Last Updated on
January 5, 2023
By
Excedr
Early-stage biotechnology companies almost always require large amounts of capital and resources to fund and fuel their research and development. Even if your business can generate some revenue, it may not be enough to scale as much as you’d like.
Keeping growth in mind no matter what your business model is—you could be focused biotech, medtech, healthtech, or something else—is especially important if you’re interested in working with venture capital and angel investors. They will be looking to help grow your business as much as possible, and will be less interested in slow growth over many, many years.
But, you may not be interested in high-growth. It will all depend. And depending on your goals and needs as an entrepreneur, you will have a different funding journey. With this in mind, there are a few questions you and your co-founders should ask yourselves before fundraising:
A thorough self-audit will help steer you towards the most appropriate type of funding for your company, and how best to set yourself up to get it.
In this article, we’ve broken down the different funding opportunities, starting from sources you might look at in the earliest stages of company growth to options you might explore as you become more established and start considering bigger moves, such as a capital investment to grow your operational capacity.
For early-stage biotechnology and biopharma companies focused on medical devices or therapeutics, grants, private investments, personal savings, and loans make up the majority of the financing ecosystem, will be the most accessible, and most likely the most appropriate.
Let’s start with grants and public funding. Unlike other kinds of start-ups, life sciences companies have access to no (or minimal) strings attached funding from government and private entities who are also interested in advancing biotech research and development.
Grants are perfect for early-stage companies that are still collecting early data and developing their products and/or services.
Not only are grants prestigious awards that will add to your credibility and therefore help with future fundraising efforts, they are also given without requiring equity in exchange. Grants can either come from the government or from non-governmental entities.
Public funding is available through several government bodies, but the National Institutes of Health is the largest funder of biotech startups.
They provide two types of programs specifically intended to finance discovery, development, and commercialization. The Small Business Innovation Research (SBIR) program provides grants to fund research and development for commercialization, and the Small Business Technology Transfer (STTR) program offers grants to fund research and development between nonprofits and small businesses.
Within both of these programs, there are regular application cycles, as well as “funding opportunity announcements” that occur throughout the year, so we recommend signing up for email alerts and regularly checking the federal grants website.
The main downside to grants is that the application process is slow, and each one will have different and highly specific requirements. It’s important that you look for grants that fit your product or service, your stage of development, and your goals.
Even though grants don’t require as much proof of success as other types of investments do, you will still need to demonstrate scientific credibility, clear methods for research and data collection, and defined feasibility testing. Depending on the type of grant you apply to, your application reviewers will also be looking for a clear go-to-market strategy.
In addition to government grants, you may also be able to receive funding from non-governmental or philanthropic organizations like patient advocacy groups and family foundations.
These grants are less competitive, but they are more specifically oriented to diseases and health conditions. Look for NGOs that share your goals, or whose patients might be supported by your product. Major corporations are also increasingly providing funding to smaller life sciences companies through their foundations, either through a one-time lump sum, or a longer-term partnership.
Large, well-established life sciences companies will most likely have opportunities for startups who are doing similar or synergistic work. Note that you will need to have some established data on the utility of your product or service to secure a non-governmental grant.
Private investments are another important source of funding during the early stages of business development, and are secured by connecting with biotech investors who understand and are excited about what you’re working on, and are willing to make riskier investments if they believe your company has a strong valuation.
Although the nomenclature used to describe early-stage investors/investments has changed as investment habits have shifted—investors that didn’t participate in the earliest rounds are now doing so—there is a general lay of the land to private investments involving equity participation: angel (or pre-seed), seed, Series A, Series B, etc.
Angel investors, high-net-worth individuals who often have deep expertise in their field, generally invest in startups before anyone else, as they are more willing to take a financial risk for a promising idea and don’t tend to care about decision-making.
They can provide the investment as an individual or as part of a network or syndicate, and often fund the startup when it has only just launched, with simply more than a promising idea to base their decision on.
When you raise capital with angel investors, and only angel investors, you might see it referred to as an angel round, or angel investing. You might even see it called a pre-seed round, or pre-seed funding these days.
Seed funding, which follows angel investing, or pre-seed funding, is generally considered the first official equity funding stage, and is a way to refer to a formal pre-Series A round, where VCs traditionally get involved. The investment round itself is referred to as a seed round. However, this is where things get a little wishy washy, due to a change in when investors participate.
Angel investors, who traditionally filled the gap between friends and family investments and seed funding, will now often participate in more formal seed rounds alongside venture capital firms, who traditionally did not participate in seed and pre-seed funding rounds, instead waiting until the Series, A, B, and C stages, where companies are generally more developed operationally and financially.
All that is to say, the nomenclature surrounding early-stage private investments has evolved, and will continue to, leaving room for confusion. As a founder, don’t get hung up on the minutiae. Fundamentally, money is money, and support is support, regardless of the name given to the private investment/investment round. Instead, pay attention to the timing. An angel round will be pre-seed, a seed round will be pre-Series A, and so on.
Private or angel investments are typically faster to secure than grants, and don’t require your R&D to be complete at the time of investment. Receiving financial endorsement from respected colleagues in the industry can also lend legitimacy to your product/service. Despite the speed at which you can secure an angel investment, you will still need to do some legwork, in the form of networking.
You can attend events, present at conferences, engage in conversations with your community, and even write content for industry blogs. Because angel investors are looking for great ideas from great people, spend some time thinking about and refining the way you talk about yourself and your company. Tell your story in a way that showcases your background, your passion, and where your passion came from, and the potential you see for your business.
In general, once you’ve got robust data, a clear business plan, and seed funding, you can start looking for venture capital for your Series A round of financing. However, a larger number of VCs invest in seed rounds these days, so you might even start interacting with VC investors at the seed stage.
