How to Avoid 3 Common Pitfalls for Early-Stage Biotech Funding

Early funding rounds require startup founders and executives to balance a unique set of competing priorities. One is to establish a cash runway long enough to reach either an exit window or a vital development goal to draw additional investment. Another is selecting investors and partnerships capable of external validation for your market research, audience estimates, and growth projections. Yet another is the need to position yourself within your sector of the larger biotech/biopharma space with respect to the size, source, and timing of your early financing events. And all of those needs are in addition to the fundamental requirement of offering investors a suitable return on capital within a timeframe that justifies their willingness to support an untested product or platform.  

Most CEOs and Boards, especially those with relatively little startup experience, make one or more significant strategic mistakes during these early funding rounds. I’ll outline the most common of those mistakes here and point to crucial mitigation and prevention strategies along the way. 

1. Adopt an external perspective 

The simplest mistake made by inexperienced leaders is to overestimate their product, platform, or pipeline and buy into their hype as a result. By default, a firm-internal perspective involves confidence in the company’s market research and a focus on the company’s operations and growth plans over external market dynamics. A skilled CEO makes major financing decisions from an external perspective, the viewpoint they share with potential backers, anticipating their concerns and playing into the trends they are pursuing.  

One key aspect of this approach is to be choosy about whom you pursue for early financing. Pitching indiscriminately can create a negative reputation and will typically land you with investors who are themselves less careful and less savvy and therefore less helpful to you in the long run. Instead, adopt a data-driven and highly targeted outreach campaign for blue-chip investment firms and recognizable pharmaceutical companies. Investment from one of these high-profile parties is a powerful endorsement and will offer critical third-party validation in addition to the cash you need. Securing these deals requires fine-grained market awareness, especially of funding in your sector: how many deals have been made recently, who were they with, how large were they, what kinds of equity were offered, and so on. Your pitch should align with these market norms.

2. Mitigate medium-term risk

Biotech is volatile, competitive, and fast-moving, especially for young companies. Therefore, investors in biopharma face significant risk when supporting startups, and leaders need to take steps to mitigate that risk through standard measures – building an efficient, coordinated company with top talent – and through the structure of their early financing deals. 

One key component of this kind of risk mitigation is your science team. Directors and executives with past entrepreneurial success or significant accomplishments at large Pharma companies are ideal, as investors will trust them to have made accurate assessments of the viability of your products. Another important move is to match the size of Series A and B funding rounds to the runway you’ll need to reach your exit window or major development goals. Not only does this demonstrate the maturity of your approach, but it also increases investor confidence that they’ll see a reasonable return.  

Finally, strong communication is critical. Press releases, publications, and presentations at conferences and industry events are indispensable tools to build a firm’s image as being a safe bet. Publicize your development goals and chief milestones so that financiers have a clear sense of direction and viability. This is especially true if your development goals involve branching or parallel tracks; multiple ways of adding value create a margin of safety for investors. 

3. Use financing to build strategic partnerships

Ultimately, the advice given here boils down to: “don’t be overconfident.” In addition to realistically assessing your company’s appearance from an external perspective and structuring growth plans around risk mitigation, it is also important not to avoid partnerships that might give the company new paths to develop.  

In particular, establishing an early partnership with a corporate venture capital group has two positive effects. First, it is strongly correlated with higher success rates; corporate venture capital is involved in about a quarter of early-stage biotech financings but has been equity holders in almost half of all IPOs and acquisitions. And second, they attract the attention of pharmaceutical business development groups that, in exchange for equity, will provide the resources needed for R&D and the expertise and networks required to accelerate both clinical and commercial progress. 

Other partnerships can be just as valuable. Signing licensing deals specific to a single product, for example, can generate the cash flow to fund subsequent products while your company remains independent.

For more detailed insights and guidance, we encourage you to reach out to Paul Cashman, COO and Head of Europe pcashman@lifescisearch.com to arrange a discussion.