Fundraising for Biotech Startups: the Effect of Public Perception

Recently the news in biotech has been dominated by stories of unicorn companies offering disruptively innovative products and therapeutics. In 2015 the personalized medicine startup Moderna Therapeutics raised $450 million in a funding round, the largest biotech funding round ever. Or perhaps you have been following the story of billionaire, Stanford drop-out Elizabeth Holmes who left a promising education to head the extremely well-funded blood testing technology company Theranos, whose current problems are attracting greater public interest. Stories like these offer the illusion to the general public that funding in biotech is large capital, easily obtained from venture capital, and reserved for the most innovative companies. The reality is the vast majority of biotech start-ups have to use other funding sources and are not attempting to disrupt an industry with the next amazing new technology; they are just small capital companies developing a promising new therapeutic in an unaddressed market. This general lack of the public understanding of biotech may lead to reduced opportunities for innovative medicines and treatment options. Given current public perceptions how do ‘run of the mill’ biotech startups navigate this current state of mind to get funding?

If we look first at investors, based on what you see in the news it may appear that there is plenty of Angel Investor and venture capital funding, but available funding has actually decreased since 2003. With less money up for grabs investors are looking for innovative opportunities with promising returns, and have less interest in the combination of high risk, high burn, long time to a return on investment, and convoluted FDA regulations that come with biotech startups. If they do become interested, investors will want a significant share of the business. So, while this type of funding may be stalling it is still a viable option for a biotech startup who accepts the conditions of the investor (which will more than likely be in their favor).

In this investment climate the government and private sectors have stepped up to provide a much needed source of funding. Through agencies such as the NIH, DARPA, and BARDA, the government identifies startups that meet specific criteria on a peer reviewed scientific basis and provides much essential funding in the form of a SBIR grant. The private sector such as big pharma, state level organizations, foundations, and individuals also provide grants with various conditions. These options are becoming increasingly more prominent as the major source of initial support. Even today some well-funded companies such as Keranetics boast a 50/50 dilutive to non dilutive funding portfolio.

Crowdfunding has also become a popular mechanism in the startup world. While this approach has limitations, early charitable crowdfunding structures offered on sites such as Kickstarter.com, enabled startups to offer small incentives to individuals who participated. While this may be a great option for a startup that produces an app, technology, or any other tangible product, this current crowdfunding setup is a hurdle for companies producing FDA regulated treatment options. Unless these companies can persuade the population with t-shirts, most biotech startups have nothing but equity to offer. This may be soon changing with companies like Angelist who offer an online platform that is similar to crowdfunding but vets accredited investors upfront and initiates a syndicate like structure of multiple investors interested in the same type of investments. To facilitate the participation of accredited and non-accredited investors, the JOBS Act was introduced in 2013, which allows for access to new sources of capital. However, the regulations surrounding the many different types of raises defined in the JOBS Act make these types of raises difficult for small private biotech companies. While very new, these platforms may offer a potentially important funding platform for biotech startups in the near future.

In conclusion, the public perception of funding in biotech is in need of an overhaul. It could be that if the general public were more aware of the challenges facing ‘run of the mill’ biotech fundraising, increased understanding could further influence people and funds to participate in this part of the biotech space. This change could come about through the general influx of investors who may have avoided biotech investments in the past because of the perceived large capital needed and/or through the generation of new innovative ideas in fundraising mechanisms. Until then biotech startups have to navigate fundraising out of the public eye and contend with the limitations in prevailing public perception.

This article was written by Omeed Rahimi, Chief Operating Officer of EncepHeal Therapeutics, Inc.