What is Venture Capital (VC)?
According to Investopedia, VC is a type of equity financing that investors give to startups and small businesses they believe have long-term growth potential. Generally speaking, it comes from well-off investors, investment banks, and other financial institutions.
Though they’re most often considered cash investments, VC investments may also be in the form of managerial or technical expertise and support. In exchange for this investment, the VC firm gets equity in the company. As a result, they have a say in company decisions.
For new labs with limited operating history, VC is becoming an increasingly important source of funds. In situations where access to bank loans, other debt instruments, or capital markets are not available, VC funding is essential. Starting a lab is an expensive endeavor because not only do you need lab space, but you also have to have the right kind of equipment. VC gives you access to the funds you need to take care of whatever you need to get your lab up and running while you apply for grants and continue to find additional sources of funding.
What Venture Capitalists Want to See in Biotech
Securing VC investments for your biotech company will take time and effort. Because of the risk of losing their money, potential investors will spend time vetting your company to make sure the potential for a good return is possible.
Good Market Size
Large markets will grab an investor’s attention. “Large” generally means that the market can generate at least $1 billion or more in revenue. To receive the return they expect from their investments, venture capital firms generally want to ensure that their portfolio of companies has a chance of growing sales worth hundreds of millions of dollars.
The larger the market size, the greater the likelihood of a trade sale. This makes the business even more exciting for VC firms looking for possible ways to exit their investment. Ideally, the business will grow fast enough for them to take first or second place in the market.
Cutting Edge Research/Products/Services
Investors want to spend their money on outstanding products and services that have a competitive edge that will last a long time. They look for solutions to real problems that haven’t been solved before by other companies currently in the marketplace. They’re looking for products and services that customers can’t live without, because they’re so much better or cheaper than anything else is currently available on the market.
When assessing your company, they’re looking for a competitive advantage. They want to be able to generate sales and profits before competitors enter the market and reduce overall profitability. The fewer direct competitors, the better for you and your potential investors.
How You Can Stand Out From the Crowd
Look at all the other biotech ventures out there right now. Do your homework about the firm and its investors. Adjust your pitch according to what you learn. Avoid using the same pitch for each company.
In terms of other biotech startups, what are you doing differently than your direct competition? Who has your direct competition approached for financing? Don’t expect any VC firm to invest in you if they’re already working with your competitors.
Management is the biggest factor that smart investors consider. Their investment is in the management team and the team’s ability to execute their business plan. As such, investors are looking for executives who have built successful businesses that will generate high returns for investors.
As a business looking for a venture capital investment, you should be able to provide a list of qualified and experienced people who play major roles in the company’s development. If your business lacks talented managers, you should be willing to hire them from outside. Many venture capitalists would rather invest in a bad idea that’s led by a strong management team than invest in a stellar business plan that’s supported by a group of inexperienced managers.
Financials – Proof of Progress
Anything you tell a potential investor needs to be supported by data. During their due diligence investigations, these firms will have their accountants review your financial reports very closely. Be sure to have income statements and balance sheets, along with information about your customer acquisition costs, retention rates, average purchase amounts and more. Make sure you account for every penny and every product, with reports and receipts to back it up.
Even if you carefully put together your financial statements, your financial situation will be hard to prove if it’s not supported in documentation at this phase. A simple accounting error may be the difference between getting the funding or not.
Not only do venture capitalists want to see your financial reports, they want to see that you’re making progress. You don’t necessarily have to be profitable yet, but if there isn’t substantial growth, you likely won’t secure an investment.
They want to know about your sales, marketing, and business model along with historical revenues and future projections.
Top VC Firms for Biotech Funding
Data shows the most active Series A investors for FY 2019 were:
ARCH Venture Partners
ARCH Venture Partners has made it their business to back disruptive science by investing anywhere from $50,000 to$150 million per company. They have offices in three of the top cities for biotech, including Chicago, Seattle, and San Francisco. They also have an office in Dublin, Ireland. They had five series A deals in 2019, and are currently involved in coronavirus research.
Cannan prides itself on being an early-stage venture capital firm. Like ARCH, they invested in five major series A deals in 2019. Biopharma only represents a small portion of their total portfolio, but the companies they’re involved with are highly reputable. One such company, Comet Therapeutics, is developing small molecule therapeutics with a focus on rare genetic diseases and errors of metabolism that aims to address defects in the body’s ability to turn food into energy. Some others include Arrakis Therapeutics, a company pioneering the discovery of medications that directly target RNA, and Graywolf Therapeutics, a biotechnology company developing next-generation immunotherapies highlighting non-responsive tumors for destruction by the immune system.
Sofinnova was also involved in five series A projects in 2019. Overall, they’ve funded 88 companies, of which 41 IPO’d, and 17 resulted in mergers/acquisitions. Their 120 years of operating experience and 100 years of investing experience has led to 18 FDA approved drugs, and much more. Their portfolio includes companies focused on orphan disease, cancer, and other specialties such as neurology, women’s health, and ophthalmology.
Flagship Pioneering participated in three series A projects in 2019. They have founded more than 100 companies and add anywhere from six to eight new companies every year. They have had 20 IPOs since 2013 and more than 2,500 patents granted across the globe. Their network of collaborators includes AstraZeneca, Bayer CropScience, and Nestle Health Science.
Life Science Partners
Life Science Partners, a global biotech VC firm, has offices in Munich, Amsterdam, and Massachusetts. As one of Europe’s most experienced healthcare investment firms, they participated in three Series A investment rounds in 2019. With investments in developing and delivering therapies for central nervous system disorders, natural killer cell therapies, enzymatic DNA synthesis, and more, the company has raised more than 1.6 billion pounds ($2 billion) for biotech companies.
New Enterprise Associates
NEA is one of the largest VC firms out there – but healthcare is not their only area of focus. In addition to healthcare, they invest in technology companies, providing funding across all stages, from startups and early-stage companies to those that are in the later stages of massive growth. In 2019, they participated in three series A deals.
Morningside was founded in 1986 and provides capital to businesses in clean technology, education technology, and life sciences. In the life sciences sector, they’ve invested in diagnostics, therapeutics, medical devices, and telescopes. Like NEA, they provided funding on three series A deals in 2019.
The Column Group
The Column Group is focused on “science-driven” healthcare venture capital, investing in early-stage drug discovery companies. They invested in two series A deals in 2019. Their office is in San Francisco, California.
Third Rock Ventures
Based in Boston, Massachusetts, with another office in the San Francisco Bay Area, this firm invests in nothing but biotechnology startups. Their portfolio includes GBT, a company that recently received FDA approval for the first approved treatment that inhibits sickle cell disease. They invested in two series A deals in 2019.
This VC firm invests in a variety of companies across multiple industries including biology, cybersecurity, applied AI, digital health, and more. They have offices in Palo Alto and San Francisco and invested in two series A biotech deals in 2019.
Did you know, Excedr’s equipment leasing program can make it easier for you to stretch your budget? Angel investors want to see your budget and spending. With the leasing approach, you can show you’ve got the tools and equipment you need in the most affordable and efficient way possible.