No matter the motivation behind starting a research lab, it’s much like starting any other business. You need a business plan, along with funds for your lab equipment, space, and staff. If you’re not sure where the money’s coming from or you’re on a tight budget, you can still start a productive enterprise. We’ve put together this post to help you get started, with resources to start you in the right direction.
Creating Your Business Plan
Drafting a business plan is crucial to your efforts, because it not only helps to secure startup funds, but also demonstrates that you have done your market research and outlines the services you plan to provide. Your business plan should include:
- Executive Summary: Highlight the strengths of your overall plan. Show that you have completed a thorough and comprehensive market analysis. Include information about a need in your target market – and how your lab will solve it.
- Company Description: Provide a high-level overview of the elements of your business. Think of it like an extended elevator pitch. Describe your goal and unique position. You can start by considering the following questions:
- What are you researching?
- Are you developing a product? If so, is that product business-to-business (B2B) or business-to-consumer (B2C)?
- Are you looking for a cure, or a therapeutic that better manages a disease, or something else?
- Do you need help from existing labs/big pharma?
- Market Analysis: Demonstrate knowledge of your industry and market, along with research findings and conclusions. How big is your industry currently? What is the projected growth rate? Etc.
- Organization and Management: Detail your legal and organizational structure, management profile, and qualifications of members of the board of directors. Include a description of your product or service, details about the product life cycle, status of intellectual property protection, along with current and future research and development activity. Some other questions to consider include:
- What are your long term goals, how long do you think it will take you to achieve them?
- Are you selling products/services to other labs?
- Do you provide contract research services?
- In terms of a business exit, are you planning for an acquisition/IPO? Or are you looking to grow cash flows and profits long term?
- Marketing and Sales Management: Include your marketing and sales strategy. How will you get into the market? How will you grow? What are your channels of communication and distribution?
- Funding Request: Outline your financial requirements, both current and future, covering the next five years. Support the information with historical and prospective financial information. Include an analysis of how you’ll use the requested funds.
Though this sample business plan focuses on a medical lab with services to the public, it gives you a good idea about how to adapt it to your research lab.
Structuring Your Business
Before you can start running your new lab, you’ll need to determine the legal business structure you want to use. Each structure comes with legal and tax implications to consider, so it’s best to seek legal counsel before finalizing your business structure.
- Sole Proprietorship: The most common legal business entity, a sole proprietorship is owned and operated by a single person. The main issue is that your personal liabilities and assets are not separate from the business. If you go into debt, you could lose your home or vehicle as a result.
- Partnership: This is when two or more people own a company together. If it is a general partnership, all the partners share liability just as a sole proprietorship. If it is a limited liability partnership, the business is established as a separate entity from its owners, so that personal assets are not at risk should the company go under.
- Limited Liability Company (LLC): A single person, partners, or a group of people can form a limited liability company, to separate their personal assets and liabilities from their business ones. This is an ideal option for small businesses that don’t want to put themselves at risk. You don’t deal with double taxation as you would with a corporation. These structures are flexible, and all owners have shared tax responsibilities. LLC laws differ from state to state, with many states requiring you to either dissolve or reform your LLC if someone joins or leaves the company.
- C-Corporation: This business structure is completely separate from its owners, and is an independent legal entity. This approach ensures you have the strongest protection from personal liability, but with that protection comes additional complexity. This structure is ideal if you want to expand your business and add shareholders. However, they require more in-depth recordkeeping and reporting, more regulatory compliance, and additional tax issues.
- S Corporation: This is similar to a C corporation, but in this structure, profits and losses are passed through directly to the owner’s personal income so they are not subject to corporate tax rates. Shareholders must be U.S. citizens, and there can only be a maximum of 100 shareholders, which may limit your ability to raise capital.
Financing Your Lab
Lab start-ups can become expensive quickly because it’s necessary to secure lab space, get equipment, find faculty members, and so on. Luckily, there are many lab funding options available including:
The federal government offers hundreds of grant opportunities, funded by different agencies such as the National Institutes of Health (NIH), the National Science Foundation (NSF), the Department of Energy (DOE) and more.
Grants are advantageous in the sense that they provide a source of funding that does not need to be paid back. Winning a well-known grant can give your lab promotion and prestige, bringing credibility to your business.
But when you consider that the competition is fierce – given that there are so many businesses and comparatively fewer grants available, and that the application process requires spending money, it isn’t the most practical approach. Not only this, but that free money comes with conditions that must be upheld.
In some situations, grants may be renewed annually, but it’s possible that a grant you were expecting to renew will vanish at a moment’s notice. Because of this, if your lab relies too heavily on grants for operational funds, the business could collapse.
Venture capital (VC)
Working with a VC firm may sound great because it provides an influx of cash you need, but it may not always be in your best interest. You’ll get to keep the money and, if your lab goes under, you won’t be obligated to repay the VC investors like you would be a loan. The drawback is that the venture capitalists who invest in your company become stakeholders, and now earn a share of the profit.
