How to find investors for your biotech startup
Healthcare startups, especially those in the biotechnology and pharma sector, need to be strategic when preparing to target new investors. But, why? Because like you, so many early-stage startups are looking for financial backing where the number of companies that receive pre-seed funding is relatively low. Investors may consider thousands of startups, but they only invest in a few.
The last 2 years have been very peculiar due to the COVID-19 pandemic, which has attracted increasing interest from traditional and non-medical investors looking to invest in startups in this area. This is potentially creating new opportunities for your fundraising efforts.
Figure 1. Global venture investment in biopharma, $B. Source: https://www.baybridgebio.com/blog/top_vcs_2018.html
2022 has seen a downturn in public markets across industries, and biotech has not been spared. There are reports that this effect has trickled down into the private markets, lowering the valuations that investors place on companies.
Despite this, the activity of the last few years has meant that there is a lot of capital out there waiting to be deployed.
But are investors the best first option to finance your biotech startup?
No, not always. It takes quite a lot to be able to secure funding — and especially in a demanding space like this. Even though biotech is a hot field, financing a biotech startup is nuanced and involved. It is important to know what options exist for financing, and which are the best options for your company at its current stage of development.
Finding the right funding for your biotech startup
The first step in finding funding is to identify the main types of funding, which can be divided into non-dilutive and equity funding.
Sources of funding
Non-dilutive funding – any investment that does not include you relinquishing ownership of your firm. Non-dilutive funding can take many forms. Common types include:
- Bank loans
- Loans from family
- Tax incentives
- Licensing and royalties from products
Equity funding – is a form of financing in which business owners sell shares of their company in exchange for capital. These funds are used for direct business operations or long-term growth. Common types include:
- Venture Capital
- Equity crowdfunding
- Angel investors
- Public Offering (Initial Public Offering – IPO)
- Accelerators / Incubators
- Individual Private Investors
- Venture philanthropy
This last type of funding will be our focus for the rest of this article. We’ll give you tips on how to get equity funding to achieve your goals.
Who are your potential investors?
Once you’ve made the decision to seek equity funding, it will help to know more about the types of investors available to you and what drives their decision-making. Here’s a quick introduction:
Angels, as these individuals are often called, tend to invest in the earliest stages of company development, taking on more risk than venture capitalists may be comfortable with. Their investments also usually happen in the “seed” or “pre-seed” investment stages. Angels are wealthy individuals, and many of them gained that wealth from successfully running and exiting their own startups - in this respect, investments from angels can be considered a form of “smart money”.
Seed investment venture capital (VC) funds
Venture capitalists are professional investors and typically invest larger amounts than Angel investors. It’s worth noting that VCs are investing other people’s money, and therefore have a duty to support their investment goals. Nevertheless, like angels, many of them will use their knowledge and connections to help the companies they invest in to be successful. It is therefore common for VCs that make a significant investment to request a seat on your company’s board of directors in addition to equity.
Accelerator or incubator programs
Some of these organisations provide pre-seed capital, and grant access to entrepreneurial communities full of advice, training, networking opportunities, free or discounted resources, and exposure to top-notch VCs for future funding rounds.
Figure 3. Top Life Science Investors in Accelerator Companies. Source: https://www.cipherbio.com/blog/see-the-top-life-science-accelerators-in-2019-2020/
This describes the application or repositioning of traditional VC financing principles to achieve charitable goals. Important examples of organisations that have done this in the biotech world are the Bill & Melinda Gates Foundation, Cure Alzheimer's Fund, The Redstone Acceleration & Innovation Network (TRAIN) initiative from FasterCures, Cancer Research UK and Alzheimer’s Research UK.
How to find investors?
Seed funding can be crucial when you are starting up or growing your enterprise. It can be the difference between showing proof-of-concept and falling into the valley f death. Identifying and approaching the right type of investors can be difficult and a time-consuming process. At Probacure, we can help you rapidly find investors that are most aligned with your needs.
To start doing this on your own, you can try the following:
TIP #1: Explore lists of investors who have taken positions in companies similar to yours, including your rivals. Look at who they raised their first money from and see if they could be a good fit.
TIP #2: Explore initiatives, funding programs, and events where companies like yours and their investors attend.
TIP #3: Explore big companies and consider going after a giant or two. Many of the largest pharmaceutical companies have corporate venture capital arms, and equity investments sometimes form parts of partnership deals.
TIP #4: Searching Twitter and LinkedIn for investor keywords (e.g. “angel investor”, “VC”, etc.) can be a good starting point.
TIP #5: Explore platforms for finding business information about private and public companies (e.g. Crunchbase, Pitchbook, etc.).
TIP #6: Explore other sources such as University Funds and Angel Syndicates.
This can be a great starting point and can give you an overview of your options for funding!
Now that you identified the investors, you need to consider that…
People that are most likely to invest in your company often have three things:
The greater degree of overlap, the greater the odds they’ll invest.
So… if your startup has generated sales, struck partnership deals, or otherwise gained attention, this will greatly increase your chances of obtaining pre-seed financing. However, even if you don't have a product or service available, there are four key attributes that can help you to convince investors:
So, now that we have a better understanding of the main tips to find the best funding for your company as well as some attributes that help you to convince investors, there’s one more key thing to consider…
Making sure investors are the right fit
Explore and get to know your funding partner
- Check their investment thesis and understand whether you really fit what they’re looking for
- Look at the history of their past investments - do you resemble the portfolio companies in any way? Do you match their expertise?
- Consider speaking to other companies they have invested in. Having a good working relationship with your investors is essential.
Give investors the best chance to know you: Different types of investors will demand or be interested in specific information about your startup.
- Review investors interested in what you are striving to become in the next year.
- Determine Long-term Goals: As the owner of your new business, it's important that you think about what you really hope to achieve in the long term.
- Plan your financing strategy in advance. Depending on your business model, you need to prepare financial forecasts and model scenarios.
- Have a “Proof of Principle” or “Proof-of-Concept” to illustrate that early hypotheses regarding the mechanism and characteristics of a drug/vaccine are established and are likely to be relevant in the clinical setting.
- Demonstrate a strong intellectual property (IP) strategy.
- Demonstrate potential for product-market fit and have a strong founding team with relevant background and experience.
- Becker-Blease, J. R., & Sohl, J. E. (2015). New venture legitimacy: the conditions for angel investors. Small Business Economics, 45(4), 735-749.
- The science of success: UK biotech financing in 2020. (2021). Bioindustry Report. URL: https://www.bioindustry.org/uploads/assets/4a953291-ff29-4379-b2f2526faac5bdc7/The-science-of-success-WEB-small.pdf
- Venture Pulse Q4 2020: Global analysis of venture funding. (2021). KPMG Report. URL: https://assets.kpmg/content/dam/kpmg/xx/pdf/2021/01/venture-pulse-q4-2020-report-global.pdf
- Want to start a startup? (2013). URL: http://paulgraham.com/convince.html