March 1, 2010 (Vol. 30, No. 5)

Amy Spaisman
Phyl Speser J.D., Ph.D.

Tips on Securing Money and Stakeholder Support

Commercializing biotechnology is challenging. Hurdles include, but are not limited to, securing funding, navigating the approval process, and managing technology risk. These key barriers must be overcome or circumvented to achieve successful market entry. This article will focus on two common challenges: raising money and securing stakeholder support.

It will come as no surprise that early-stage money is a common problem. Biotech products generally take around eight years and more than $1 billion to develop. Early-stage R&D alone can cost about $100 million. In universities and nonprofit institutes, early-stage work is funded through federal and foundation money.

Small companies, in particular, have a harder time finding outside money. Angel, venture capital, or industrial funding are hard to find for early-stage work. One reason is that it is incredibly difficult to calculate potential returns on investment. Traditional discounted cash flow (DCF) methods rely on predictable outcomes, yet the very nature of early-stage work makes prediction difficult, if not impossible. Since the recession began, investors are even more cautious with their investments.

Amy Spaisman

Real Options

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.

Phyl Speser, J.D., Ph.D.

Concurrent Engineering

One process of reaching out is called concurrent engineering. The focus here is determining likely downstream end users, lead customers, and commercialization partners. These people are brought together with your R&D team, manufacturing team (if you will make products), and sales team (whether for partnering, investment, or product sales). 

In concurrent engineering, end users and possible lead customers are asked to contribute ideas as to what would make the technology particularly useful. You do not have to reveal anything that is proprietary. What you do is ask for peoples’ wish lists for an area of activity (a diagnostic or therapy, for example). 

In today’s age of Facebook, LinkedIn, Twitter, blogs, and websites, there are many ways to use the Web to reach out to people to open a dialogue. In this dialogue you are just another participant, but unlike the others, you are listening strategically in order to better set your technology’s performance, ease-of-use, and cost design specifications. Later, as you move forward, a more formal team is put together under nondisclosure agreements to act as an advisory board and review panel for the R&D plan and evaluation of its results.

Along with concurrent engineering, reaching out to other stakeholders is important. Our experience is that once a formal current engineering team is in place, it makes sense to reach out to regulators, professional societies, and industry associations (in particular chairs and members of relevant committees), and finally investors and other funders. This has two advantages.

First, regulatory approval is usually a huge challenge Early contact with the regulatory body is advisable to ensure that all testing and protocols comply with regulations—including manufacturing. Our experience is that if you call in and explain all you want to do is comply and you are just trying to figure out how to do that, people are almost always helpful. 

The second advantage is you can generate “pull through” before approaching funders, by which we mean having a cohort of stakeholder advocates in place so when the investor does due diligence, they find people supportive and excited about what you are doing. That helps with the prior challenge. Of course, once you start reaching out to larger numbers of people, it is critical to have good intellectual property protection in place as trade secrets will only hold for so long once you start talking to folks.

Amy Spaisman ([email protected]) is team leader, life sciences assessments, and Phyl Speser, J.D., Ph.D., is CEO of Foresight Science & Technology. Web:

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