I am creating a new compute-driven biotech company. I need to raise $50M. This $50M raise might look like:
- $30M from VC equity
- $5M from SBIR/NIH grants
- $10M upfront/milestones from a pharma collaboration
- $5M in venture debt and tax credit savings
What does all this mean?
Straight up cash
Foreign grants/credits: One of the benefits of being in biotech is that it is science and engineering driven- meaning, it is speculative. You gotta put some money in to make some money out. Because of this, grants, which are non-dilutive, can be a great source of money. The amount of money in grants is not enough to really grow a company, but there is certainly enough to get the ball rolling. Look for groups like EU’s Horizon Europe grants, Canada’s IRAP, or UK’s Innovate UK. If global presence is part of the plan, you might be able to secure a grant for a pilot project in the region you want to test, like the EU, Asia, or Africa. Start by reaching out to one of the groups I mentioned.
Upfront/milestone-based payments: This is really popular in biotech, and I’m not sure why it isn’t more popular in engineering/technology. Maybe because of the speed of change in consumer technology? I don’t know. Regardless, this is where your customer funds the initial development of what you are trying to do. This is how I’ve started both of my companies- milestone-based technology development then reinvest in product. The only condition is that you better know your stuff and execute. Microsoft did a lot of this in the early days. Non-equity crowdfunding is the consumer version of this.
Equity
I. Venture capital: This is your typical idea of financing a startup- sell a portion of your company’s stock for money. Some of the high quality biotech-specific investors I have seen are Flagship Pioneering, ARCH Ventures, Atlas Ventures, Soffinova Partners, Foresite Capital, a16z, and Lux Capital. It will be nice seeing more scientists become rich and create science-focused funds to spur on more biological-driven innovation.
II. Crowdfunding: This is your KickStarter, GoFundMe, StartEngine, and now RobinHood type of financing. You pre-sell product and/or equity, then use that money to bankroll operations. This usually requires more marketing instead of close relationships. This is how Oculus started. Prepare to spend money on marketing if you do not go viral.
II. ICO (initial coin offering): Like crowdfunding, but international. You can raise through crypto, which has international distribution/accessibility by default. There are marketplaces that facilitate this specifically for biotech companies, like BioProtocol, VitaDAO, and Molecule. I think this will grow simply because of reach- crypto people spend 3x more than non-crypto, and I think a lot of it has to do with liquidity. Money moves faster on-chain.
In summary, you have a bunch of different types of funds to target- venture funds, local angel groups, sovereign wealth funds, local and regional banks, speculative investment arms of large companies (like Blackrock, IBM, etc)- really any fund structure where multiple people are pooling capital together to earn some target return over a specified period of time.
Hybrid
I. Convertible note: This is both debt and equity. The venture firm that listens to your pitch likes what you are doing, but is wary that there is money to be made in the short term. In order to manage their risk, they are going to give you $5M as debt, where you have to pay back a certain amount monthly or annually, and should things go well, they have the option to convert that into equity and participate in your growth. This could be really good or really bad- it entirely depends on your operational ability to manage cash flow, growth trajectory, and how the market is (if there is an economic downturn and you cannot weather the storm, you still need to meet your debt obligations).
Debt
I. Venture debt: debt but provided from the venture fund that normally gives out equity investments. There has been a trend where more VC’s are offering debt, which you can leverage. If you have pre-existing relationships with aforementioned biotech VC’s, or you don’t need equity investment and just need the cash for a boost in growth (great place to be in!), you can acquire debt from these firms. Usually a higher interest rate than what you would get from a debt-focused fund.
II. SBA loan: It shocks me how little we think about the SBA inside of technology bubbles- but they are real and they have real money. Just as you can borrow $5M from VC, you can also borrow $5M from the Small Business Administration. Under the hood, they are really partnering with banks, then the SBA guarantees a percentage (50-85%). In my limited experience, companies outside of tech hubs leverage this all the time. Although, thinking about it, I don’t think they are your typical biotech investor. More like accounting firms and home-services companies. The SBA might not be the best group to value your p53 inhibitor.
III. Credit cards: The credit card company that issues you this is typically not expecting you to fund a company with the card, so they prefer small purchases paid back quickly, typically within a month. This is why the penalty for not paying your minimum is so high (25%+). Other forms of debt require the same, but with larger amounts over longer time periods.
Terms
underwriting models: the big math equation a company uses to make all of its investments
pre-money valuation: value of a company before an investor has put investment money in
post-money valuation: value of a company after an investor has put investment money in
non-dilutive: no shares being sold
Resources
Venture Deals book
Secrets of Sand Hill Road book
Template investment documents for early stage financing