Author Archives: James Taylor

Non-Dilutive Financing for Biotech Startups

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In a series of posts we introduced the Leverage Startup and how non-dilutive sources of capital can be used to accelerate the commercialization of academic biotech projects.  In this post we discuss the use and sources of non-dilutive financing in biotech startups.

We define non-dilutive funding as financing that does not require the sale of your company’s shares, and hence does not cause dilution of the existing shareholders.  The use of non-dilutive funds as a component of your financing strategy is important and has many benefits.  First, non-dilutive funds can provide critical cash to support your company’s development.  Second, because non-dilutive funds do not require the sale of the company’s voting equity, it allows founding teams and existing shareholders to retain company ownership and control.  Third, as many non-dilutive funding sources require approval from expert stakeholders with deep domain knowledge like funding agencies, important validation of the team and technology can be provided for future customers, partners, and equity investors.

The following gives an overview of non-dilutive sources.

Government research grants. (for example: NIH).  Certain research focused government grants include companies as eligible awardees.  The National Institute of Health (NIH) is a good example, where companies can compete for R01 and R21 grants alongside traditional University applicants. These government research grants typically fund basic research or its commercial translation, with the required stage of development clearly outlined in the call for proposals. Such monies typically fund salary and consumables, but limit their contribution of overhead or other non-research activities.

Government industry grants (for example: SBIR, NRC IRAP).  With the aim of enabling the commercialization of cutting edge technologies, various governments have established industry specific grant programs.  These grants typically emphasize the commercialization of research and the application often requires a strong market argument for the future product.  These grants usually fund commercialization activities rather than basic research and sometimes can be partially used to support the filing of intellectual property, conducing a market analysis, and other business development actives.  Many of these funds require the company involved to provide matching funds in the form of in kind (i.e. additional salary support) or cash, and to demonstrate that the business will provide a conduit for commercialization.

Foundations (for example: Gates, CF, Ellison, Lou Gehrigs, X Prize).  Foundations are becoming an increasingly important driver of biotechnology innovation. Foundations are typically focused on improving the health of individuals inflicted with a specific disease, for example the Cystic Fibrosis Foundation, and are primarily funded by donors with a connection to the ailment.  To increase the research being conducted for the given indication as well as the effectiveness of that research, Foundations are taking a very pro-active approach to funding R&D.  For companies, this can represent a significant opportunity to obtain R&D funds to push forward a technology that can impact a given disease. In addition, Foundations also provide a conduit to clinical expertise as well as potential access to patients and stakeholders, giving a program a larger chance of translational success.  There are also new initiatives specifically focused on biotechnology entrepreneurship.  For instance, Breakout Labs, an initiative from the Thiel Foundation, has been set-up to bridge the gap between early-stage research and venture capital-ready technologies.

Industry partnerships.  Industry partnerships are the life blood for pre-revenue biotech firms. Typically, partnerships involve a transfer of technology from a small biotech to a large company in return for cash and/or co-development rights.  These partnerships can involve significant sums of upfront and downstream cash flows and often represent the first major validation of the technology by an established pharma or large biotechnology company. Although these funds usually do not involve an equity stake in the selling company, such transactions usually involve a license or option-to-license of the selling firms intellectual property.  It is important to keep such licenses non-exclusive or narrowly-exclusive such that the startup remains positioned for long term growth.

Venture Debt (for example: Silicon Valley Bank). Venture debt is a useful tool in Biotech financing.  For example, debt can be utilized to extend the runway of an existing financing round to allow the company reach critical proof-of-concept achievements prior to follow on investments.  A financing round is usually required before accessing Venture Debt, and the lenders are anticipating that the company will raise another financing round or other capital injection to receive their payback.  Lastly, as with all debt, there is insolvency risk associated with it and careful consideration is required before taking such funds.

