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Non-Dilutive Funding Summits Offer Free Insights

Life science startups are eligible for free money. Entrepreneurs should know how to find non-dilutive financial support.

15Jan

I attend as many local finance events as possible. The week's JP Morgan Healthcare Conference 2016 brought out lots of supporting events to keep me busy. I attended the FreeMind 11th Annual Non-Dilutive Funding Summit because I need to know how startups can raise money without giving up eventual riches. I have no badge selfie this time so you'll just have to imagine me there. The speakers were tailored for a life science audience given JPM's presence this week. I'll share my own thoughts below based on what I learned.

The federal government's SBIR and STTR programs are big funders of projects that meet the government's program requirements. The Milken Institute's report “Estimating Long-term Economic Returns of NIH on Output in the Biosciences” shows how the NIH's non-dilutive funding has tremendous leverage on future funding and economic output. I don't know why some federal agencies cluster their awards in certain parts of the fiscal calendar. Maybe they just don't get enough interested applicants for a regular award cycle, or maybe they just procrastinate. It's good to know that small businesses owned by private investment funds are eligible for SBIR/STTR funding.

The US government is not necessarily the ideal target market for most pharma startups. The government's niche drug needs for low-volume doses do not offer the same scalability of a high-ROI commercial market. Furthermore, I suspect that the government's need to stockpile even large doses of drugs for emergency use requires only periodic replenishment every few years as stocks expire. Contracts for definite delivery of definite quantities do not offer private companies the same quality of earnings as regular sales through commercial channels. Startups targeting a government or military customer should use that non-dilutive funding to enable penetration of a larger commercial market if their solution has more than one application. Realistic startups will not get rich on DOD's need for bio/chem war countermeasures, but will instead recognize the useful partnership and validation that comes with DOD research funding.

I am pleasantly surprised to learn that FDA priority review vouchers can be sold in private transactions. Netting a few hundred million dollars for a voucher is a sweet deal. Perusing the FDA's Center for Drug Evaluation and Research (CDER) Small Business and Industry Assistance (SBIA) webpages reveals a whole bunch of tax credits and other incentives for drug developers addressing special situations. Here's a legal path to riches in drugs, kids. Stay away from the ghetto street dealers, earn your MD or PhD, and get Uncle Sam to fund your commercial drug lab.

The NIH's NIAID funds Phase I efforts and helps companies find a transition partner for Phase II. Centers of Excellence for Translational Research (CETR)are NIAID's academic research partners offering subject matter expertise for medical tech under review. The Bayh-Dole Act's procedures for determining exceptional circumstances (DEC) apply to tech transfer in the life sciences, just as they do to other government tech commercialization efforts. Small companies can use Bayh-Dole's leverage in a DEC to get funding if they commit to accelerating a technology's development.

Salespeople know that more frequent contact in highly targeted campaigns gets better results. Raising capital is a lot like selling a product. I will not listen to self-proclaimed experts who sell exorbitantly priced marketing solutions. Cheap or free marketing efforts are best. Scientists who have never left an academic research lab need a business partner who can sell. Just ask the Google founders. Startups staying in stealth mode longer than needed miss out on publicity and fundraising that they need to accelerate. The stealth aficionados need to get out more to see that tech ideas are more common than execution ability.

I want to see good definitions of the clinical research phases that describe the value-added things entrepreneurs can do before Phase I. Some private funders in venture philanthropy break down pre-Phase I tasks in different ways. Entrepreneurs need those things so they can leave stealth mode quickly. They also need good data on unmet needs in medical conditions to guide assessments of viable markets. I found some basic unmet needs descriptions of Parkinson's disease and multiple sclerosis with a Google search. The truth is out there.

It's really great to see the NIH National Cancer Institute's SBIR program offer an I-Corps pilot program. The popular biotech forums like BIO Innovation Zone and AdvaMed's MedTech Showcase are the kinds of places where life science researchers cam meet entrepreneurs. Once they start hanging out together, they can start commercializing government research and jump into I-Corps training. They can start by exploring NIBIB's Biomedical Technology Resource Centers (BTRCs) for data at the BTR Portal that supports a technology's commercial prospects.

Greedy business people can forget about buying influence with the US government. The interest of a powerful government patron means nothing at all in funding tech. Government program managers must follow rigorous guidelines and scientific evaluation criteria when awarding grants and research contracts. Contact with a senior government official may get a private company some feedback on the government's procurement interests, and nothing else. I have to laugh at companies who stuff their advisory boards with prestigious former government people. Lobbying for influence is a waste of money.

The Milken Institute / FasterCures report "Fixes in Financing" from April 2012 is a much better guide to funding success than what any retired political hack could offer. It would be more useful for a life sciences startup to have an advisory board of grant experts, government contracting experts, and NIH subject matter expert reviewers than some Theranos-type board of clueless celebrities. Startups should also read NCBI's 2013 article "Estimating Return on Investment in Translational Research: Methods and Protocols" to appreciate how some government funding reviews incorporate ROI calculations into awards.

It's worth noting that SBIRs can have slightly less stringent requirements than STTRs. The SBIRs can also have broader objectives in socioeconomic development and keeping the industrial base warm. Government managers may just offer SBIR grants to generate some random innovation even if the result doesn't completely meet a procurement requirement.

I suspect that private companies seeking non-dilutive capital may have no clue how to describe a minimum viable product (MVP) using technology readiness levels (TRLs). I want any startup in my private equity portfolio to use those TRL milestones when they submit SBIR/STTR applications or develop cooperative research and development agreement (CRADAs).

Non-dilutive funding saves small company founders from giving away ownership too early in the life of their big idea. Only private industry can do large-scale manufacturing and distribution, so late-stage companies will have to seek dilutive funding for final commercialization. Taking the free money up front from government agencies and non-profit venture philanthropists is always a smart move.

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