How to Spend Your Biotech Startup’s Money

Biotech startup money

Biotech investment rounds tend to draw big headlines, but experienced players know the real work is done in between them. Avoiding some common pitfalls can make the difference between petering out and pressing on.

Managing a biotech startup means always keeping an eye towards the next financing round. But piquing the next investor’s interest requires more than just staying afloat–it means managing relationships with current investors, developing a long-term strategy with room for adaptation, taking steps toward concrete milestones, and setting aside the academic mindset.

No amount of planning can help when it comes to the number one risk for any early-stage company: the science may just not work. According to João Ribas, Senior Associate at Novo Seeds, “these companies tend to be ambitious companies with ambitious founders, working on breakthrough science.” That risk is part and parcel of being a biotech, or a biotech investor, he says.

Novo Seeds, the early-stage investment arm of Novo Holdings, both invests in spinouts and builds companies from scratch with academics, says Ribas. “Then we follow along through the lifetime of the company,” investing in future rounds as a company hits its milestones.

Issues can arise, ranging from toxicity to animal data to manufacturing, “but there are things we think we can anticipate or optimize,” says Rafaèle Tordjman, founder and CEO of life sciences VC firm Jeito Capital, For example, she advises early-stage companies to plan early about batch manufacturing all the way up through potential commercialization, which can avoid headaches down the road. She also urges them to think about compatibility with both the US and European markets, to capture maximum value.

The transition from idea to company is rife with pitfalls, especially for academics, says Helén Fält, business coach for finance and growth at Umeå Biotech Incubator (UBI). Even once they’ve secured funding, founders may not know what to expect and can be too optimistic as they begin to execute their plans. For example, she says, founders may have developed an animal model in the academic lab for proof of concept testing that convinces initial investors but does not meet industry standards. Failure to plan for additional animal testing can cost both time and money.

Most academics that Fält works with tend to underestimate the industry requirements for documentation and repetitive experiments, she says. Incubators like UBI can educate young companies, but Fält says that entrepreneurs need to continue to tap the expertise available from stakeholders.

“When you are building a company with academic founders, most have a way of thinking about developing a new idea that comes from the science side,” says Ribas. Building a company means thinking beyond the biology to the long-term strategy, even at the earliest stages: the commercial case, the clinical applications, how long clinical trials will need to be, and if there will be a sufficient number of patients for a trial in a particular indication. 

“What you most often see is founders that don’t have that broad perspective,” he added. “And that’s OK,” because VCs or a solid network of advisors can provide the feedback a green management team needs. “Ultimately it will be a combination of input from different people with different skill sets that will make the company be successful.”

Within the first investment round especially, companies need to plan milestones that demonstrate they’re creating value, Ribas says. “It’s tough if you have a certain financing round and that pushes a company all the way to a place where it needs to raise another round, but hasn’t really shown any data.” 

That kind of failure doesn’t happen overnight, and early planning with experienced investors can often steer the management team in the right direction before they reach this point. “Having active ownership in a company is being able to detect when things are not going in the right direction,” says Ribas.

Keeping the lines of communication open with investors also serves the company as it looks to future investment rounds, says Fält. “Whenever I talk with investors, they really want to know what is happening with the company, to build a relationship.”

One important resource is a company’s advisory board, but it ought to be more than just a group of founders and investors, says Fält. “It’s common that companies are lacking competencies on the board. Some of the companies that we work with still have the same board members, year in and year out,” rather than changing as the needs of the company evolve, because existing stakeholders are hesitant to give up their seats. “Everybody must think about what is the best for the company.” 

“If you have the right people around the table, you’re often in a better position to solve any problems that come your way,” adds Ribas.

Tordjman works closely with companies prior to the first investment to agree on the subsequent steps, ensuring a continuity of vision as the company progresses. Jeito Capital invests in ambitious companies, and Tordjman encourages the entrepreneurs to plan and manage an intellectual property pipeline. Aligning with the company early on can avoid trouble later, she says. “If you just want to have one indication or one asset and just flip a coin, we know it’s not for us.”

Ensuring alignment within investor syndicates can be key for a company. Not all investors have the same appetite for risk, especially in Europe, says Tordjman, and they might be inclined to push a young company to look for a premature exit, though Jeito prefers a longer-term approach. “Continuity allows for a lack of disruption, including fundraising, in between inflection points.”

Any business plan needs to have clear go/no go points, says Tordjman. But experiments don’t always yield black or white answers, so a company needs to have a sequential decision tree that accounts for answers in the gray area, she says, which keeps companies adaptable and mitigates risk. “The most important thing for the entrepreneur is that they know when to stop, when to question themselves.”

Even still, at some point companies need to take risks, as with the decision to start manufacturing–to avoid losing time, companies often have to deploy capital before getting confirmation from previous trials, Tordjman says. It helps when the board and management team are aligned on how much to spend and when.

Keeping a little room in the budget can help prepare for the unexpected, says Ribas. The pandemic is the obvious example of things that can go wrong beyond a company’s control: suddenly, CROs were shutting down and lab access at universities disappeared. “It’s a balance between being ambitious, being diligent to the budget that you have established to get to valid inflection points–and at the same time, being mindful and realistic,” Ribas says.

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