Revenue (for example: contract research, early product release).  Building a company on the back of a successful revenue stream is an ideal financing approach, however this can be challenging for nascent ventures.  For biotech firms will little to no regulatory involvement (i.e. tools companies, certain medical devices, industrial applications, etc.), establishing customers to use and test early prototype products is feasible and recommended.  For firms with significantly more regulatory barriers (i.e. therapeutic, diagnostic, etc.) revenue can sometimes be generated through auxiliary products or services, for example contract research or consulting.  In these cases however, the founding team needs to be diligent to not be distracted from the ultimate product goal of the firm and needs to weight the value of these funds over the delays it will create in achieving overall long-term goals.

Although non-dilutive sources are a great way to finance an early stage biotech, it should be noted that they are not “free” and can have important implications and associated costs.  For instance, certain funding agencies require that the invested cash be returned if the company is acquired by a foreign company, that they receive a multiple of their investment upon commercial success, or that they have certain rights to the IP.  Additionally, non-dilutive funds are typically allocated to a given project, rather than to the company at large.  As such non-dilutive funds are more ridged to business pivots that require a change in a said project, and do not fund other business development and overhead of running your business. A combination of dilutive and non-dilutive financing is often the strongest mix for early biotech.

Thanks to Euan Ramsay  & Mike Koeris for edits and input on the post.  This post was originally posted on BiotechStart.org.  Please provide any insights you may have to the use of non-dilutive funds, and sources of non-dilutive funds in countries outside of North America.

James Taylor

 

Testing the Value Hypothesis

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Medical research tool providers have driven sweeping changes to the biotech industry. By introducing technologies like DNA sequencers, thermocyclers, mass spectrometers, and others, tool providers have tremendously accelerated biological understanding, leading to advanced new treatments and diagnostics.  A prime example is the impact genomic tools are making in the emergence of personalized medicine.  Technology push is a key factor driving medical revolutions and these new tools are enabling capabilities not previously dreamed possible.

Bringing such technologies to market is the role of many biotechnology startups.  Often, these firms are penetrating markets with significant technical differentiation but limited capital resources. In a series of posts we consider the challenges faced by these companies as they bring products through the varying stages of commercialization.  A recent post discussed the use of Minimum Viable Products (MVP) in biotech.   Here we focus on the use of a MVP in the first key stage of commercialization: setting up Beta-Sites to test the Value Hypothesis.

Testing the Value Hypothesis:

The Value Hypothesis simply states that your users obtain significant value from your product when they use it.  For a breakthrough product to provide value, it must demonstrate capabilities that otherwise cannot be obtained (achieves magnitudes better sensitivity, accuracy, cost savings, usability, etc.).  Such technologies are usually developed with a specific advantage in mind, however until your instrument or tool is in the hands of a user it is unlikely you’ve considered the full benefit or burden of your value proposition.   It could be the case that your system is superior in the metric advertised, but is inferior in aspects critical to your user (throughput, speed, workflow changes, etc.).  By getting your technology into the hands of users quickly, you allow yourself the opportunity to modify your product as needed (read: pivot).  The use of beta-sites is a useful way to understand the full scope of your customer’s needs.  The following outlines some considerations that should be taken into account to ensure your beta-testing is a success.

Request Payment to Ensure Your Technology Will Be Used

Only work with those users who are as serious about your technology as you are.  Early adopters should be excited enough about your offering that they are willing to use it at its earliest stages and they are willing to pay for this early access.  Look hard for these customers and avoid those that are only interested at zero investment.  Paid beta-sites will have ownership in the success of the program and are more likely to stay with your technology through the bumps and bruises.  Importantly, if you cannot find any customers who are willing to pay for early access, you will likely have a hard time finding customers willing to ever pay at all.

Test the Core Value Proposition You’ve developed your technology with a key benefit in mind.  However, your users may prioritize your feature set differently and you should clearly identify the real and perceived value your users place on the technology.  For instance, maybe instead of the improved sensitivity of your system, it’s that it avoids tedious tasks within with the user’s work flow.  By understanding your user’s perceived value proposition, further development and marketing materials can be guided accordingly.

