You've started your own company, established proof of concept and might even hold a patent for your idea. You need money to develop this idea and grow your company. Where do you turn? There are many different options to obtaining research funding for a new biotech startup. One of these is private investment from a venture capitalist, a venture investment company, or angel investors. But before any of these people will risk financing your "baby" you have several things to prove. What does a seasoned biotech investor look for in a company?
1. Personal Preferences
Different investors have different preferences in terms of the stage of development of companies they choose, industry, capital required, geography (country, biotechnology hub) and more. Some investors might be partial to getting involved with products that have been given orphan drug status. These choices might simply be subjective preferences based on their own experiences, interests or gut feelings.
2. A Worthy Project
Investors look for companies that are organized and have a focused plan for R&D and growth. Also important in the biotech industry is usually a product that will be used on humans and in a therapeutic setting (i.e. to treat high profile diseases such as heart disease, cancer and diabetes), although different investors might have interests in different "niches" (see #1). However, generally companies are not selected that provide a service (analytical, consulting etc.). Those types of company should (ideally) be recouping their own costs via contract revenues.
3. Established Proof of Concept
Investors feel safer if proof of concept has been established, meaning the company has demonstrated, at least in preliminary experiments, that the idea will work. Ownership of IP and patent approval would certainly help, since that means a demonstration of proof of concept has stood up to external evaluation. Proof of concept may be demonstrated through experiments performed at the cellular level and on animals, resulting in data that can reasonably be extrapolated to realistic predictions of significance and human trial results.
4. Competitive Projects
Investors look for projects with a competitive edge, namely those for which the IP is already owned, or the company is in a position to file an imminent patent claim. A competitve product is unique and has a niche in an obvious market by filling an unfulfilled need with, for the time being, no competition. Approach a venture investor with a clear idea of why your product is important, who would buy it, and why.
5. A "Believable" Storyline
Points 2-4 contribute to a predictable and attractive "storyline" that follows the progression of a new product as milestones are achieved. The story concludes with a prediction of when an IPO might be made, or the occurance of other exit strategies, within 3-5 years, such as acquisition by another company, buyback of shares by the owners, or sale of shares to a third party. The investment risks should be somewhat quantifiable and counterbalanced by a plan for executing the storyline, over a reasonable timeline, via small incremental steps. The storyline also includes backup plans (i.e. having more than one product in the pipeline) and options for out-sourcing certain aspects of a project.
6. Potential for Increased Value
Investors like a project for which the value can be reasonably predicted to increase as each step of the storyline is executed in sequence. This makes it feasible that new sources of funding might be raised in the future, if needed. It's also important that the owner and investors receive comparable returns over time, adjusted for each of their relative risks. Venture and angel investors invest with the goal of gaining something in return (usually about 25 - 40% return on their money). A company must appear viable and poised for growth in the not-to-distant future. Having a mandate on corporate sustainability is also likely advantageous.
7. Good Management
One of the roles of venture capital investors is to ensure that the companies they invest in have experienced management at their helms. In some cases, the stipulations of signing with a venture investment group might include replacement of existing mangement with seasoned professionals who have started or managed successful companies before. In other cases, investors might be looking for "coachable" people; people who are open to new ideas and ways of doing things that can benefit from their experience and contacts.
The pre-existence of experienced management in a startup increases company credibility and improves the chances of getting funding. Investors look for those in leadership roles who demonstrate versatility (the ability to perform the many job roles in a startup), a strong understanding of the project or product, and the industry and market. Knowing who within the organization is responsible for what, with what amount of accountability, also helps.
8. Alternative Sources of Funding
Investors want to work with companies that have good credit ratings and might qualify for conventional sources of funding (i.e. loans) if needed. Having access to alternative sources of funding demonstrates the value of the company and its projects, indicates viability of the project and company structure, and is a sign of sound management. It is also a marker signifying how much potential there is that investors will get a return on their investment.
