In a world where it seems like startups are created every other day and market economics remain largely unpredictable, securing funding for your biotech startup can prove to be an arduous task. Venture capitalists prefer tested and proven biotech enterprises, government- and NGO-backed funding remain ever so slightly out of reach, and every other funding outlet seemingly comes with its own set of hard-to-match requirements and specifications. What is the fate of the budding startup without experience in the harsh economic climate of today’s biotech ecosphere? As it turns out, it's not quite as bad as one would expect. It’s all down to knowing the ropes and peculiarities of the market.
Channel Your Fund Derivation Efforts In The Right Direction
While the marketability and overall appeal of a biotech company do play an integral part in the fundraising process, it’s important to note that investors will, in most cases, only commit if the biotech company fits their venture capital profile. Different classes of investors provide funding for different categories of companies under specific circumstances. Investors typically have a predetermined indication, sector and stage of development they intend on committing to. Some have a preference for bootstrapping early-stage companies, while others are more for companies already in the late-funding stage.
In the same vein, it will be counterproductive to approach a venture capitalist with a long history of providing funding for a specific biotechnology niche when your company falls outside that niche. The ideal approach would be first to understand what your needs are by conducting a market analysis and then defining your operational mandate before going on to outline VCs that match your needs and have backed up deals similar to yours in the past.
Holding Off On VCs Can Sometimes Prove To Be Beneficial
This year alone, venture capitalists along with angel investors have raised more than $758 million in funding for biotech companies. If there’s one story that statistic tells, it’s the fact that there’s no shortage of VC cash that's ready to bootstrap the next big thing in biotech.
That said, for a small startup that’s still in the process of sinking its roots in the industry, it is usually a better idea to hold off on venture capitalist involvement till much later -- especially if your fundraising goal is less than $1 million. For capital margins of this range, reaching out to private investors or brokering partnership deals are the ideal fund derivation faucets.
Three-quarters of all venture-funded startups are in or near Silicon Valley, New York City or Boston. That leaves plenty of opportunities in the rest of the country. That's where David Hall, this week's guest on Masters in Business, comes in.
Hall is a partner at Revolution’s Rise of the Rest Seed Fund, where he is responsible for investment sourcing, execution and oversight for Revolution portfolio companies. The fund is designed to address this geographical/financial gap. It enjoys backing from the likes of Jim Barksdale, Jeff Bezos, Tory Burch, Steve Case, Ray Dalio, John Doerr, Henry Kravis, Sean Parker, Eric Schmidt and Meg Whitman among others.
Hall discussed why focusing on the areas outside of the coastal urban centers is so promising: not only are costs are lower, but there's talent out there just waiting to be discovered.
His favorite books are here; the transcript of our conversation is here.
You can stream/download the full conversation, including the podcast extras on iTunes, Bloomberg, Overcast and Stitcher. Our earlier podcasts can all be found at iTunes, Stitcher, Overcast and Bloomberg.
Next week, we speak with Francis Greenburger, real estate developer, literary agent, author, philanthropist and the founder of Time Equities, where he became known as the co-op king of New York for converting prewar apartment buildings into occupant-owned residences. He is also the author of "Risk Game: Self Portrait of an Entrepreneur."
You’re looking to start a new business. You have a great idea, see an unmet opportunity, and know you can execute on it. You just need to get started, and capital would certainly help. So you need to go talk to angel investors and venture capitalists, right? It’s just how things are done.
As a long-time investor, I get approached all the time by entrepreneurs looking to raise such capital, and asking for advice as to how to pitch to angels and VCs. And I always stop them and ask them one really basic question: Why are you raising venture capital in the first place, instead of another capital structure?
This is a really basic question that all entrepreneurs need to ask themselves, instead of just making the assumption that they need their funding to be structured in this way.
Because such funding almost always comes with a particular structure – “preferred equity”. And while that structure can be the right fit for some startups, for many great business ideas it can have long-term implications that are not so great. Although it may be more painful in the short-term to bootstrap or raise capital via “common equity” structures, it may very well end up saving your business in the long run.
Okay, before we get into the trade-offs and the reasons for asking yourself this question, what are these terms I’m talking about?
Venture capital is classically structured as “preferred equity”, which means the dollars come in to buy a new class of shares with special rights (versus the founder shares or other common shareholders). Those rights typically involve a lot of protections, so that even as a minority-stake shareholder, the preferred equity holder gets some input into decision-making. That can be a good thing, in my experience, because if you’ve raised capital from an experienced professional investor, hopefully they can bring a lot of acquired wisdom and other benefits to the table. Making sure they’re in a position to be listened to can benefit the right entrepreneurial team.