Identify Real and Perceived Competition & Substitution Products. Every product has competition.  It is tremendously important to understand who your user thinks that is.  Who do they initially compare your product to?  Often this is not a direct competitor but a substitute approach (for example, using label-free antibody-based detection of proteins instead of mass spectrometry).  By having a deep understanding of your user’s perspective, you will be able to anticipate challenges posed by future customers.

Determine what is required for your product to be fully integrated into your customer’s work flow.  Adopting a new technology or process is a lot to ask of your customer.  He or she is taking a significant risk by using your untested innovation and their need for pragmatism will likely match your inherent optimism.  With your user, dig deep into the requirements needed to have your equipment be in the critical path of their success.   What data package should be compiled?  What level of reliability is required?  What upstream and downstream processes need to be changed?  And so on.

Discover new potential uses of your technology.  An important bonus of providing smart people with new innovative tools is that they come up with exciting new applications of your technology.  Be acutely aware of any potential new applications introduced by the user – this could be your next big thing!

In summary, initiating beta-test sites is important tool in understanding the value proposition your product offers your customers.  With some foresight into the objectives of the program, you can extract significant learning from this process.  In a follow up post, we will discuss some of the engineering considerations that will help ensure your program is a success.

James Taylor and Joe Marotta. Find more on the Biotech Startup Blog.

Minimum Viable Products in Biotech

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Hat tip to the source.

A major pillar of Lean Startups is their use of Minimum Viable Products (MVPs) to test the validity of a product within a marketplace. By definition, a MVP has the minimal number of features that is required to test a given market hypothesis. A MVP allows the originating startup to gather invaluable feedback from customers, which in turn accelerates the feedback cycles around every aspect of development. Put differently, the use of an MVP avoids spending extensive time and resources building a finished product before validating the product concept with customers. When used in the context of validated learning, MVPs are a valuable tool for identifying product-market fit.

MVPs have been discussed extensively elsewhere (see related links below), usually in the context of information technology (IT) companies. The success of the MVP model has been validated in the IT industry, and a common operating procedure for IT product deployment is now early launch followed by rapid product iteration. Software based products, and specifically consumer web products are amenable to such rapid development, as the engineering challenges are well-defined even when significant. In contrast to most software / web based products however, products rooted in the hard sciences like the biotechnology or bioengineering sectors (and yes we lump all sciences together where progress is “hard” to come by), have an appreciable level of technical risk in addition to the market risk that MVPs are designed to address. To successfully map the MVP model onto the hard sciences, such technical risks need to be considered in the context of the large upfront capital and time investments required to abrogate them.

Re-framing the MVP model to include mitigation around the technical risk as well as the market risk is both appropriate as well as imminently necessary. We believe that MVP concepts can and indeed should be applied to fundamental research driven industries like biotech. Having entrepreneurs in these fields use MVPs and validate learning will lead to more capital efficient commercialization of technologies. This will benefit the entrepreneurs, founders and employees, as well as the funding organizations involved, be they VCs, foundations or the government. Because of the different set of starting assumptions inherent to these industries mentioned, we suggest the following three steps to adapt MVP concepts to these industries.

  1. Test product concepts to identify product/market fit.
  2. Conduct MVP-focused research.
  3. Explore adjacent marketplaces for the technology.

Test product concepts to identify product/market fit.

MVPs are used to evaluate the product/market fit. This concept can and has to be rigorously applied to the hard sciences. Too often researchers have an “if we build it they will buy it [come]” mentality, only to later find the developed technology lacks commercial relevance. As such, the first requirement of developing a technology for commercialization is to identify markets you think can be impacted by the technology, and then use an MVP to test the validity of the product within these markets. In the context of research intensive products, testing market need before demonstrating technical feasibility may seem premature and one may receive pushback from the researchers involved. However, to turn a scientific project into a commercial success, one needs to investigate the fit with greatest prejudice, and do that across multiple markets. This means talking to the end users early on. As compared with months of technical R&D that might be misdirected at worst or undirected at best, gaining a detailed view of multiple potential product-market fit scenarios is a high return-on investment effort.

