More attractive valuations can be created using real options that take into account the value of strategic positioning and flexibility to exploit changing situations. Unlike traditional DCF-based investments, buyers of real options are hedging their bets. For example, imagine a buyer was interested in emerging stem cell therapies under the Bush Administration. Traditional DCF would value those very poorly because of uncertainty that they could ever be used.
Under the current administration, however, stem cell therapies are endorsed, and the value of a license for them is worth more. Now, suppose that an investor had bought an option several years ago. The option gives the right to license the stem cell therapies on completion of in vitro testing or to buy an additional option to license after animal testing. Furthermore, suppose the seller agrees that all receipts will be used to mature the technology. (The cost of the option is commensurate with the cost of the R&D to be conducted.)
For the seller, the option provides needed cash flow to keep a project alive to the next technical milestone. For the buyer it provides a strategic hedge with limited financial exposure. When the milestone is reached the investor can exercise the license, buy another option to the next milestone to preserve their strategic position, or walk away.
Once this business model is grasped, it is clear that you can sell the same option to a pool of investors to spread the risk. In this case, each option holder receives the right to bid against the other option holders to license, or if none wishes to license, to hold an exclusive option until the next technical milestone is reached.
The bottom line is this: when you cannot find equity investment, think about other ways to structure investment to give you what you need to advance the technology until its technical merit and financial value is clear.
Another approach is to reduce the costs of R&D so return on investment becomes more likely—whether via lower-cost equity or options. One of the best ways small companies can reduce the cost of R&D is to seek government money. The SBIR and STTR programs at the NIH, DOE, DOD, and NSF all fund biotech work.
There are also state-level programs that fund early-stage life science technology companies. Another solution is to partner with a university professor or research group to seek federal or foundation money. This approach opens up new sources of funding. The Gates Foundation, the Wallace H. Coulter Foundation, and the Ewing Kauffmann Foundation, among others, sponsor translational research programs designed to speed commercialization of biomedical research.
Solid stakeholder support makes it easier to find funding. The key to stakeholder support is reaching out to people early, before their support is critical. When you reach out early, you can solicit advice and ideas on how to improve your technology, and the processes for developing and making it, before you are locked into a product and process design.