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The risks and prospects for biomedical start-ups and scale-ups

Recently, the European Innovation Council (EIC) Accelerator awarded 74 European companies with grants/subsidies, following the March cut-off. The European Commission’s EIC Accelerator program grants € 2.5m in subsidy and up to € 17.5m in equity financing to innovative companies. In the first of three cut-offs this year (March 2022), over one thousand high-potential start-ups and scale-ups were selected from those that applied for funding and investment. Two of the three Dutch companies that applied successfully in the (bio)medical field partnered with FFUND for their applications. A great accomplishment, obviously! But why did other promising start-ups and scale-ups not make it to the finish line? What are common pitfalls for these kinds of application by fledgling biotech companies? And what lessons can you learn from their mistakes?

At FFUND, we generally work with companies who thrive in hardcore science and who have exciting technologies in development. To earn a seat at the table of investors, however, you need to dive into business development as much as into product development. Too often, we see knowledgeable scientists create something amazing, but they do not manage to develop it into an actual product and, unfortunately, lose their grip on the product once investors get on board and acquire significant voting shares. During my seminar at BioBusiness Summer School, I elaborated on how to nurture three main elements contributing to the failure or success of start-ups and scale-ups: intellectual property, financing and assembling a skilled team.

1. Why intellectual property (IP) matters

For knowledge-intensive companies in the life sciences, the patent portfolio is often the company’s biggest asset. The IP position largely determines the value of the company since it has a massive impact on the revenues that can be earned after the product is fully developed and validated. It is essential to build a patent portfolio as your company grows and the technology matures. The IP position and patent lifetime need to last long enough to secure a place in the market for the product that you develop. Together with an increasing set of data, this is how your key asset retains value and presents an attractive business case for investors and future buyers, allowing you to raise funding while maintaining ownership of the company.

An IP portfolio consists of more than just patents, however; it concerns the brand name, trade secrets, and the design of your product. All aspects should be incorporated in the company strategy and product development path to optimize the value and maximize the chance of success. The world of science will always be full of risks: the nature of experimentation means that a positive outcome is never certain. For knowledge intensive companies, however, it is essential to counter this risk by ensuring that all other company aspects, such as the IP portfolio, are well secured to maximize the company value and make sure that you maintain ownership of the portfolio, even when the science is challenging and provides unforeseen results. Document everything, whether or not it seems insignificant, and protect it as well as possible along the technology development path.

2. Why financing is key

Most life sciences products have very long development paths and are greatly dependent on scientific experiments with a high chance of failure. Most successful companies therefore make use of a mixture of financing sources to limit dependency on (single) investors and mitigate extra expenses because of unexpected scientific results. As a biomedical start-up, it is important to realize that you are dependent on external financing in every way. During the full technology development path, your company will spend a lot of money on the development of the product and on the people in the team without making any significant returns. To finance the expensive R&D path, it is important to attract and hold onto the right investors to bolster the essential dilutive equity funding. When attracting equity, the pros and cons of different investors (i.e. philanthropic or knowledgeable investors with strategic networks) need to be carefully weighed up and timed. On the other hand, non-dilutive funding, like grants, loans, prize money, and tax credits, is often underappreciated. Nevertheless, it forms an essential source of funding that brings cash flow into your company without having to exchange it for shares, thereby providing you with a stronger negotiation position towards the company shareholders by reducing the dependency on your investors. When you are successful in attracting multiple sources of funding, you build an increasing validation basis for your company, the technology, and yourself! This demonstrates to your (potential) investors that you are run by a professional management (team) that is capable of attracting funding and that you are a reliable investment. Most importantly, combining multiple funding sources allows you to deliver to your investors, even when there are unexpected (scientific) circumstances.

3. How your team is crucial for success

Finally, make sure to involve the right people at the right time in your team. The biomedical field is constantly evolving. There is no way to predict what it will look like in five years’ time. The only way to stay ahead of the evolutionary curve is to engage skilled staff and experienced partners, and to assemble a competent team. When the technology has successfully passed the early proof of concept phase, it is time to professionalize and ensure all roles in the company are covered. Especially in the early phases, not all roles need to be full time, but it is essential to gather the required expertise around you to fast forward the development of the technology and company. Attract a revenue manager to monitor, secure and manage new opportunities for funding. Maximize the chances of gaining funding by appointing a CFO, an entrepreneurial CEO, and a technology expert. Bring in an expert in the field of business administration and enhance your staff with experienced scientists and regulatory experts that match the technology readiness level in the development path. Finally, ensure that you complete the team with an external advisory board, including end-users and key opinion leaders that will provide you with independent strategic advice. The more experts you attract, the more mistakes you prevent.

How can FFUND help your venture?

Is your start-up in need of advice to attract strategic finance for the next development phase? Please feel free to reach out and set up a meeting with FFUND for you and/or your venture.

by Judith Smit