Due to the constraints placed on the commercialization by the time/capital-investment function, entrepreneurs need to pursue clever ways to test product concepts in the marketplace prior to achieving technical proof. One important test is to create the appropriate product profile and socialize this to potential customers within the field. For example, for therapeutics this will involve identifying key stakeholders for a given indication and present to them a product profile of the anticipated active drug, including how it will be administered, dosage regimes, interaction with other drugs that are co-administered and potential side effects, etc. For example, if you’re developing a cancer drug, it will be critical to speak with oncologists, cancer patients, survivors, and payors. Understanding how your therapeutic could be adopted in the context of the current treatment regime is critical and most often clinical decisions are made on factors other than what molecular target is being drugged. This effort will illuminate the opportunities and point to the key challenges that need answering at the earliest stages of technology development. A crucial mistake many startups make is failure to take the current process into account. Never just assume that if you can successfully develop a product the customer will change his use pattern to accommodate you.

Conduct MVP-focused research

Research is often perceived to be a necessarily meandering path. However, as the development effort moves toward the application of the technology in the marketplace, applied research has to be efficiently guided. This requires an R&D process be in place and a significant amount of discipline from everyone involved to ensure that experiments are designed from the bottom up to really answer the important questions about the MVP product. For anyone aiming to develop any successful product, rigorous focus and capital efficient behavior is needed. It’s challenging and very difficult to implement a culture of laser-focused research effort, but fundamentally, a small biotech startup or commercially focused research lab has no choice if it wants to develop a product in times where raising capital on promising research alone is not a winning pitch. It should be noted that if the goal is to develop strong IP based on novel and early-stage science the parameters are different and we will cover those aspects in a following post.

Explore adjacent marketplaces for your technology

Last but certainly not least, early-stage research can and does create technologies that can have many applications – many startups are founded on the premise of a platform technology (technology push). This is often referred to as the “hammer looking for a nail” syndrome, and in many cases the most interesting nails are outside of the entrepreneurs domain of expertise. There are many examples of adjacent markets where products met their ultimate success. For instance, discovery of a drug target that impacted unexpected indications (e.g. Viagra was originally a cardiac drug), applied physics developments used in biotech applications (e.g. Pacific Biosciences optical waveguide technology used in sequencing), genetic engineering used in many industrial biology applications (eg. Genencor’s industrial enzyme production), and bioinformatics analysis technologies generally applied to the big data industry (eg. GNS’ foray into financial and systems analysis).

In summary, using an MVP based on a product profile enables the entrepreneur to be able to nimbly test product concepts in adjacent markets and generate invaluable feedback for further iterations of the MVP and final product. Additional posts will dig deeper into MVPs for different types of biotechnologies.

Here are some links to related content:

The Lean Startup

Minimum Viable Product Guide

Four Steps to the Epiphany, by Steve Blank.

James Taylor & Michael Koeris. Originally posted on Biotech Start.

Engineering a path from science to business

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The folks at Nature Biotechnology asked us authors for a description of how we’ve navigated our careers from bench to business. My story is still a work in progress, but as a recent Ph.D. I do have some lessons for how you can prepare yourself for a career beyond research. First here’s a brief bio to give insight into my perspectives and biases.

I completed an Engineering Physics undergraduate degree at the University of British Columbia, with a focus on wireless and photonics. During this time, I worked at my first startups as an engineer, which ultimately sewed the entrepreneurial seeds. Following, I decided to pivot and apply my engineering skills to health and completed a Ph.D. in Genetics at the Institute for Systems Biology (ISB). My decision to conduct a Ph.D. was driven by my interest in the commercialization of advanced technologies and the ISB was a fantastically entrepreneurial organization to pursue this goal. Concurrent with my Ph.D., I was fortunate to work as a venture capital fellow at the ISB-affiliated venture capital firm, the Accelerator Corp. This was a tremendously valuable experience and during my three-year tenure, the Accelerator team started 7 biotech companies. After my Ph.D., I started looking for my next startup opportunity and met my co-founding team while working at an innovative technology transfer group, the Centre for Drug Research and Development. About 1.5 years ago I jumped ship to be a co-founder and CEO of Precision NanoSystems, where we are developing technology at the convergence of drug delivery, nanotechnology and genomics.

