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Funding Strategy for Biotech Startups

Today, biotech startups have more options for funding than ever before. These different sources include equity crowdfunding, venture capitalists, incubators, angel investors, public funding, as well as federal and state grants and incentives. Now presented with a real choice, it is critical founders develop a well thought out funding strategy that really gives the firm the best chance of success in each unique phase of its growth. 

Traditionally biotech firms have the reputation of needing a hefty capital investment. Luckily, being a biotech founder today has its perks. Importantly, the costs required in the earlier stages of the firm are now substantially lower than in the past. For biotech firms it is now possible to prove a concept with even $100k, a feat that was almost impossible without millions of dollars 20 years ago. This is now possible through infrastructure such as contract research organisations (CROs) whom you can outsource research to, renting fully equipped lab spaces by the bench, affordable lab robots to automate batch experiments, computational drug discovery enabling certain experiments to be done completely in silico, and companies that reduce the cost of filing patents. Through this infrastructure it is now possible to clear major scientific hurdles in a cost effective manner, and wait till the clinical trial stage (which still remains expensive) to raise large sums of capital investment. This strategy is not only economical but it even increases the amount of money firms can raise later as they have now de-risked their idea to a level that was only possible with millions of dollars before.

Because you can now start relatively cheaply, and have more ways of raising capital, biotech founders should be careful in considering how much investment they receive and from what sources, as each funding opportunity comes with its own advantages and disadvantages. You have to be flexible and consider each opportunity as it fits with each stage of the firm. It’s vital to balance the capital you need with how much control you are willing to relinquish. If an investor asks for equity, it’s crucial you have confidence that they are able to support your company for the next coming years and rounds. New potential investors will ask, ‘what percentage of the new round will be covered by the insiders’? If one of your insiders is not willing to support you in the next round of funding you may face some trouble as this can raise alarm bells on the startups ability to deliver on the milestones and turn profitable. 

Investment is milestone driven and as such, it is absolutely crucial that start ups deliver on their milestones in a successful and timely manner, backing up their progress with data and proof of concept.

Incubators are a good source of funding especially in the earlier phases of the firm. They also provide support through resources, services and a wider network. Angel investors are another source whose funding usually ranges from $150k to $1.5 million and they usually expect a return within 5-10 years. Similarly there are angel groups who pool their resources for investments in specialised areas. This can be advantageous for biotech firms as you may be exposed to a greater network who are looking to invest in similar areas of interest. In return for their investment, angel investors can expect board positions, control in key decision making, stocks, weekly or monthly reports, and even a 5-25% stake in the company. Venture Capital (VC) firms provide capital to early stage biotech firms in late phase II and early phase III. VC funding usually comes from institutional investors and high net worth individuals pooled together by investment firms. In return for their funding they usually expect the startup to be sold profitably or successfully undergo an IPO in around 2-3 years time. As a result, founders may feel rushed and stressed to sell or go public sooner than they would have liked. With VCs although you may potentially receive millions of dollars of funding, in the end you are facing dilution. This means the founders may no longer have a significant ownership and may no longer be a significant equity shareholder.

If instead biotech firms obtain government grants or claim a portion of their expenditure back through the R&D tax incentive, they can then delay the time till they need VC funding. In this time, the founders can keep VCs in the loop of the problem they are solving and their process, progress and milestones; being transparent with what they as a team can do and where they need further talent in the team. This can result in a higher pre-money valuation in the first financing round where the dilution to ownership may not be as significant and the founders may be able to retain greater control over the execution. Instead of raising a giant amount upfront through a venture capitalist it may be better to raise money incrementally and have greater control of your company, without having to sacrifice your vision. 

To take advantage of this strategy, there are multiple government grants specific for biotech firms in Australia, such as the Medical Research Future Fund and the Biomedical Translation Fund, as well as wider funding programmes for innovative companies. Other incentives include the R&D tax incentive, a patent box (where from 1 July 2022, income derived from Australian biotech patents will be taxed at a concessional corporate tax rate of 17%), and Early Stage Innovation Company (ESIC) tax concession (a 20% tax offset (non-refundable carry forward), CGT free) for ESIC investors.

As with tech companies in 2005 that evolved to see a boom in funding options as the cost of starting up decreased, this is likely to be paralleled in biotech firms. It seems that even within life sciences firms, where traditionally the high amount of capital requirement meant trade-offs such as sacrificing majority control of the company, there will be new funding models that will lead to an explosion of biotech firms. This explosion will be the catalyst that empowers more people to follow through on their dream of making a genuine, positive impact on the lives of others. THIS is a future I am excited to be a part of.