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Non-dilutive options are a critical part of seed financing

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Non-dilutive financing is an expected and integral part of early seed financing, according to panelists at the 2019 Biotech Showcase session Early Seed Alternative Financing. The various options, however, have unexpected undertones that can tie up company assets for years.

The lesson, panelists say, is to read the fine print and always have a Plan B. “People always look at the lead program, but not necessarily the backup strategy,” Natalie Dakers, president and CEO, Accel-Rx, says. Yet, monetizing the secondary programs can provide the influx of cash young companies need to retain control of their lead assets while still fueling growth.

Non-dilutive options are a critical part of seed financing-1

Several different kinds of monies are available to support early-stage companies. Angel investments, family and friends raises, NIH grants, scientific development funds, regional tax credits, collaborations with research centers, and grants from disease-specific foundations and patient advocacy groups can help a company get started. In Great Britain, organizations like Innovate UK are another option. “A lot of JLABS companies are funded only by SBIR grants,” Lesley Stolz, head, JLABS CA, Johnson & Johnson Innovation, points out.

Accelerators are options, too. While JLABS doesn’t take an equity stake in its companies, Canadian-based Accel-Rx does. Dakers formed it to bridge the funding gap between seed and Series A financing. Unlike many accelerators, Accel-Rx actually invests financially in the companies it supports. Because of this vested interest, it spends a lot of effort building the management team, board and scientific advisors to maximize the chances of success.

Surprising undertones to some early options

It seems obvious, but for whatever form of financing you obtain, “read the fine print,” Hakan Goker, senior investment director, M-Ventures, says. Determine the obligations associated with accepting this money. “Imagine where the company will be in 10 years’ time and look back. Did you need this money and should you have taken it?” he asks.

For example, Stolz says, “some of the foundation money comes with payback provisions. Many are looking for a 300 percent return on investment. Others have time frames associated.”

Grace E. Colón, president and CEO, InCarda Therapeutics, Inc., agrees. “You get nothing for free. Investors always want something in return.” For instance, the terms of funding may lock companies into completing programs that, in the long run, may be tangential to the company’s mission. “If you have limited resources, it can be challenging to finish this obligation” and still take the company in the right direction.

The bottom line? “Read the fine print. Be mindful of the scope of the license, milestones and how you negotiate options,” Colón says.

Licensing dos and don’ts

Early-stage licensing is becoming increasingly valuable in certain therapeutic areas, and especially in oncology. “It’s not truly non-dilutive, but can be incredibly useful if you’re careful about what you partnering and which part of your platform you license,” Stolz says.

In a mouse-seeking-elephant situation, the potential licensee may want more than you’re willing to give. Yet, the potential partner may only need to license the product rather than the entire platform. It’s important, therefore, not to get carried along by the prospect of a fresh influx of capital and lose sight of the goal. Before negotiations begin, define what constitutes success for this deal and for the long-term life of the company. Determine how licensing options—and whether or not they’re exercised—affect your ability to raise funds later.

Before out-licensing, “Entrepreneurs and board members should determine why they want to take this route,” Goker says. Getting up-front cash is an obvious reason, but others include gaining big pharma validation to distinguish the company from its competitors and gaining insights that can be applied to the overall platform.

“Be careful to work with companies that are aligned to your vision,” Dakers cautions. “Young companies are under pressure, but there are many different types of investors. If you’re not on the same page, it can make for a rocky relationship.”

Seed the field with excitement for your company

Your scientific advisory board’s role is not only to provide advice but also to help excite researchers and physicians about your approach. Colón says this was part of her responsibility while at Gilead. “We ensured we had the key names in the field on board,” she says. They provided expert insights that helped us choose the best study design and the best animal models, but they also lent invaluable cachet to our programs. “When you drop their names in meetings, potential investors see that thought leaders are as passionate as the entrepreneurs. That’s worth its weight in gold.”

Ideally, you should have a broad phenotype of advisers whose collective expertise ranges from scientific to commercial, Goker says. Also, plan an exit strategy for your scientific advisors that ensures you can easily refresh that expertise to meet current and future needs.

At Encarta Pharma, the practicing physicians’ excitement about the technology being developed was integral to fundraising, Colón recalls. That belief was so substantial that individual physicians wrote checks of $25,000 to fund the company. That’s a powerful endorsement that resonates with other investors. But, when you take this approach, you also must commit yourself to listening to their advice and taking their concerns and insights seriously.

Have a clear sense of your own goals

The panelists each advise choosing investors strategically. “Investors all want to see different milestones, so you need to have a clear rationale about how you need to use your funds to maximize the chances of success,” Colón says.

“Have a clear sense of your plan,” Dakers adds. “Know your commercial pathway, specific goals, and the type of investors who are most aligned with your vision.” Ultimately, the milestones that are important to building your company also should be important to your investors.

Non-dilutive options are a critical part of seed financing

To reach this understanding, talk with many potential investors or partners well before you need funding. Not fixating on money enables a better discussion and helps you understand what they expect to see at certain stages before they will consider investing. “It’s free advice,” Colón says. “Track who you spoke with and when, and go back to them when you reach the milestones they consider important.” Then, when you are ready to discuss funding, they already know you and your company.

That final advice underscores the importance of working within the biotech ecosystem. When funds are flush, generalist investors enter the field. While this is tempting, “it’s better to work with people who really understand biotech. If investors don’t understand this area, they may have unrealistic expectations.”

Rather than accepting any cash that comes your way, put in the work now to ensure that the funding you obtain enables your company to attract the later-stage funding it will need to grow long term. Seed financing alternatives are not all equal, and not all are good for growth.


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