During my tenure as a Ph.D. student I often contemplated how to best use the degree to achieve my business goals, and as some of you are likely realizing, the path from bench to business is not always clear. Here are some lessons I learned during my degree that may be helpful for those wanting to pursue an entrepreneurial or business career:

Experience more than your Ph.D. offers.

Graduate or postgraduate studies are designed as a scientific training ground for a career as a scientist or professor. The knowledge gained is narrow and the skills learned are specific. For anyone serious about transitioning off the bench, you will need to actively pursue additional experiences and skills outside of your research work. There are many ways to do this during your degree, and I found that volunteering at an organization in an area of interest is one of the best ways to get your feet wet. My time at the Accelerator Corp. (which I initiated through a volunteer position) was one of the best experiences of my Ph.D. There I learned a tremendous amount about biotech, startups, and venture capital. I was very fortunate to have a Ph.D. supervisor supportive of my entrepreneurial interests and was able to dedicate half of a day to a full day a week to the experience (in addition to most of my evenings and weekends). If you are less fortunate, you may receive push-back from your supervisor, who may not recommend taking the time away from your thesis or papers.

However I strongly disagree. Ph.D. and Post-doc work is highly repetitive and obtaining orthogonal experiences will greatly enrich your time as a student. Further, your supervisor will benefit from his or her student’s success, be it in academia or industry, and should be supportive of those that demonstrate such ambitions.

Do not be wedded to a given technology.

During a Ph.D. or Post-Doc you spend a tremendous amount of time on a specific topic. At the outset you may feel completely invested in your corner of the technology world and that you should pursue a career involving that technology. However, this can be very limiting and greatly reduce your opportunities for success. Technology trends change constantly and what you picked 6 years prior may not be your best opportunity moving forward. Once you publish your papers or submit your thesis, take this unique transition period to adjust and consider on what technologies or business area you want to spend the next 5-10 years. Compare each potential area of interest as though you are making an investment (your career), and be prepared to defend your choice to your future self a few years out.

Want a job, create a company.

Lastly, the best way to gather vast business, management, and leadership skills is to start your own venture. Being a first-time entrepreneur is akin to drinking from a firehose and this time will greatly accelerate your experience and perspectives on our industry. Starting a company may seem like a daunting endeavor, but considering the potential career upside, it is actually a pretty reasonable proposition. Even if you fail, you will learn a tremendous amount, meet a community of like-minded folks, and become comfortable with taking career-altering risks. I suggest spending at least an extra 6 months at your institution to find an idea with legs and try to get it off the ground. Don’t do any bench work at this time, but use the period to find and test the commercial viability of potential new ventures. Be bold – talk to your tech transfer office to see if any technology is looking for a founder, ask professors to fund you from existing grants while you examine the commercial viability of a technology, join entrepreneur communities, attend founder speed-dating events, etc. And if your venture doesn’t fly, this time is a drop in a bucket compared with the 6 years just spent padding your academic CV.

James Taylor

Non-dilutive financing to power your leverage startup – part 1

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In this post, we will discuss the use of non-dilutive financing to incubate early-stage technologies with commercial potential prior to company formation. This strategy is designed to advance technologies originating from, or based in, an academic environment. In a later post, we will explain how the non-dilutive financing strategy can evolve when the startup company is founded.

