How to Secure Funding for a Biotech Business
By: PATRICK J. KELLY
April 2004
While funding has been a problem for biotech in Minnesota, there are still many local angel investors and venture capital groups that are paying attention to, and putting their money into, local biotech. What does a company need to attract their attention? Here are ten things that biotech start-ups need to secure money to bring their ideas to market:
- A product with demonstrable results (at least in early stage testing), or one that shows promise. A product for which the company has obtained, or is in the process of obtaining, patent protection helps. It always starts here.
- A well written, well developed business plan.
- A management team that includes individuals with a history of success in the industry (this can be executive management, scientific management, or board level leadership). Successful companies know they need to attract good executives and good board members. Investors want to make sure that the people spending their money and making critical decisions know what they are doing. Many start-ups don’t have this luxury, but it should be an early goal.
- Knowledge of the sources of funding. This means the company’s chief scientists and executives have to get plugged into the local angel and venture capital networks. Companies can get assistance here from associations (the Collaborative, MNBIO, Medical Alley, to name a few), brokers, investment bankers and legal and accounting professionals. This is also another goal for management—having executives and board members who know where to find investors is essential.
- Get professional help—accounting and legal that is. When seeking financing, biotech companies need to make sure that their legal and accounting is in order.
- Depending upon the type of financing sought, the company will likely need to put together a private placement memorandum (“PPM”) in order to satisfy state and federal securities requirements. The PPM should provide information on the company’s technology in terms understandable to non-experts, state how much funding the company needs and under what terms the stock will be sold, outline the intended use of the funding, describe the competitive landscape, provide risk factors to inform investors of material risks associated with investing in the company and give investors an idea of the potential market for the company’s product or technology.
- Put together a short presentation focusing on key aspects of the business, the potential market and the impact of the product or technology in the market. Once the presentation has been fine tuned, the executive team must learn how to present the story quickly and professionally. The team must predict and be able to answer the tough questions that investors will pose.
- Be realistic about how much funding is required. If you need $5,000,000, don’t settle for $1,000,000 unless you can materially progress with that amount, and you investors know what you can achieve with the lesser amount. Investors don’t want their money to go to waste. Investors will likely demand that the company establish milestones and meet them.
- Know what investment bankers, finders, brokers and investors (whether angels or venture capitalists) are getting from other companies for terms in consideration of assisting in the process of raising capital, or in investing. You need to know what the demand is for such things as commissions, warrants, stock valuation, preferential rights and anti-dilution rights. Not knowing what the market is can mean that you obstinately cling to terms that will prevent you from receiving funding, or that you give away too much too early, sacrificing future financing needs.
- Be persistent and relentless. When capital is scarce, the effort necessary to find the capital can be extremely time consuming. Don’t give up easily.