1. Seed Funding
Capital that initially funds a new business or idea. Seed investors often gain a stake in the business as a result of funding the startup.
The NIH’s, NSF’s, and other government agencies’ SBIR and STTR grant and contract programs are a major source of seed funding in the United States, and, unlike private investors, they do not take a stake in the business. Make sure that your business fulfills the requirements for government seed money. For example, for the Small Business Innovative Research Grant (SBIR) or Small business Technology Transfer Research (STTR) grants through the NIH or NSF, small businesses must:
- Be a US for-profit business.
- Have the correct legal form of the business.
- Meet ownership requirements specified in the full list of eligibility criteria.
- Have no more than 500 employees, including affiliates. However, most awards go to businesses with 10 or fewer employees.
Amount for SBIR grants: $1.7 million in two phases.
Post-Awards are also available to help further development after an SBIR award. The help bridge the gap between an SBIR award and a commercially viable product.
The following are other common sources of funding for small businesses aside from seed funding:
2. Bank Loans
Bank loans are often easier to obtain after you have paying customers. A disadvantage is that you are personally responsible to repay the loan, even if the business fails. To avoid risks and make sure they will get paid back, banks ask for collateral. Young companies often lack assets to use as collateral, so you would have to put up a personal asset, such as your home. Therefore most early small businesses try to avoid bank loans.
3. Angel Investors and Venture Capital
Angel Investors are individual(s) who provide capital to a business startup, usually early in development, in exchange for preferred shares or partial ownership of the company. Investments may be one-time or ongoing, depending on need.
Venture Capital is funds provided to a startup that is seen by investors as having long-term growth potential. Controlled by an individual or group, these investments are made in return for significant ownership of the business, which is expected to have a high rate of return based on metrics such as market or predicted consumer needs, competitiveness, the superiority of the product or service, innovation, the business’s past success, and the success of earlier investments. Like angel investors, VCs are likely to provide support to the business, such as with management, promotion, and providing contacts to protect their investment. The first venture capital is called series A and often occurs after proof of concept beyond what was achieved with seed money.
Amount: As low as $250,000 and as high as $20 million.
Return on Investment (ROI): ROI is the ratio between income made upon an investor selling or “cashing out” an investment and how much was invested. Investors obviously want a high ROI. The potential for financial gain is often greatest for early investors, but the risk is also often greatest. Both Angel and Venture Capital investors risk losing all the money they invested. In exchange for taking this risk, they are cautious and may have a lot of demands of the business for information to assess risk and profitability. Investors vary as to how long they are willing to wait to obtain a high ROI. Many look for investment opportunities with preferred shares, where they are paid ahead of those holding common shares.
Look for Aligned Objectives: Make sure your objectives are aligned with your investors’ objectives. Most investors want to make a lot of money quickly. For example, an investor who wants a quick, high ROI is mismatched with a business that is primarily interested in making a difference in the world in the inventor’s spare time at as low a cost as possible.
Tip: Make your business more attractive to investors:
- Achieve a milestone before meeting with investors, one that reduces their risk and/or brings in money.
- Find out what milestones are most important to your potential investors and show progress in those.
- Avoid family or other non-accredited investors who may need to get their money back for personal reasons when it might hurt your business. If you did use money from these sources to get started, buying them out may make the business more attractive to investors.
- Make sure you have clear ownership of your intellectual property (IP). Avoid anything that might result in a challenge from someone who views it as an infringement on their IP.
- Involve your investors in the financial plan.
- Courses are available for a fee on how to be an “investor-ready entrepreneur.”
- VC and Angel investors are more interested in companies that have had an SBIR grant funded. Similarly loans are easier to obtain.
Resources on Angel Investors, Venture Capital, and Government Loans
- Search a database of angel investors for angel investors in health care or biotechnology.
- Venture Capital in Biotech (Wait!! Come Back!! Let Me Explain!!) – An introduction to venture capital and explanation of the particulars for the Biotech Industry. By Christa Dhimo. Published on Linkedin March 19, 2021.
- Biotech Venture Capital – Lewis Maleh interviews biotechnology venture capitalist, Jonathan Tobin, about science, investment, and how new drugs get to market. Episode 12. Podcast: Don’t take out your phone. May 20, 2019.
- GovLoans – Describes loans available for small businesses. Even with a grant, you may need a loan to cover some startup costs.
- 49 Biotechnology Accelerators and Incubators – List of the best in 2022 developed by Failory, a newsletter for startup founders
Other Potential Sources of Capital
- Vendors may be willing to delay your payments to them if you ask, thus improving your cash flow until you get more customers, if they need your product.
- Customers may be willing to invest if they strongly need or want your product or service.
- Patient advocacy groups may be another source of funding for biotech and medtech startups.
- Some biotech and pharma companies are themselves funding biotech startups.
- Individuals: Private investors may be willing to invest based on a strong interest in the problem you are solving or the importance of your solution.