Non-dilutive finance and the Leverage Startup

Non-dilutive financing is a central tenet of the Leverage Startup Model. This model is a capital-efficient vehicle to advance research-intensive technology, through its earliest and riskiest stage, toward commercialization. The Leverage Startup is designed to leverage established resources available to the biotech community: non-dilutive financing, R&D facilities, technical expertise and commercialization resources, and could be used to advance technology in several distinct environments, from an idea incubating in an academic laboratory to an emerging technology in an established company.

Non-dilutive financing can create value prior to company incorporation

The savvy entrepreneur will consider a non-dilutive financing strategy as a vehicle to develop the technology prior to licensing intellectual property (IP) and creating a company. Innovation emerging from an academic institution can be significantly de-risked and/or expanded in scope using pre-company non-dilutive funding. Used strategically, these funds can positively impact the short- and long-term success of a future company, and are frequently necessary to advance a technology sufficiently to attract future investment. This category of non-dilutive financing can be sourced from research grants, translational grants and translational centres, which are discussed below. Before embarking on this strategy, the entrepreneur should ensure that the academic institution’s technology transfer office agrees in principal to license the technology to the proposed start-up company; otherwise, a third party may benefit from these pre-company dollars.

Non-dilutive financing is not necessarily “free”

Prior to engaging a non-dilutive financing strategy, it is essential to recognize that this money is not necessarily “free” and potential company founders should carefully assess the costs, and other pros and cons of each potential funding source. We will highlight the potential “cost” of research dollars using examples from North America, which reflect our experience as founders of a biotech start-up based in Vancouver, Canada. Please add any additional sources and insights from North America and other regions to the comments below.

Research grants

Basic research grants provide the greatest diversity of opportunities, and cumulatively the largest source of funds to support research in an academic laboratory. These grants range from small-scale seed grants for risky research (no preliminary data) to large-scale, multi-year grants to support multi-faceted programs (preliminary data required). These grants offer not only much needed dollars, but also an opportunity for the entrepreneur to build, and test drive the start-up team, prior to incorporation (we will discuss this further in a later post). The “cost” associated with academic grants is generally minimal. For example, the Canadian Institute for Health Research (CIHR) the primary government funder for the life sciences in Canada claims no rights to any IP generated, or to future revenues enabled, by the funded research. The National Institutes of Health (NIH) has a more stringent IP policy, which includes a formal grant of a limited use license to the subject invention to the United States government. There are additional stipulations for foreign grantees.

Translational grants

Translational grants are designed to accelerate academic research with commercial potential. Generally, the technology focus of the grant is the subject of a patent application (US Provisional, or PCT), or has significant basis for an application in the future. These grants are usually short-term (1 year duration) and are often submitted in conjunction with the academic institution’s technology transfer office. Applications are evaluated on the basis of both the technology development plan, and the business development plan (a good opportunity for the future “founding team” to have an independent critique of their preliminary business plan). An example available through the CIHR is the Proof-of-Principle: Phase 1 competition. The objective of this grant is to develop academic innovations toward commercialization. The “cost” associated with Proof-of-Principle: Phase 1 funding is as described above for CIHR research grants.

Translational centres

Translational centres are increasingly evident in the academic life sciences community. Their mission is to fully capitalize on the R&D emerging from (usually affiliated) large academic institutions/hubs. These centres come in many flavours from fully equipped and staffed organizations designed to mimic a biotech company (an example is the Centre for Drug Research and Development (CDRD), based in Vancouver, Canada, to virtual centres with experienced ex-industry staff (such as MaRS Innovation, Toronto, Canada). Common to all is a source of independent funds that can be used to de-risk technology. However, the origin (e.g. Big Pharma partner) and “cost” of these dollars varies and must be carefully considered. For example, in return for financial support, the translational centre (or its funding partner) may acquire certain IP rights, such as a first-right-of-refusal; alternatively, the centre may seek an equity stake in any resultant company, or rights to any future revenues generated by the supported technology.

