Biotech Funding – It’s Out There…But There’s a Catch

Just over a week ago, the Cleveland Clinic wrapped-up the 2009 Medical Innovation Summit after putting on an excellent event. As usual, the Summit gave attendees a peak at the latest innovations hitting the medical world, as well as a chance to mingle with industry heavy-hitters. The event also featured a panel of industry leaders discussing the state of funding in the biotech arena.

Shortly after the event, MedCity News ran an article covering the panel’s thoughts on funding, and also reached out to me for my insights on the state of biotech funding in Cleveland. (Click HERE for the article). I wanted to use this post to expand on what I said in the MedCity article, and to give a more thorough response to the question: What is the reality for Ohio biotech’s seeking funding?

 To understand where we are today, we really have to look back a couple years ago. While VC’s were still funding companies, they were starting to hold back from supplying capital at the innovation and proof of concept stages, and instead waiting to supply funding for the execution and growth phases, ergo, limiting their risk by waiting until after companies had already overcome the long (and expensive) clinical trial, regulatory and IP hurdles.

Obviously from the standpoint of an investor, such a “wait and see” strategy makes sense, the problem is that many companies (our clients among them) ran into a chicken and egg problem. In order to get more funding, they were being asked to prove the technology, protect the IP, and navigate regulatory mazes before they could receive capital. The problem: those steps are very involved and expensive, hence the need for capital. You start to see the problem.

However, once those stages were met and funding was raised, a company standing on the other side of the fence was looking at potential exits through going public (although still difficult), or more likely, through a sale to a strategic buyer.

 So that was then.

 Where are we now? Well, let’s talk about those strategic buyers. What we have seen is that “buyers” are now preferring to become “partners.” Instead of purchasing a company or technology outright, these larger players are accessing the R&D and technologies of smaller biotechs through partnerships, licenses and joint ventures, as opposed to through a traditional acquisition, and really only stepping forward to purchase truly game-changing technology.

So what does this mean for small biotechs out there with promising technology? A few things. Let’s start with the most obvious, which is that the days of developing a technology, proving it works, accepting VC money to get over those last hurdles, stepping back to field offers from multiple strategic buyers, and exiting through a nice payday are largely a thing of yester-year. Will they still happen? Sure, but they will be the exception rather than the rule, and reserved for companies with fantastic technology.

Instead, companies must have the mindset that they are in for the long-haul. Specifically, they are going to develop formal relationships with multiple strategic partners, find capital through diluting (angels, VC’s) and undiluting (grants) funding sources, and look for singular opportunities for exits through selling and licensing stand-alone products. While VC money may come in down the line, ultimately, companies must also be prepared to bring technologies to market themselves. Perhaps most importantly, companies must become comfortable with taking cold, hard looks at their technologies (which are often the result of years of dedication) and knowing when to cut bait and move in another direction.

So that’s the “obvious” part. The not so obvious part is that companies must ensure that on their road to raising capital or being bought down the road, that they do not make themselves “unattractive” to future investors or buyers by making decisions that make sense in the short-term, but which could prove to be a hindrance down the road. What does that mean? Simply, every corporate decision, be it relating to a partnership, an IP issue, or a corporate structural matter, must be made in the context of asking “how will this affect our ability to raise money or exit down the road?” As one VC said at a recent TIE event, “we are always looking for a reason to pass on a deal, because there are many more potential deals than we could ever fund.” So while the road to biotech success has never been easy, it is now, more than ever, going to be a process that will require patience, and the wherewithal to identify and circumnavigate potential pitfalls along the way to a successful conclusion.

With all this being said, at least from our experience, there certainly is money out there, and our clients have been able to secure funding through angel, VC and grant sources, but it’s evident that investors are being much more selective with what they fund, and more aggressive with their terms and valuations.

That’s not to place the onus on VC’s for the shortage of financing, in-fact, it’s quite the opposite. VC fund raising hit a 16 year low this year, according to survey by the National Venture Capital Association and Thomson Reuters (Click HERE for an interesting article on the dearth of fund-raising in the VC world), development cycles for technologies seem to be ever-increasingly, IPO’s are near extinction, and strategic buyers are far and few between. In short, VC’s face a lot more risk now than they have in a long time, and therefore have had to adjust the way they make investment decisions.  

So while a company with cutting-edge technology and an experienced management team can still raise money, it’s just going to be a longer road than a few years ago. The reality is, what companies are really going to need is something not often mentioned: the will to persevere.

In closing, not that I have really mentioned anything of a legal nature, but I always feel compelled to at least say that this is not legal advice, and every situation is different, so always consult an experienced attorney before addressing any legal issues.