“A lot of entrepreneurs, particularly young first-time entrepreneurs, think venture capital is the only way to build up a company,” said Andreas Schmidt. Ten years ago, when he founded the proteomics company AYOXXA Biosystems, he was one of those first-time entrepreneurs.
“I started the company right after my PhD. I had no experience in running a company or even being an employee of a company,” Schmidt told me. Despite this, he managed to build a successful company and went on to found a new biotech company, called Proteona, about a year ago.
During this time, Schmidt came to the realization that in order to be successful, a biotech company needs to closely look at its business plan to find the type of funding that suits it best. And VCs are not always the answer.
“If you think about it, startups are very innovative, but the VC model is not innovative at all. It hasn’t changed for the last 30 years,” Schmidt remarked.
VC funding comes with certain restrictions. The most common one is a time limit. Except for the few firms that have evergreen funds, most VCs specializing in life sciences have a limit of 5 to 7 years to make a return on their investment. After that, their first priority will be to sell the company — which will not necessarily be the best for the company in the long term.
The VC model often fits drug development companies, where the outcome is either the drug gets approval and makes a big return, or it fails. Companies offering services, selling tools or developing diagnostics might start making revenues earlier, but it will take longer for them to make the 10-fold return that most VCs seek. In these cases, the VC model may not give the company a chance to reach its full potential.
Another challenge of VC money is getting the right amount. “There’s a sweet spot. Not enough money will cripple the company, but too much money is really bad as there is a huge pressure to multiply that amount,” said Schmidt.
But is it possible to run a biotech company without VC money? “Take Miltenyi, a major company that belongs 100% to Stefan Miltenyi, the founder,” said Schmidt. “No venture capital ever touched it, it was financed through bank loans.”
The options are many: family offices, business angels, loans, grants, crowdfunding… It can be challenging to figure out which one is best for each company, so let’s have a closer look.
Family offices and business angels
Biotech startups that need more flexibility than a VC can allow might benefit from getting investment from a family office or a business angel. They can be sources of ‘patient capital’ that have no pressure to obtain a return in a certain timeframe like VCs do. And while the amounts might not reach the levels of a VC round, it can take significantly less time to get the funds than with a VC.
But how easy is it to find an angel willing to invest in a biotech startup? “Life sciences can be more challenging than other sectors for angel investing,” said Joana Neves dos Reis, who manages London’s Angels in MedCity, a program to connect business angels with life science startups. “One of the main reasons being that a return on investment will typically take longer, 8 to 10 years compared to 5 to 7 years for other sectors such as artificial intelligence or automation.”
Still, some angel investors are attracted to the life sciences by the potentially large returns and the social impact these companies can have. This type of investment is mostly suitable for companies working in diagnostics, medtech and digital health in the seed and pre-Series A stage, which are typically raising less than €2M.
“Angel investment is the first external funding round for most of our applicants,” Neves dos Reis told me. “What it brings to the table in comparison to other options is what we usually call ‘smart money’. This means that besides the necessary capital, it will also bring networks and expertise. An angel investor will rarely invest in a sector that they do not know well and this can really help founders to take their venture to the next milestone.”
Angel investors will typically take seats on the board and spend time and energy building a business. In exchange for their money and dedication, they often take a 15 to 30% stake in the company, according to Neves do Reis. Some examples of biotech startups that have successfully benefitted from the angel program she runs include Eagle Genomics and Smart Target.
It’s important to note that securing money from multiple family offices and business angels can also mean that the management of the company will have to spend a lot of time liaising with each shareholder. This risks slowing down decision making and can put VCs off when raising larger rounds later.
In recent years, crowdfunding has become the go-to for many projects to get off the ground. While this model is most suitable for companies that can pre-sell a consumer product that will be released in a relatively short time frame, the life sciences sector has found a bigger opportunity in equity crowdfunding.
Equity crowdfunding lets biotech startups raise up to €1M by attracting a big pool of small-ticket investors. Across Europe, several equity crowdfunding platforms specializing in life sciences have arisen in the last few years, such as WiSeed in France or Capital Cell in the UK and Spain. The model is still fairly new considering the time it takes for a biotech company to make a return and there are few examples of exits. The most notable is Antabio, a French antibiotic developer that made a return to its WiSeed crowd investors within just 18 months.
With the popularity of equity crowdfunding rising, the German crowd investment platform Aescuvest recently created the first pan-European crowdfunding platform dedicated to life sciences. Backed by the EU, the new platform seeks to bundle multiple different investors together.
“The investee company only has to deal with one entity, rather than lots of them. That is a huge saving in terms of timing and legal fees on the company’s side,” said Schmidt, who is a member of the investment committee of the platform. A biotech company could raise up to €10M using this method.
Non-dilutive funding and tech transfer
Whether in the form of a grant or a loan, non-dilutive financing can make a big difference to a biotech company, especially those in the earlier stages of development. “Non-dilutive funding can be very attractive because it retains value for the company and it also helps attract investors,” said Adam Stoten, COO of the tech transfer company Oxford University Innovation. “As a company, a grant can get your technology to the point where an investor or a partner can be found. As an investor, you’re getting far more bang for your buck.”
Projects at the tech transfer stage can be particularly difficult to fund. Most programs at this stage will not make it to clinical trials, let alone the market, meaning that a large number of projects is needed for just a few to succeed. As a large university with a big output in life sciences research, the University of Oxford recently set out to address this gap testing a brand new model to fund and de-risk academic projects with potential for commercialization.
In partnership with the German biotech company Evotec, the University of Oxford launched a project called LAB282 that funds promising academic projects with £250,000. The scientists work together with Evotec staff in order to get the projects ready for seed investment. In exchange, both the company and the university get a stake in any company that is formed.
“It’s encouraging academics who haven’t thought about applying their biological insight to drug discovery to do so, giving them the support, framework and funding to be able to explore some really interesting commercial avenues for their research,” Stoten told me.
However, he noted that while the model is suitable for companies developing a single therapy, companies seeking to develop a whole new technology platform would require more traditional funding routes.
Another drawback to seeking funding at this early stage is that most of the funds available are restricted to a certain institution or region. In addition to Oxford and its counterpart in Cambridge, Europe has several notable examples of tech transfer programs, including the VIB institute in Belgium or the Karolinska Institutet in Sweden. In contrast, biotech startups coming out of less recognized universities or locations might have a tougher time securing funding at the tech transfer stage.
Diversity is key
At the end of the day, each specific company will have unique requirements in terms of funding. What will dramatically increase the success rate and return generated by biotech companies is the availability of multiple different options to choose from as a company advances through the different stages of development.
Even on the more traditional VC front, European biotech startups could benefit from having more options. Especially local VCs that can support early-stage companies before they are able to attract investors internationally.
Having limited options can lead biotech startups to accept funding against their best interests. “In Europe, you often have the case of not having enough money, so you have to cater to the different wishes of different investors,” added Schmidt. “Government funding has different requirements from a purely private VC, and from a business angel. They all want different things. Aligning them is difficult and makes decisions slower.”
“I am now very picky about what model fits us,” he concluded. “I think that’s the difference between starting a company the first time, when you’re amazed that somebody is giving you a huge amount of money, and being a bit more mature in the game. It’s also ok to say no if somebody offers you money.”