Non-dilutive financing can be used to “test-drive” the technology, team and business plan

This post provides an overview of potential non-dilutive funding sources that can create value by de-risking technology, building a founding team, and incubating a business plan prior to company incorporation. This is a strategy that we have used successfully and we would love to hear of other examples of creating value before establishing a company. In a following post, we will discuss how these concepts can be extended once the resultant company has been formed and the technology licensed from the associated research institution.

James Taylor and Euan Ramsey

The ‘Leverage’ Start-Up Model

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Entrepreneurial professors, recent graduates, or students in the life sciences who would like to translate their research into a biotech start-up have the potential to de-risk nascent technology and provide the foundation for a company by using a capital-efficient, non-dilutive operating model we term the “leverage” start-up. This model was developed in response to an economic climate in which early-stage investment capital for biotech is scarce and prohibitively expensive. By leverage of existing infrastructure and resources in universities and other organizations, and by judicious use of non-dilutive financing, an entrepreneur with a laptop and access to some lab space can incubate early-stage academic discoveries, develop proof of concept, generate value and establish a biotech start-up.

Biotech represents an expensive, high risk, long-term investment. Translating a discovery in a research lab to a new medicine approved for human use requires extensive research and development infrastructure, expertise and resources at an estimated average cost of $1.5 billion, and a product development cycle in the decades. Compare this with information technology, where the ability to create, test and develop a start-up has never been easier. A company can literally be funded on a credit card and new business concepts can be rapidly tested and iterated. A significant driver of this advancement has been a reduction of costs for technical infrastructure and an increased ability to rapidly test ideas in the marketplace. The convergence of these advantages has created tremendous innovation and investment in information technology companies over the past few years. In contrast, it remains exceedingly difficult to bring nascent academic biotech research to a stage attractive to investors. The Burrill & Company 2011 Annual Report on the Life Sciences Industry noted that “the funding woes biotechs face…represent[s] a structural change to the finance landscape for the life sciences.” The Leverage Start-up model represents a response to this change in the finance landscape for early-stage technologies.

The Leverage Start-up – a new model for building biotechs

The Leverage Start-up model (image at top of post) is a vehicle for developing technology through its earliest and riskiest stage. We believe that this model is repeatable and scalable because the Leverage Start-up:

  • Leverages R&D infrastructure, such as specialized facilities and equipment that exists in academic organizations, thereby minimizing the cost of establishing and equipping research facilities. This accelerates the R&D and product development program of the start-up
  • Leverages technical expertise from world-class academic institutions, building collaborations and obtaining insight into your proposed solution from recognized opinion leaders. These contacts serve as an (in)formal Scientific Advisory Board (SAB) ;
  • Leverages resources that support the commercialization of academic innovation, such as technology transfer offices, incubator organizations and industry support organizations. This access to business intelligence supports activities such as patent filing and business strategy ; and
  • Leverages non-dilutive funding from public, charitable and private sources to finance R&D programs to de-risk technology and generate value. This financing fills the gap left by shrinking investment dollars available to early-stage biotech start-ups and provides funding to help de-risk early venture concepts.

The “leverage” start-up is a mechanism to generate proof-of-concept data for promising early-stage academic discoveries in the life sciences. It is designed to advance technologies in a biotech start-up to the stage where investors would contemplate an investment, and the cost of that investment to the founders was not prohibitive. In future posts we will discuss each of the four components of the “leverage” start-up model in more detail.

Have you used a similar approach to launch a biotech start-up? Or do you believe that this model would work in your academic environment? We would love to hear your input. Please leave comments below.

James Taylor and Euan Ramsey

Implications of Financing Your Biotechnology Start-up

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cycle.png Source: Kmuehmel

Starting a biotechnology company requires thoughtful strategies for the development of your product, and for your intellectual property portfolio, team, and many other areas. One such key aspect is your financing strategy. Deciding on what types of capital to raise and how much financing is required has major implications for the type of business you can operate, the amount of control the founders retain, and the types of exits available. In this post, I discuss the implications that financing has on two critical aspects of your business: the dilution of founder’s equity and the exit options available after financing is secured.

