Where Einstein Meets Edison

To VC or not to VC, that is the question

To VC or not to VC, that is the question

Feb 8, 2012

Most pharmaceutical biotechnology companies get their start through venture capital (VC) funding and years of research & development to move their promising technology into (and sometimes even through) clinical trials. Such success is often met with a lucrative partnering/licensing deal or in some cases a buy-out or merger and a payday for investors.

But at what cost? Traditional funds aim for 3-7 year liquidity timelines, which hardly incentivizes long-term growth business strategies, let alone responsible science. Would anyone care to bet whether any data has been fudged or even fully forged to push through a pre-clinical or clinical trial for the sake of getting a buy-out offer? I shudder at the thought, but it is not totally unfathomable. Consider cases like BioPure Corp., which rushed for approval even though clinical trials indicated that its blood substitute was ineffective and unsafe (1), or the recent report that the science underpinning Sirtris’ longevity therapy may be incorrect (2).

Before we get sidetracked by horror stories, let’s consider a less nefarious but more common side-effect: VC funding significantly dilutes founders’ equity. Consider yourself an academic who has a promising new compound or drug development platform. A VC analyst might grant you a pre-money valuation of a few million dollars, which at first blush seems like a flattering assessment: your hard work and government research grant grew into something worth millions of dollars! The trouble is that in order to convert your preliminary data into a product validated in clinical trials, and make your putative start-up interesting to a pharmaceutical company’s M&A (mergers and acquisitions) division, will probably cost on the order of $30M. At those rates, even if you are very crafty with creating funding rounds and taking on technical risk, you’ll probably come out owning < 10% of the company. Not a disastrous proposition if you’re able to sell the company for 100s of millions of dollars; but even then why should you have to share in the value that you and your technical team created?

The reality is that to develop a new drug, you’ll need that money. Sure, you can run a “lean” start-up, but R&D (research and development) is expensive, especially when you start to talk about clinical trials, and there isn’t really any way around it. So if you’re a young innovator or even a seasoned academic how do you capture the most value? Depending on how daring you are or how much faith you have in your technology, the answer might be grants, angels, or incubators.

A fairly standard piece of advice for many academics is to continue applying for grants to get free (read “non-dilutive”) money from the government to continue development, but the progress that can be made this way is somewhat limited because of the size of the grants. The largest of these provide just a few million dollars over several years. Such amounts may be sufficient to support a few graduate students and their work, but not a set of professional R&D scientists or clinical trials. But one nice feature of government grants is that they come in many different formats tailored to your situation, whether you need money for follow-up work in your lab or for getting your start-up off the ground there exist appropriate grant programs for either (i.e. RO1 vs. SBIR) (3). And if you find your niche in the government grant space, the money can sometimes be easier to get than from a VC firm.

Now that you’ve taken your technology further than you thought necessary in the lab, perhaps you’re ready to charge out on your own. To keep you above water in your new start-up, you’ll need money, but you don’t want to take VC money yet because there’s still value to capture. There are still a couple ways to run lean: angels and incubators. In my last article, “No CEO? No Problem”, I wrote about the powers and success of biotechnology incubator programs. There I referenced Accelerator in Seattle and BI3 here in Cambridge, and there are also university associated programs such as the Sid Martin Biotechnology Incubator at the University of Florida and the QB3 Garage@Berkeley. Incubators can offer an opportunity for low-overhead cost lab space to continue research in your small company and in some cases can help align you with potential customers or buy-out candidates. Meanwhile you continue to create value through focused pre-clinical research.

But to do that you’ll need some money and one useful way to get it is from angel investors. Finding an ideal angel investor can sometimes be tricky, but the effort to find them can certainly be worth it. The process involves tapping your professional network and reaching out through it. You should have an idea of what the profile of your ideal angel looks like before beginning your search. Angels with relevant industry experience and connections as well as aligned incentives can bring value beyond their investment dollars. Just like VC investors, angel money is usually given in exchange for equity, but the smaller total amount of money means that you’ll give up less equity and if it can be structured as a convertible note then you’ll have a chance to increase your valuation perhaps through an important inflection point before exchanging equity.

The approaches described above certainly require more effort than would be required to simply raise a large VC round to start a high-profile pharmaceutical biotechnology company. But that effort would likely translate into a great payoff in terms of improved valuation at the end of the prescribed activities. Barring technical setbacks, taking advantage of the above may tailor your company for acquisition, or at least position you well for a positive valuation in a future growth VC funding round.



  1. BioPure files Chapter 11, plans sale http://www.boston.com/business/healthcare/articles/2009/07/18/cambridge_biotech_firm_biopure_files_for_bankruptcy/
  2. Glaxo stops study of Sirtris “Red Wine” drug in cancer patients. http://www.xconomy.com/boston/2010/05/05/glaxo-stops-study-of-sirtris-red-wine-drug-in-cancer-patients/
  3. NIH RO1 Research Project Grants are designed for traditional investigational programs, while SBIR Small Business Innovation Research programs are hosted by almost every government agency specifically for small businesses.
Christopher M. Pirie, PhD


Scientist & Co-founder, Manus Biosynthesis";s:15:"profile_teambio";s:432:"Dr. Pirie is a scientist and co-founder at Cambridge, MA based Manus Biosynthesis. Chris earned his PhD in Biological Engineering from MIT in 2011 where his thesis research was focused on therapeutic protein engineering and he was a recipient of the NSF Graduate Research Fellowship. Also while at MIT he served on the Institute Committee on Intellectual Property and served as a writer and editor for the Entrepreneurship Review.";s:11:"profile_bio";s:1019:"He received his Bachelors degree, cum laude with college honors, in Bioengineering from the University of Washington where he studied intracellular drug delivery. In addition to his academic research he has served as a student representative to the Institute Committee on Intellectual Property where he helps guide MIT policy on important IP issues like open source publishing and patent reform. While at Washington he served on the Bioengineering Curriculum Committee pushing for improved course work in molecular transport and mathematical modeling. Born in the San Francisco Bay Area, he grew up in Seattle and now lives in Cambridge. As a life sciences editor and writer for MITER he sources primarily research focused articles with tangential, intellectual excursions into ideas on venture capital and technology translation. Chris enjoys sailing the Charles River, reading classic literature and astrophysics books, traveling to places other people only read about, and BASE jumping off the Green Building.