Dr. Khoa Nguyen, experienced scientific consultant, shares his top tips for biotech due diligence and technical considerations, specifically for startups and SMBs that are seeking funding. Dr Khoa is the founder of Tranquis Therapeutics, a biotech startup that launched with $30 million Series A funding.
Table of Contents
1. What kinds of fund raising strategies are available to biotech startups?
Conducting scientific research is costly and therefore it is critical to secure enough capital to run a biotech company successfully. There are many ways to obtain funding for a biotech startup, which depend on
- 1) how much money is required to set up the enterprise,
- 2) how much control the founders would like to give up in exchange for financial resources,
- 3) the origin of the enterprise: whether the startup is an academic/pharmaceutical industry spinout or a starting-from-scratch business,
- 4) the existing network of the founders in the field of life sciences, pharmaceutical development, and investment.
Most startups obtain funding from established venture capital investors and angel investors. Alternatively, there are also the options of obtain funding via governmental/academic resources. Additionally, if one is lucky enough, they could also raise money from wealthy friends and family members to support their scientific aspirations. Lastly, it is important to consider the network of knowledge and experience that a potential investor could bring on board as sometimes this intangible resource is also crucial for a successful launch and development of a biotech startup.
2. How can angel investors help with funding biotech startups?
Who are angel investors:
Angel investors are individuals who usually provide the necessary financing for a startup at the initial phase when the risk of failure is relatively high that most investors are not ready to support them. This initial financial support was often provided in exchange for ownership equity or convertible debt, which could later be converted into an equivalent amount of cash or shares of the company. The financing terms from angel investors are usually more favorable than other lenders as they are often interested in helping the entrepreneurs to jump start the business from the first steps, rather than focusing on the long-term viability/profit of the business. These investors might invest alone or form a network of angel investors for early-stage startup investments.
How to approach angel investors:
The best way to approach angel investors is through personal or professional network. In any cases, the entrepreneur should conduct some preliminary study of the background of the angel investor to understand his technical/business expertise and investing experience so that additional information about the type of business the angel investor is interested in, the working style of the angel investor (passive/active management), typical amount of funding that could be raised, etc., could be obtained.
- Elevator pitch: The initial pitch to angel investors is usually less formal than that to venture capital investors (often called the “elevator pitch”). Nevertheless, the entrepreneur should be prepared to have a concise story that outlines the uniqueness of their technology to the investor and clearly explains the need for the initial funding to get the business started.
- If there is an interest from the angel investor, further discussions could be set up for the entrepreneur to provide more details about the business plan, the core team members of the startup as well as to discuss exit strategies for the angel investors (the startup getting bought or IPO’ed, the latter is more rewarding to the angel investor and is the preferred exit strategy).
- Seed funding: The support from angel investor is usually called “seed funding” and often superseded by other funding series to support further development of the company.
3. How can venture capital investors help biotech startups?
Who are venture capital investors?
Similar to angel investors, venture capital investors provide funding in exchange for equity, and consequently some control of the direction of the company. However, the funding amount from venture capital investors is usually substantially larger than funding from angel investors and is aimed to support further development of promising start-ups with long term growth potential. Venture capital investors do not normally fund startups at their inception but only target companies at late stages in their development/commercialization. Venture capital investments for biotech might come in several series, depending on the stage of the development of the company. For example, series A funding might be allocated to support preclinical development/proof of concept/preclinical safety and toxicology studies while series B funding might be used for clinical development. Each funding series might be subdivided into different tranches and each tranche is contingent upon successful execution of specific milestones, which were agreed between the company founders and the investors.
In contrast to angel investors who might rely on their investment instincts along with hard data analytics, venture capital investors only invest in a startup after careful due diligence of the company, its technology superiority, strength of the management team, current and future market demands. In this regard, as discussed previously in the due diligence section, well-presented data packages and well thought-out business plans are critical for the startup to be able to convince the venture capital investors of the commercial viability of the company. Venture capital investors also believe in the track record of success of the founders/team members and sometimes fund raising without hard data to demonstrate the viability of the research program/technology is also possible if the founders are well known, have a reputation in a particular area of research as well as setting up and developing successful companies.
How do you approach venture capital investors?
In order to effectively approach venture capital investors, the entrepreneurs are expected to do some prior research on the background of the investors, including prioritized areas of investment, track record in supporting startups from development phase to IPO/buyout/commercialization stage, approaches to due diligence processes, typical funding amounts etc. Venture capital investors could be approached at by professional networking events (biotech/science conference), direct inquiries about potential interests in new investment opportunities, or personal recommendations. There are no incorrect ways to approach a venture capital investor as long as the entrepreneurs have completed their “homework”.
4. How can you get funding from academic institutions and governmental resources?
Many universities are very keen on translating basic research toward commercial products and offer institutional grants for drug discovery and med tech development. If the startup originates from an academic institution, it would be very advantageous to explore the possibility to obtain these seed grants to support the preclinical discovery/validation phases of the startup. The upside of this approach is that the founders will not lose equity to investors at this early stage of development. However, the downside of obtaining such grants is that the intellectual property rights are shared between the founders and the supporting academic institutions. When it comes to transition into an independent startup, the technology must be licensed out from the university to the company.
Alternatively, many governments have small business grants to support biotech startups. In the US, these funding sources come under the form of SBIR grants and startups could solicit financial support via these mechanisms. Similar to the academic funding scheme, the founders will not lose equity to investors via government grants. Additionally, the amount of funding one could procure from this source is significantly larger than those obtained within an academic institution. The downside of this approach is that the grant application process is competitive and time consuming. There is also the risk of revealing too much proprietary information in the grant application, especially for young startups whose IP positions have not been well secured. In any cases, these are additional sources of support that founders could entertain while brainstorming how to kick start their biotech enterprise.
5. Is crowd funding feasible for biotech startups?
If a technology is of immense interest to the general public, the founders could explore the option of initiating a crowd funding campaign to garner financial support from the general public. For instance, I recently worked with a small startup in the UK to generate a crowd funding campaign for a first-in-class COVID diagnostic device that could constantly monitor infection status in a person. The company generated an online informercial to explain the core principles of its technology, the importance and urgency of developing such device under the current COVID pandemic as well as its potential applicability to future infectious diseases threats. The key considerations for this kind of fund-raising approach include:
- 1) the relevance of the product/technology to the public,
- 2) ability to generate a message that could easily be understood by the general public,
- 3) the feasibility of the fund-raising goal, and
- 4) IP protection status.
While this fund-raising approach might not result in a substantial amount of capital, it could be a very practical way for small startups to acquire seed funding to support specific activities during their early development stage.
6. How could a fledging biotech startup can find sufficient resource/talent with limited budgets (accelerator/incubator/CRO)?
This is the common question for many founders who are short on financial support at the early steps of their biotech entrepreneurship. Fortunately, in anticipation of this growing demand, many biotech incubators and accelerators have been established to provide infrastructure support for young companies.
- For instance, there are several incubators in the San Francisco Bay Area which provide shared lab space/equipments that companies could rent instead of spending the seed capital on purchasing these items or leasing a building for their enterprise.
- Besides this type of infrastructure support, there are also many consulting CROs that offer expert advice and/or A-to-Z wet lab service on various steps of early-stage biotech R&D for startups that are short on personnel.
- Lastly, there are also many core labs from universities that offer research services at a fraction of the costs of conventional CROs. These core labs are also available for biotech clients on a fee-per-service basis. Collectively, these resources are economical ways to get through the initial stages of setting up a biotech company on a limited budget.