Dilution. When an entrepreneur takes money from an investor, the investor receives a percentage of the company that is proportional to the amount invested. For example, say you and your investor agree that your company is valued at $500,000 (this is called the pre-money valuation), and that the investor will give you $1,000,000 to operate your business for the next 12 months. Following investment, your company will have a valuation of $1,500,000 (the post-money valuation = pre-money valuation + investment cash) and your ownership will be diluted to 33% from 100% of the company. Dilution is an inherent aspect of equity financing, however this affect has the greatest impact when the company is at its youngest and has its lowest valuation. In the accompanying figure, I outline four scenarios that demonstrate the significance that the ratio of money raised to pre-money valuation has on the resulting founders’ percent ownership.

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Figure 1: Dilution following financing. Red indicates investor’s funds and resultant investor equity; blue indicates pre-money valuation and resultant founder’s equity.

In most areas of biotech, particularly in therapeutic, medical device, and diagnostic areas (where the regulatory burden requires significant capital investment), it is expected that investor financing will be required and that investors will become significant shareholders of the company. In fact, most companies require multiple rounds of financing, which can compound the dilution effect. As such, entrepreneurs should put in efforts at the earliest stages of their companies to fund their work using alternative financing sources in replacement of, or in addition to, traditional investors. These ‘non-dilutive’ sources include academic grants, government funds, industrial partnerships, making sales, etc., and allow entrepreneurs to retain control of the company while providing much needed operating cash. A savvy entrepreneur will use these funds to conduct critical proof-of-concept work that can increase the company’s valuation, leading to reduced dilution in future financings. In upcoming posts I will more specifically outline potential sources of non-dilutive funds in North America and give examples of how companies, including my own, are primarily funded by such sources. I will also discuss the cons of these monies, which can include an increased effort to secure, constraints on the use of capital, reporting requirements, and others.

Exit options available. A less well appreciated aspect that financing has on your business is how it can dictate the exit options available to your company. For example, compare two founding teams, NewCo A that raises $1 million from investors and NewCo B that raises $10 million. For simplicity, assume that in both cases the companies have a $1 million pre-money valuation, and both sets of investors expect to receive a 10x return on their investment upon exit. As shown in the table below, the two investments create very different business requirements for these companies.

table.doc

Whereas it may take a successful entrepreneur 3 – 4 years to build a $10 – 20 million company, it will likely take 7 – 12 years to build a company to a >$100 million valuation, and the probability of achieving such a level of success is lower. Considering that the founding team will receive the same absolute return upon exit (10 x $1 M = $10 M), the founders’ incentives for these two scenarios needs to be carefully considered. In addition, the methods of exit of the two companies are very different. For the smaller company, NewCo A the exit will likely be through an acquisition from either a large or medium sized company looking to expand their businesses or product line. The larger company, NewCo B, may exit through an initial public offering (IPO) on a public stock exchange or through a large acquisition by a large company. Based on the financing strategy chosen, the management team will need to align their skills and other elements of their business with these very different outcomes.

In summary. The capital requirements of your business will determine the amount of money that needs to be raised. Although simplistic, the financing scenarios I outline above start to demonstrate the impact that a financing strategy will have on your business. Alternative business models or the use of non-dilutive funding sources can help to reduce the amount of investor money required at the earliest stages of your company. In future posts I will describe alternative funding sources and the advantages and the costs associated with these monies.

Further reading. To have an understanding of how financing and dilution impact a business and its founding team, have a look at the resources put together by Venture Hacks (includes workable cap-table in spreadsheet format).

Basil Peters, an entrepreneur turned angel investor based in Vancouver and Silicon Valley, has written extensively about the impact financing has on exit strategy. I highly recommend both his book Early Exits and blog Angel Blog.

(For further opinions and insight into biotechnology, technology, financing, and innovation please see my blog at: www.persistentchange.com ; twitter: @jtbiotech)

James Taylor