Having a great business idea is only the beginning. An emerging company needs funding as well. Many biotech companies have great ideas, but not all of them are able to meet their capital needs.
Some industries allow entrepreneurs to begin with little more than an idea and a dream, starting small with few expenses. Biotech startups don’t have the luxury of lab space, equipment, software, etc., and David Johnston, former CFO says that’s why it’s essential to understand funding rounds.
This is the stage where you get your business off the ground. Initial investments, known as pre-seed funding, typically come from the business founders themselves. Pre-seed investors don’t typically seek equity in return for their investment.
The seed stage brings angel investors. Angel investors are individuals who choose to invest in startups. They can help with research, presentations, and initial production. From an investing perspective, biotech startups are high-risk, with the possibility of being high-reward. Investors typically invest in multiple startups to diversify.
David Johnston states that angel investors can also act as mentors. Angel investors are often people within the industry themselves, or those who have retired from the industry. They share their expertise with emerging companies, in addition to providing funding.
Instead of being individuals, venture capital comes from companies. These companies invest in startups in hopes of making a profit. Both venture capitalists and angel investors can be helpful for a biotech startup.
Angel investors typically take more of an interest in the company’s long-term success. Venture capitalists are concerned with making a profit. However, venture capitalists typically invest larger amounts of money than angel investors.
Series A Funding
Once your business is up and running, you can consider Series A funding. This most often comes from venture capitalists.
Venture capitalists can invest in the seed stage, and angel investors can invest in the Series A funding round. However, venture capitalists typically prefer to see some measure of success before investing. Because angel investors typically invest smaller amounts, they are less influential in this round.
Series B and C Funding
Series B and C funding are a way to expand your business. You have already established yourself in the market, and have a clear track record of success. Series B and C funding can help you reach new markets, launch a new product, or grow your business beyond your current means.
Partnerships are another key source of funding for biotech startups. Pharmaceutical and large biotech companies have downsized considerably in recent years, according to David Johnston.
They often look to invest in startups, which they can then acquire if they are successful. If your company meets the needs of a larger company, it makes sense for them to invest in your success. Partnering with a large pharmaceutical firm can give your business access to capital, equipment, and expertise needed to be successful.
Typically, an initial investment is made, with a certain goal or milestone in mind. If this goal is achieved, the company will receive more funds.
David Johston is the founder of DBJ Consulting. The firm provides financial and strategic consulting to life science companies and emerging biotechs. David Johnston uses his 30 years of financial experience to provide support and guidance to beginning companies.