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"Our model allows our inventors to focus on their competency, technical, and research sides, and we take over the negotiations and market analysis," said STI cofounder Karen LeVert. While most university business incubators provide space and facilities, STI is among the few that also licenses technology, obtains development grants, and helps commercialize the product. "We try to further develop the technology by getting Small Business Innovation Research (SBIR) funding to get it to a prototype stage so that it's attractive for financing, and then we spin it out," LeVert said.
Through STI, Bioptigen has obtained five SBIR grants worth around $2 million and last August closed on its first round of equity funding—$1.3 million from "angel" investors and private investor groups. "For the angels, the SBIRs validated our technology, our ability to execute on the technology, and also provided a foundation of non-diluted cash," said Eric Buckland, Bioptigen's chief executive. "We're already selling product, and we're staying in touch with the venture capital (VC) community as well as existing angels for future expansion," he said.
Exercise creativity
As increasing numbers of biomedical discoveries are patented, would-be scientists/entrepreneurs need to exercise greater creativity to locate seed and startup funds to launch biotech, drug, medical device, or other life science companies. In many cases, help can be as close as federal and state governments and the local business community.
"SBIRs offer biomedical researchers incredible opportunities to bring their ideas to life," said Jo Anne Goodnight, SBIR program coordinator at the National Institutes of Health (NIH), one of 11 federal agencies offering these awards. Last year, NIH awarded $640 million in peer-reviewed SBIR grants. "We seek to fund the most scientifically meritorious projects for which public and private funds are not normally available," Goodnight said.
Now in its 25th year, SBIR and STTR (Small Business Technology Transfer program for those partnering with universities or research institutes) seek to stimulate small business technological innovation and foster the commercialization of federally supported research. Last year, NIH awarded 684 new Phase I SBIR grants, each worth around $100,000 for six months, and 355 new follow-on Phase II SBIR grants, each $750,000 to $1 million for two years. Phase I awards are intended to establish the technical merit and feasibility of the proposed R&D efforts as well as monitor the performance of the awardee organization. Phase II awards allow the exploration to continue.
Because biomedical innovations, especially involving drugs and therapies, require significant time and money, NIH recently created a new class of SBIR Phase II competing renewal awards. About 25 companies so far have obtained these awards, up to $1 million a year for three years. "These are intended to get awardees into the FDA approval process, to conduct some preclinical studies or submit preclinical INDs," Goodnight said. "It won't get them into pivotal, multimillion dollar studies, but it will start to fill the gap."
SBIR funding also represents a "Good Housekeeping" seal of approval to potential investors. For-NimbleGen Systems Inc., Madison, Wis., a developer of DNA microarrays, SBIR grants not only provided development funds but also represented scientific validation for venture capitalists. "The peer review system process of the grants acted as a form of due diligence for investors, which allowed us to bring in additional funding," wrote company vice president Roland Green, PhD, on an NIH "success stories" website.
Ironically, the VC infusion also disqualified NimbleGen from receiving additional SBIR funds because, since 2003, companies must be more than half owned by individuals, and VC equity investments are typically from financial and other institutions. "We're starting to see a number of companies facing significant challenges due to the eligibility rule," Goodnight said. Neverthless, NimbleGen recently signed a broad licensing deal with industry leader Affymetrix Inc., Santa Clara, Calif., and hopes to go public this year with an IPO.
SBIR and other government grants are additionally attractive because, unlike angel and VC funding, they represent undiluted capital. "Sure it's from the government, and sure it's a pain in the butt, but a dollar from the government is worth a dollar, not the 20 cents it's worth when a VC gives it to you," said John Clerici, a partner with McKenna Long and Aldridge, a Washington, D.C. law firm that represents industry clients seeking government contracts.
Finding your angel
Biomedical entrepreneurs seeking seed and startup funds typically begin by "bootstrapping"—tapping their own savings as well as those from the "3 Fs" (friends, family, and fools) and seeking government grants before approaching outside investors. For life sciences entrepreneurs, this next gap is generally filled by angels—wealthy individuals who are often retired business executives or entrepreneurs who have "cashed-out" and want to help others start and run companies in their fields of expertise.
"Biotech, in particular, has become a mature industry, with a pipeline of high net-worth entrepreneurs comfortable with doing due diligence and able to provide contacts and other help that is the value-added part of their angel investing," said Jeffrey Sohl, director of the Center for Venture Research at the University of New Hampshire-Durham.
Since 2001, VCs have been shying away from supplying riskier seed and startup capital to funding companies further developed or which already have products in place. Last year, only about 5 to 6% of all VC deals were in seed and startup stages, compared with 46% of angel investments. "The gap is widening from when entrepreneurs run out of grants and money from friends and family and when they are large enough for VCs," says John May, vice chairman of the Angel Capital Association and managing partner of the New Vantage Group in Vienna, Va.
There are about 225,000 active angel investors in the U.S. who last year invested $25.6 billion into 51,000 different entrepreneurial ventures, according to the Center for Venture Research. Most of these investments (39% or $10 billion) went to companies in the life sciences, including biotech, health-care services, and medical devices. VC investments last year were in the same ballpark, around $25.5 billion, with 28% going to the life sciences, according to the National Venture Capital Association. But each angel investment averaged slightly more than $500,000 compared with the $5 million to $7 million minimums that VCs prefer.
In a relatively new trend, angels have formed about 200 groups to do larger initial deals and to better participate in follow-on funding rounds. Bioptigen's $1.3 million first round of funding came from the Piedmont Angel Network and the Inception Micro-Angel Fund—a consortium of local North Carolina angels. "Banding together gets you enough money to begin to be meaningful for entrepreneurs," May said.
Still, the VC migration away from startups has exacerbated the $2 million to $5 million funding gap between the seed and post-seed stages, a gap angel groups are increasingly attempting to fill. Here, government help may be in the offing, at least for companies developing biodefense products. A new agency called BARDA (Biomedical and Advanced Research and Development Authority) came into existence this year to coordinate and help fund federal government R&D efforts into vaccines and countermeasures for bioterrorism and natural outbreaks.
While BARDA doesn't have any money for the current budget year, the Bush Administration has requested about $225 million beginning Oct. 1. "BARDA is intended to help companies bridge the ‘valley of death' in biodefense countermeasure development," the gap between early-stage research and product development, where most new products fail, Clerici says.
In addition to SBIR and other federal grants, entrepreneurs should also explore funds available from state governments. Variously called small business development funds, seed funds, and challenge grants, states are increasingly setting money aside for biomedical and other high-tech companies. Some state governments will even match SBIR funds dollar for dollar. "Become aware of your state support system; you don't have to go down this pathway alone," Goodnight advises.
For companies that do things right, success can be stunning. GlycoFi, a small biotech company in Lebanon, N.H., began doing business in 2000 with a proprietary yeast-based protein optimization technology potentially useful for developing, producing, and commercializing novel biotherapeutics. GlycoFi got off the ground with a $25,000 New Hampshire industrial grant, went on to receive $1 million worth of Phase I and II SBIR grants from NIH, and a $2 million Advanced Technology Program grant from the National Institute of Standards and Technology.
Last year Merck & Co. Inc. acquired GlycoFi for nearly $400 million in cash.
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