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Today's startup biotech funding can require creativity

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Today's first time biotechnology entrepreneurs are finding their fund raising experience dramatically different than that of their predecessors.

Currently, venture capitalists and big pharma are focusing most of their attention on later stage opportunities, not on start-up companies with new, unproven technologies.

In this environment, many startup biotechnology companies are turning to government grants (like SBIR grants) and creative strategic partnerships to obtain the funding and other resources needed for their early stage activities. By so doing, the founders are able to obtain the necessary seed funding and resources and, as an additional benefit, are able to minimize the dilution of their ownership interests.

It used to be easier to raise money for start-up biotechnology companies. In the early 1990s, it seemed like almost any novel idea in the biotechnology field could get funded, with or without a business plan.

In years that followed, legions of platform companies, then tool companies, then informatics companies found easy access to early stage funding from venture capitalists and then big pharma.

But in the past five years, three things have changed. First, investors have grown increasingly impatient with the typical eight- to 12-year time horizons expected before seeing a return on early stage biotechnology investments.

Second, IPO valuations in the life science industry have dropped significantly and third, big pharma has begun to focus intensely on its near-term pipeline of blockbuster drugs.

As a result, venture capitalists and big pharma now are looking largely at companies not only with novel technologies with solid intellectual property protection and applications to large markets, but also with a pipeline of products and at least one product in late-stage clinical trials.

It is true that surveys have shown an increase in the past couple of years in overall venture capital dollars flowing into early stage biotechnology companies. However, those same surveys also show that those precious dollars are going to fewer and fewer early stage companies.

If you are an entrepreneur starting a biotechnology company and are fortunate enough to attract the interest of venture capitalists or big pharma, you must ask yourself if you will be satisfied having your ownership interest diluted to the extent that it will be as you endure the necessary several rounds of fundraising at the valuations that we are experiencing today. Many founders find that they are not.

So how does one fund an early stage biotechnology company in today's funding environment?

To be clear, there is no one fundraising strategy that is applicable to all startup biotechnology companies. A few may be good candidates for venture capital financing. Others may find that angel capital is the best way to raise their seed capital. And others yet may find a big pharma or large biotechnology company partner to provide their initial funding.

But many first-time entrepreneurs in the biotechnology industry are finding that they must access non-traditional sources of non-dilutive capital in order to validate their technologies, to conduct pre-clinical testing, to prepare to enter the clinic and hopefully to conduct their early stage clinical trials.

They figure if they can validate and progress their technologies to a later stage before they raise equity capital, then they can be in a better position to raise future capital from venture capitalists and big pharma, at higher valuations, to conduct their later stage clinical trials and get their products ready for the market.

So today we are seeing greater numbers of early stage biotechnology companies seeking government grants to provide the early stage capital necessary to validate their novel technologies.

Since most grants are not typically large, these companies are forced to focus on the one or two applications that most quickly and efficiently will get into the clinic and to the market. While these initial applications may not necessarily produce the largest market opportunities, they often are the best paths to scientific and then commercial validation.

To stretch these grant dollars as far as possible, many of these early stage companies are entering into creative partnering arrangements.

In these new types of cash-less partnering relationships, these early stage companies increasingly are trading (or bartering) their services or limited applications of their technologies in exchange for access to other technologies or services that are necessary to complete the validation, pre-clinical or clinical development of their early stage technologies.

Grant funding and creative partnering of early stage technologies produces a win-win situation for founders on the one hand, and venture capitalists and big pharma on the other hand. Founders are able to access early stage capital and resources without suffering extreme dilution of their ownership interests.

After these new technologies have matured, venture capitalists and big pharma are able to invest their resources on later stage opportunities with a lower risk profile and a higher potential return on their investments.

Wicker is a partner in Morrison & Foerster LLP' s San Diego office

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