determine what’s called your “pre-money valuation.” That’s the estimated value of your company before the investment round.
Unless you have a track record of substantial success with prior exits or with biotech sector development at established companies, you’ll need to have data. In fact, hard data is a non-negotiable. Because the nature of biotech means that R&D takes a lot of time, you want to bring as much proof of progress as possible.
Be prepared with hard data about the problems you’re solving, distinction from your competitors, and the progress made with the technology you’re developing.
Like any capital infusion, biotech startup financing is no different in that you want to time your funding right. What are you going to use this funding for? Small business lenders will want to know—venture capitalists, too. Many grants also have specific directives for what you can and can’t do with award money.
That’s all to say that you might want to consider timing your financing request with a particular phase of research you want to fund, or a new project you’re hoping to pursue. Maybe you need to obtain new equipment or hire new staff to expand. Bottom line: Don’t just apply for cash to apply.
As you’re raising capital to scale, it’s vital to continue to make connections with experts in your space. They’ll be able to introduce you to brilliant people who can share ideas and connect you to sources of new financing.
And, like we mentioned before, you want to have the endorsement of as many trusted, successful biotech professionals as you possibly can. It will not only legitimize the company you’re building but also ultimately help you secure funding in your developmental stages.
This bears repeating: Be fanatical about collecting, presenting, and organizing data for everything you can.
As a biotech company, the dream is to always get big enough that you IPO—an initial public offering in which you list for trading on an exchange like the NASDAQ. But it’s a long road to get there. As it should be: Developing an outstanding biological technology product is very difficult. It requires a lot of research and a lot of failure before the good stuff starts happening.
And, right, it also requires a lot of money.
As you’re navigating the biotech startup financing journey, above all, remain patient. Biotech companies need to raise more capital than many other types of companies, and they often need to work even harder to do it. But the rewards can be big, so hang tight and keep plugging away at your passions. Build your network, and gather your data. There’s no better time than right now to be in biotech—but like the best research, the best sources of funding aren’t realized overnight.
Meredith Turits is a contributing writer for Fundera.
Meredith has worked as a writer and editor for more than a decade. Drawing on her background in small business and startups, she writes on lending, business finance, and entrepreneurship for Fundera. Her writing has also appeared in the New Republic, BBC, Time Inc, The Paris Review Daily, JPMorgan Chase, and more.