So you’ve decided to participate in OneStart. You have a great idea and you’ve started building a team. Sooner than you realise, you will be facing the decision on how to finance your enterprise.
Raising money in life sciences is a Sisyphean task – the sums required to take an idea through to commercial viability or an exit can be staggering. But people succeed all the time.
In this blog post I will provide an overview of the options available.
To own or not to own?
A first consideration is whether you choose to part with a share of ownership in return for funds – so called dilutive funding. Undoubtedly at some point in your journey you will decide to take this route but what are the options?
- Seed funds – These provide very small amounts of money (typically less than £1m) to allow companies to conduct some early proof of concept work. Some seed funds are affiliated with Universities and their tech transfer offices; others are stand-alone incubators that provide companies with additional benefits such as industry introductions, lab space and IP/legal support.
- Angel investors – There are private individuals, sometimes acting in concert, who actively invest in early-stage companies. Angels are a significant source of start-up capital, typically contributing rounds of £1m-£2m. Angel investors have different incentives and timelines when it comes to continuing investment or realising exits and these are personal to each individual.
- Venture capital funds – VC firms are structured as investment vehicles with a life of around 10-12 years. They typically make investments in the first three/four years of a business’ life, spending the majority of their time building the companies and then exiting them. VCs raise money from institutions such as pension funds, and therefore their available funds are known. They also appreciate that companies are likely to need multiple rounds of financing and they factor that into decisions. There are generalists and specialists in venture capital investment. Life science specialists may also be able to find additional investors who share the investment thesis to join them in a syndicate.
- Corporate VC funds – These are organisations like SR One, the independent corporate venture capital arm of GlaxoSmithKline and OneStart co-founder. Corporate venture differs from traditional VC investment with respect to their time horizons. As corporate venture funds aren’t (usually) structured as limited life funds, they have the potential to continue their support in excess of 10 years. In practice, many corporate firms invest alongside traditional VCs and they are therefore governed by their timelines. Corporate investors differ in their motivations, with some more financially motivated and others seeking a window into the world of entrepreneurship to be exposed to innovative technologies that could benefit their parent organisation in the future. The extent of in-house support such as access to facilities and know-how will differ amongst corporate VCs.
Of course, you may conclude that at this very early stage, giving up ownership is not the right course of action. Leaving aside for a future blog the pros and cons of that decision, what are the alternatives to equity?
Sharpen your pencils
- Grant application – If you’re a post-doc you will no doubt have more than a passing acquaintance with grant applications. There are similar funding schemes for early stage commercial organisations. These can be at the Government level (e.g. TSB, Horizon 20/20) or through private organisations such as the Wellcome Trust. Such funding may come (as in the case of TSB) with the promise of future investment up to a limit if certain milestones are met. Either way this form of investment does not impart ownership to the provider. To state the obvious, grant applications take time…
- Third sector investor – Some charities invest in early stage businesses if their idea breaks new ground, is in a rarely studied area, or is in area where private funds are generally lacking. For example, the Michael J Fox foundation in the US has supported a range of companies undertaking research into Parkinson’s disease.
- Other government assisted schemes – There are a host of regional, national and European initiatives for life science businesses. Access criteria includes the sector, level of development, and stage of commercialisation. What they have in common is a focus on building and maintaining an expertise within a region or filling a gap the private sector won’t invest in.
Whichever route you choose, it’s time-consuming (and always takes longer than you think); hard work and rewarding – you’ll learn a lot through feedback and ultimately find the right partner for your idea.
This blog addresses the main options that are available. There are of course a host of issues yet to cover: how do you know which VC firm to work with? Isn’t a corporate VC always the best option if it’s available? Do I want someone interfering with decisions? Is it always best to keep ownership within the team?
I look forward to addressing these in future posts but welcome the opportunity to discuss them in more detail if you would like to get in touch with me directly.