How to Fund an R&D Startup: First Steps a Founder Can Take
Last updated on August 9, 2022 by
The life sciences and healthcare industries have changed over the last decade. That change has only accelerated since 2019 and the start of the pandemic.
More and more companies were founded or spun out, due in large part to an increase in private and public investments in the sector. The increased interest provided biotech founders with greater access to larger amounts of capital.
Furthermore, advances in lab equipment, laboratory workflows—such as AI-driven solutions—faster FDA approvals, and the overall acceleration of R&D and product development also allowed biotechs to nimbly operate before and in between funding rounds.
In 2022, things changed a bit. The industry is on a course correction, and the interest in biotech IPOs has slumped.
You might be asking yourself: is now a good time to start a biotech or life sciences startup, when there are an increasing example of companies failing, waning interest from investors, and a wide number of other issues, such as patent issues, high R&D costs, supply chain problems, shifting regulatory standards, and so much more?
Chances are you have a strong belief in your idea and your science. If this is true, then your answer will most likely still be yes.
Because no matter what, you know that you have the ability to create something that is truly valuable to people, and can change the way we live our daily lives in the face of diseases and conditions.
If you’re thinking of founding a research and development company that will perform basic research or applied research, know that there are several considerations to keep in mind. Considerations that we’ve pooled together based on our own clients‘ experiences.
In this article, we’ll take a look at the implications of forming a research and development (R&D)-based company, and cover the broad strokes of what scientists should consider when becoming an entrepreneur and bringing a new product to market—one that requires extensive research and development before becoming commercially viable.
Remember to ask yourself: what financing decisions will I have to make? How will external funding affect me as a founder, and what does that all mean for development processes, operational growth, and expansion?
Hopefully, this will help you feel more empowered to make informed foundational decisions that can increase your company’s chances of growth—more revenue, sales, employees, company value—and, ultimately, success.
This article is informative. It is not meant to represent legal advice. It is best practice to speak with your lawyer or advisors whenever you make legal or financial decisions.
Translate Your Academic Experience into Entrepreneurship
Despite concerns that the leap from academia into the industry is too challenging, startups and small businesses in the biotech and life sciences industries are abundant with founders, board directors, C-suite members, and scientists of all job titles who were previously working at an institution or research facility within a university. You name it! Many different paths to the industry have been taken.
With increased interest and support from investors and the public, biotech startup founders are finding themselves in an encouraging environment, one where exiting (going public through an IPO) is becoming less challenging, the FDA is becoming more supportive, clinical success rates are rising, and investor participation is increasing.
Unlike ten years ago, biotechs are on the up and up, commercializing new, breakthrough medicines and building high-growth companies on next-generation technology.
That said, the industry is still as tricky as ever, making leaving behind a stable academic position to start a business in a volatile and challenging industry a daunting task.
But while launching a life sciences company—or even just joining one—seems crazy, many graduates, post-graduates, and postdoctoral scientists have made the leap.
These scientists have joined or formed companies of all shapes and sizes as well, from biotech startups focused on antibody research and development to contract research organizations providing bioinformatics or biotech software companies changing the way scientists work.
Despite many working entirely within the industry, there are numerous examples of people splitting their time. For instance, Uğur Şahin and Özlem Türec, co-founders of BioNTech, come from academic backgrounds and are great examples of scientists who were able to maintain their position at a university while engaging in entrepreneurial endeavors.
Before BioNTech, Şahin and Türec founded Ganymed Pharmaceuticals in 2001, which Astellas Pharma eventually acquired for €422 million.
Another industry leader, Andrew Allen, the Executive Chairman and Founder of Revitope Oncology, translated his academic achievements into the industry by focusing on oncology R&D after completing his Ph.D. His company recently partnered with Janssen to leverage its unique T-cell engager platform.
That is all to say, the skills you acquire through your academic career can translate well into the industry, and just because you start working in a for-profit setting doesn’t mean you can’t find a way to keep your nose in some books.
Establish Your Company’s Focus
Some considerations are the same irrespective of whether you plan to seek outside investors or whether you plan to “pay as you go” and reinvest the money you make back into the business (i.e., bootstrap your business).
The most important thing to consider is how long it will take to turn your idea into a revenue-generating one or how many years before you have an exit opportunity (e.g., IPO, acquisition, etc.)
If your plans are long-term, your product is years away from being ready, and your internal resources are finite enough that you’ll run out before you can reach critical milestones and commercialize, then you’re most likely headed down the snaking road of research and development. In that case, read on.
Secure Funding for Research & Development
Whatever your R&D project’s goal is, whether it’s creating diagnostics, manufacturing medical devices, or developing antibody therapeutics, you’ll likely go through a substantial period of R&D.
This can mean years of work before a final product is ready to be commercialized.
Because of the length of time, cost of goods, and space, equipment, and personnel needed to complete your work, you will typically incur significant losses in your early years.
If, however, you are lucky enough to generate some revenue, you will usually defer those profits for the foreseeable future by investing any profit you do make back into the company.
That’s because most startups with high initial costs will use any profit to pay or cover operational costs rather than retain profits. Although some will, it’s not as common.
