Starting up biotech goes beyond just having an excellent idea. It takes time, dedication, discipline, and, most critically, funding. In this blog, David Johnston, former CFO, and Founder of DBJ Consulting, will take you through three stages of biotech funding. It aims at helping both biotech companies and investors know what biotech funding entails and how to begin on the right foot.
Stage 1: Early-Stage Financing
The early-stage financing is divided into four phases:
Seeding or equity-based financing is the earliest stage in biotech financing. It involves capital firms and angel investors committing their capital in exchange for the company’s equity. The biotech company may have fully developed research on the viability of its idea. However, the commercial capabilities of such ideas remain a mystery. Biotech can use seed funds for product development, market or demographic research, team onboarding, purchase of essential equipment, or initial production.
Pre-launch financing enables the company to get its products ready for the market. It involves funding clinical trials and other tests that determine whether a product is adequately safe to be sold on its own. The average pre-launch round size is about $5 Million. However, this amount varies depending on the nature of the product, production techniques, and duration of trials.
Start-up Financing Phase
The product is ready for the first launch. A biotech company may request start-up funding to get started. You’d want to show investors how much revenue the company can generate in the next few years.
This phase covers the period just after launch. The company is collecting customers, generating revenue for the first time as it transits the start-up phase into profitability.
Stage 2: Expansion Stage Financing
The second stage of financing is the period when a company is seeking to expand its business. The company has attained a certain level of maturity and has enough working capital.
However, the company may still need expansion funding for:
- Projects that are currently in development but have not yet been fully funded by the company
- Projects that are already fully funded but require additional funding to complete or bring them to their full potential (e.g., product development costs)
Successful biotech companies consistently look for new markets and demographics, explains David Johnston. Your company may need expansion funding to acquire new businesses, market existing products, or expand its internal team. If the company cannot raise the acquisition funding organically, it’ll need external funding to expand.
Stage 3: Bridge Financing Stage
Bridge financing is a term used in the biotech industry to refer to the period between two rounds of major financing. For example, between seed financing and pre-launch financing or first-stage financing and expansion financing. This stage is vital to biotechs as it allows them to take advantage of low-interest rates and flexible repayment options.
In Biotechs, bridge financing is the last stage of capital financing. The company has reached maturity. According to David Johnston, biotech companies can use the funds for activities like IPOs, mergers, and ownership transitions.
Working With a Professional CFO
David Johnston brings over 30 years of financial advisory experience to the table. He has worked with numerous biotech companies. Currently, he’s the president of DBJ consulting. Get in touch for a pair of extra hands you need for valuation, auditing, and financial analysis in the biotechnology and pharmaceutical industries.