VC investments can help you grow faster, because without that cash, you may be forced to wait a year or more before you can count on a steady stream of revenue to invest in new equipment or staff. But, your company may not be ready to grow. If you don’t quite know how you’re going to make the business profitable on its own, you could spend too much money on things that won’t help you in the long run.
You’ll have to spend a considerable amount of time (and possibly money) to get your pitch right and present to VCs to raise the funds. You may not get the deal you’re hoping for. But if you do, you’ll expand your network of people to include other business leaders and entrepreneurs who can help you succeed.
These are people or companies that invest their own money in your company, with the idea that your company will succeed so they earn a return on that investment. Venture capitalists are one type of private investor, but others include angel investors, friends and family, and private equity firms. Friends and family may be eager to help you get started, but failing to honor your commitments could strain the relationship. Private equity firms aren’t generally interested in startups, but instead focus on established businesses.
Fellowships are essentially scholarships for people who have already earned a college degree and are seeking additional education. Often, these are graduate students who are completing their graduate program or graduate degree holders who need hyper-specialized training. These funding awards vary widely among disciplines and are highly competitive in nature. Fellowships generally last a year, though some may last longer, and some may be renewed.
Building Your Proposals
You’ll need to prepare budgets as part of your proposals. Focus on the science, because it’s a large part of what determines whether you get funding or not. At the same time, you need to budget accordingly, factoring in the total amount per year that first-time investors can request, along with the allowable supply budget per person per year. The budget needs to match the proposed work, especially because of how competitive grants can be.
Opting to lease equipment rather than purchase it outright relieves a great deal of financial burden, and can improve your overall budget. Leasing is a non-dilutive form of financing, which means you as a shareholder retain more ownership of your company while getting the expensive equipment you need into your lab. You can make your dollars go further by paying a smaller upfront cost for the things you need to work with every day. Leasing is also much faster than raising venture capital or borrowing from a bank, so you can quickly procure equipment without extended, drawn-out lead times. You can learn more about equipment leasing here.
Beyond money for the lab, equipment, and staff, you’ll also want to establish funds for overhead expenses, insurance, accounting fees, and legal fees.
You’ll also want to prepare for funding sources as the lab grows. Beyond VC and grants, the Small Business Administration (SBA) offers loan options for small businesses that meet certain criteria. Your area of research also influences financing opportunities in terms of the available grants.
Securing Lab Space
It’s not always easy to find clinical laboratory space. With the costs of building a new lab from scratch, not practical for most, plan to spend time researching various locations available for rent or lease. The lower your rent, the more funding you’ll have for setting up the lab, but it’s important to balance rent with amenities, features, and security.
In 2019, $14 billion was invested in biopharma startups across the globe. When scouting locations, consider not just the cost of living in the surrounding area, but also where it falls in line with VC investors.
When looking at the top biotech VC firms, four of the top five are located in Boston/Cambridge. California, however, has nine out of the top 20. There are some from New York, along with Pennsylvania. This points to the money at the top VCs staying close to the companies they invest in. If you’re a VC funded lab, it’s important to be close to your investors, but otherwise, it may make sense to secure a lab location close to your ideal partners or clients.
If you’re limited on funds, you can look for incubator labs. Your state government is a good place to start, though there are also many independently run options to choose from. Using an incubator facility is often more cost-effective than leasing a commercial lab space. That said, requirements for using incubator facilities vary depending on your location. For example, the Commercial Center for Innovative Technologies in New Jersey requires the start-up lab to apply to the advisory board. When approved, they can stay in the space for up to five years before graduating to a commercial lab space, though there are certain incubators with no time limits.
Setting Up Your Lab
At this point, you’re ready to secure the lab and office equipment you need to effectively operate the lab. Depending on your area of research, you will likely need a variety of lab tools and machines, such as imaging equipment, analytical instruments, chromatography, microscopes, and more.
Opting for used equipment can be tempting, since buying new equipment can easily cost hundreds of thousands or even millions of dollars. However, used equipment comes with the risk of equipment malfunction or failure. The auction style approach can provide great deals, but if the equipment fails shortly after your purchase, you’re out of luck.
Alternatively, leasing your lab equipment offers an affordable way to set up your lab, while ensuring you have quality functional equipment, whether new or refurbished. Whether you operate a medical laboratory or a research laboratory, an lab equipment leasing program such as Excedr’s ensures that machines are properly maintained and repaired in the event of a breakdown. Additionally, because of the operating lease structure, as opposed to a capital lease structure, the monthly lease payments are 100% tax deductible.
Please speak to a tax advisor to determine the full implications of equipment leasing.
This approach gives you peace of mind by avoiding the hefty upfront costs associated with purchasing and by removing the headaches associated with annual service contracts.
Any successful business, not just a lab startup, will need a team of advisors to help manage it. Beyond the lab itself, there are many other functions that must run smoothly, such as human resources, accounting, legal, and insurance.
In the beginning, it’s perfectly fine to hire outside consultants or contractors to address these needs. As the lab grows, however, it may be necessary to convert these to in-house positions. If you operate in an incubator facility, you may have access to shared business management services.