Without generating enough cash flow to support your operations, you’ll have to rely on initial seed investment and any necessary funding rounds throughout your company’s journey.
The effects you and your company will experience regarding the speed of growth and control over the company can depend on the amount of funding you’re able to secure.
These factors will also affect your exit strategy, defined simply as a business’s plan to go public in an initial public offering (IPO), reach a merger & acquisition agreement (M&A), or complete a management buyout.
Having an exit strategy is something every company should aim for, whether it is “investor-led” or bootstrapped. However, it is a specific necessity when seeking outside investors, as they will want to know how they will eventually be able to “cash out.”
That said, the funding opportunities you will have as a founder include a wide array of external investors, grants, and much more.
However, whatever your idea is, whether it be a product, process, or tool, the high initial costs and long lead time before revenue generation or exit (e.g., IPO, acquisition, etc.) will most likely mean you’ll need to go with experienced investors who can provide the large amounts of money needed to develop your technology into a product.
The point is, the life sciences industry is extremely capital-intensive, and as a founder, you should prepare to do more fundraising than you’d initially anticipated if your R&D department is going to be doing the heavy lifting. This includes working with:
- Seed funds
- Angel investors
- Incubator and accelerator programs
- Venture capitalists and venture capital firms
- Institutional investors (banks, hedge funds, private equity)
- Pharmaceutical companies (partnerships, licensing)
- Government and non-government agencies (various grants and R&D tax credits)
Right now, you might not know what your R&D strategy is, or know how much money you’ll need for R&D spending, but it will become clearer as you create your business plan and look to build out your team.
As you work on this document, as well as your science, learn as much as you can about the fundraising and grant opportunities available to you, so that you can be well-prepared for those moments.
With the right amount of funding, you will more likely be able to build out a strong R&D team and department, full of talented and committed team members.
Help Your Business Grow, But Keep Costs in Mind
In the face of extensive R&D and little to no revenue, you’ll need to raise money throughout the company’s lifecycle. The amount of cash you have on hand will affect your ability to grow your business’s operations.
For example, contract research organizations do not always need to secure the largest funding rounds due to their ability to generate sales (revenue) early on and use that cash to fund operations.
But, this also lends itself to slower company growth since that growth is intrinsically tied to sales.
For pre-revenue startups, investors’ ability to inject large amounts of cash into the business accelerates growth exponentially and allows young startups to complete research and development faster, achieving milestones in less time (the team needs to be strong, and the lab needs to be properly equipped too).
This makes equipment leasing a great pairing with venture capital. Our lease program is designed to be both founder- and investor-friendly, and helps stretch investment dollars by spreading costs out over time, avoiding hefty (and often debilitating) down payments, and ensuring any machine downtime is minimized.
Determine How Much Company Control & Ownership You Need to Retain
Equity plays a vital role in all stages of a company’s lifecycle, but its function at an early stage is one of the most important. How much ownership/equity you can keep will affect your ability to make the decisions and control your company.
If you are considering a liquidity event (like an IPO, private sale, or merger), the amount of equity you retain will affect how much you can profit.
The reality with external funding—specifically, equity-based financing—is that most founders will not retain 100% control. Keeping complete control of your company when you utilize equity financing and raise multiple rounds is usually not an option; you will have to issue and provide company shares when securing funding.
Doing so includes deal terms that can change voting power as well. In other words, the more funding rounds you raise, the more your ownership percentage as a founder will be diluted.
But, as an entrepreneur, you may not have to give up too much control if you know what you are doing and if you draft your documents and negotiate properly. For instance, achieving a high valuation for your startup is one way to counter excessive dilution.
That said, don’t be deterred by ownership retention when dealing with angel investors and venture capital firms. Giving up control comes with benefits. Not only do you get money to grow your business, but these types of investors also typically have a comprehensive financial and strategic network that you can leverage.
Many will provide fair and reasonable term sheets. With the proper documents in hand, it’s up to you to decide which will be the best fit.
Parting Thoughts: Do You Make the Leap?
Keep these considerations in mind when trying to create new technologies:
- How can I use my academic experience to my advantage?
- What is my focus?
- How do I fund my venture?
- Does my source of funding affect my ownership stake?
- How will it affect my ability to grow and expand? Can I move faster or slower?
As a new business owner, having answers for these questions will help you build a road map that can help you through the good times and the bad of running an R&D lab.
But remember, not all business models backed by a strong idea will look promising in the eyes of investors. Nor can all science be commercialized. It can take years and millions of dollars to take an idea from the discovery phase all the way to market.
Deciding whether or not it’s worth your time and effort depends on several important questions you have to ask yourself.
Additionally, it’s possible you won’t have the room in your budget for in-house legal counsel, so equipping yourself with basic legal and finance knowledge and finding a trustworthy consultant will be essential.
Excedr’s Startup Resources aim to answer the most common questions founders have about the life sciences and biotech startup landscape, and provide scientists with legal and finance best practices.
We continually consolidate and create content to support your endeavors as part of our mission to help scientists, researchers, and our clients. Find more articles on similar topics in our Resources Hub and Excedr Blog.
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These articles are designed to be informational and do not represent legal advice. Before making any legal or financial business decisions, you should consult with a professional who can advise you based on your situation.