Funding Your Biotech: Go Beyond The Traditional IPO

By David Diamond, CPA, managing director, CBIZ MHM, LLC

It’s no secret that the biotech IPO market has been “on a tear” of late. While it’s brought greater exposure to the industry, it also has afforded investment banks the luxury of being hyperselective when deciding which biotech companies to work with and to bring public.

Because the market has been so hot for so long, no one knows when the window will shut. That being said, if a company has good technology and wants to go public, now is the time.

However, the competition is fierce, and investors are unwavering in their desire to work with top-notch companies, including those that can withstand scrutiny of their clinical data, carve out a large enough market niche for their drug, and/or offer a robust pipeline of drugs or medical devices. This doesn’t mean that biotech companies are left without options for funding, nor does it mean that they will never go public. Rather, they need to consider alternative lending sources. Here are a few options:

1. VENTURE CAPITAL
   The number of VC capital firms investing in early-stage biotech has shrunk significantly during the past several years, with some going out of business and others taking the safer route of investing in more mature companies. Yet, there is still VC funding available for the right startups. Those remaining early-stage VCs generally look for companies that have CEOs or management teams with proven success records, which makes it easier to fundraise and go public more quickly.

   In turn, this means the VC will see a return on investment more quickly. An example of this is serial biotech entrepreneur Rich Heyman, who was founder and CEO of Aragon Pharmaceuticals. He sold Aragon for $1 billion to Johnson & Johnson, then quickly started Seragon Pharmaceuticals. Because he had a proven record of success with Aragon, VCs immediately put money into his deal. He sold Seragon for $1.7 billion in 2014 to Genentech.

2. GOVERNMENT GRANTS
   If a biotech company doesn’t want to go public or work with a VC firm, another option is to apply for government grants, which include funding from Small Business Investment Research (SBIR) or the Defense Advanced Research Projects Agency (DARPA). Companies also can receive funding as an incentive for locating in science parks that have been set up in cities across the United States, as well as in certain cities in Europe. We had two biotech clients; one went to a business park in Holland and received $3 million dollars in grants, and another went to Austin, Texas and received a grant of several million dollars.
3. BIG PHARMA
   Big Pharma companies are another source of funding. These companies often will invest in very early-stage drug companies, fund them through drug development, and then buy them out without the company ever going public.
4. ANGEL INVESTORS
   Companies can get funding from friends, family, and angel investors. Angels can be seen investing in both small and large deals, but they generally invest in early-stage companies. The Internet is the best place to research angels, but other good sources for contacts are accountants, attorneys, and banks that specialize in biotech companies.
5. ALL OF THE ABOVE
   Biotech companies shouldn’t feel that a funding source should fall into one category or another; many companies have been funded by a combination of all of the above. There are no restrictions on the number of sources that can offer funding.

David Diamond, CPA, is a managing director of CBIZ MHM, LLC, a national top 10 accounting and professional services provider, and the National and International Technology Practice Leader for the firm. David’s expertise covers a vast array of public, private, and venture funded biotech companies.