Series and seed rounds can come from firms whose sole purpose is to finance startups, usually in the tech industry. They can also come from the VC arms of large tech, biotech, and pharmaceutical companies. Venture capitalists or venture capital firms will provide more substantial capital, but they are less willing to take on risky investments.
Because they want to mitigate risk, they will perform much more rigorous due diligence. You’ll need a track record, one that includes proof of success with previous, similar businesses, or substantial promising data from your current work. VC funding can help you develop your product, scale business operations, expand your offerings, and eventually go public through an initial public offering (IPO).
Before you start pursuing venture capital funds, consult with corporate development experts to identify the firms that are the best options for you, as well as how to refine your pitch materials, and how to negotiate your terms.
You’ll have to give up some equity and/or autonomy in exchange for their investment, so we don’t recommend looking for VC funding too early. You’ll also have an ongoing relationship with your investors. Pursue VCs that share your company values, are educated in the field you work in, and can help you with networking.
As we mentioned earlier, the biotech industry has long been powered by the partnering of large pharmaceutical companies and biotechs. A well-suited partnership can be instrumental in developing your product or expanding your offerings.
The main benefit of these partnerships is that big pharma can provide a steady source of capital, and therefore absorb some of the risks associated with the early stages of business development. If you’re with the right partner, you can expect them to support you with administration, clinical development and commercialization, and post-FDA-approval marketing.
For big companies to even consider partnering with you, you’ll need to present well-organized and robust data. Just as you are spending time on your pitch materials, you should also spend time getting to know the company and who you’ll be working with.
Partnerships like these will require you to give up some control over your company and share your intellectual property, so make sure you have a good lawyer who can negotiate favorable terms for you.
What we’ve outlined so far are the most common ways that startup founders look for financing and growth opportunities, but there are more options available to the biotech sector. Below are a few other options that might work well for you as you build your company.
If you’re a student, recent graduate, professor, or other faculty member, university funding may also be an option for you. If you have ties to an academic institution, you may be able to tap into financial resources set aside for companies like yours.
Even if you can’t get funding from your alma mater, connecting with alumni organizations can be a great way to connect to people in your industry and potential investors. Academic funding won’t provide a huge amount of capital, but can be helpful to kick things off.
There are several different types of loans available to you as you build your business. Loans may not be appealing since they have to be paid back, but they can be incredibly helpful.
For brand-new companies, personal loans, loans from friends and family, and savings are a common place to start. Even if it’s a small amount, this initial financing can help you purchase lab equipment and pay for other essential overhead costs.
As your business grows and you can show your financial statements, you may be eligible for larger bank loans. Many biotech companies find equipment loans to be particularly useful, since the equipment itself can serve as collateral. As a startup you may also have access to small business loans with more favorable interest rates.
Depending on the nature of your product or service and its relevance to the general population, this could be a great option for you.
The key with crowdfunding is to help your audience understand why what you’re doing is important, and why they should help, which means you have to tell a compelling story. Usually, backers will receive some sort of “perk” in exchange for a contribution.
Different platforms will specialize in different types of products and have different models of funding, so do some investigating on what makes sense for your product. You also have to set out with a specific goal in mind and an idea of how much money it will take to achieve it.
Finally, we want to highlight biotech incubators and accelerators. As an early-stage startup, you’ll need a lot more than financial investment to help your business grow, and incubators and accelerators provide much more than just money.
Many people automatically group incubators and accelerators together, but they actually work slightly differently.
As the name suggests, accelerator programs are created to help your business grow, both in size and in value, often with the goal of creating a proof of concept and preparing you to look for seed funding.
When you begin working with an accelerator there are usually set terms, which includes the amount of capital they will contribute and the time they will work with you. They also put on events and showcases like “Demo Day” to help you network with potential investors.
Incubators, on the other hand, are intended to provide long-term mentorship, lab space, lab equipment, and other primarily non-financial resources like networking and community-building. They will both usually require you to have a minimum viable product (MVP) and a detailed business plan, but the relationships you form will be invaluable in the early stages of business development.
It’s essential to do thorough research on accelerators and incubators before applying so that you get the most out of your experience there. Look at the background of the people who started it, companies that have participated in their programs, and exactly what their offerings are.
Entrepreneurship is risky, and chances are you’ll need to raise funds if you’re pursuing drug discovery and development, building a medical device, or creating a diagnostics kit.
No matter what option you choose, startup funding can be a lifeline. One that improves your ability to develop from an early stage. Much of the work done in the life sciences industry, whether it’s diagnostics, healthcare, or biotechnology-based, requires a significant amount of capital, and there isn’t always a way to generate revenue during periods of heavy research and development.
In many cases, it’s extremely difficult to reach all of your scientific and operational milestones without at least some type of external funding. From preclinical studies to clinical trials to FDA approval, the costs of building a product are significant.
Additionally, if you plan on taking your company public through an IPO or SPAC, certain types of funding, like venture capital, can help you with your exit strategy by providing other business resources, networking opportunities, and industry expertise along with capital.
Getting this type of funding early on can help you survive the early-stage difficulties startups endure and reach stages of growth that are the stepping stones towards going public.
But, if going public isn’t your goal (for instance, maybe you don’t plan on moving out of academia), funding can still support your research when there’s no internal sources of capital or channels of revenue to rely on.
For more details on early financing options, we love this resource from Bay Bridge Bio: Top biotech seed investors and how to raise money from them.
If you’re interested in venture funding and biotech financing, here’s a few biotech venture capital firms to check out:
This content is informative, and doesn’t represent legal advice. Before you make any legal decisions, it is best practice to speak with a legal professional who can advise you on your particular situation.
