Funding your biotech startup: Practical advice from venture capital investors

Aaron Steger

Biotech startups are working on critical products and solutions that have the potential to address some of the biggest problems facing our world, from disease and climate change, to hunger and sustainability. Startups need resources and capital to propel their important work forward.

While the current funding environment is favorable (2021 was a record breaking year for venture capitalist investments in biopharma, totaling more than $24 billion according to Evaluate), raising money is still a difficult task. Furthermore, the majority of biotech CFOs expect to increase R&D spending this year according to the 2021 BDO Life Sciences CFO Outlook Survey, making raising funds all the more important.

We chatted with experienced VC partners from Canaan, Menlo Ventures, and IndieBio at SOSV to get their insider perspective on the top things they look for when backing early-stage biotech startups. Read on to learn what they value in CEOs and founding teams, how they size up market opportunities, and what they look for in R&D programs.

It starts with the team

Venture capitalists fund early-stage startups based on the confidence they have in the company’s people, science, and ability to execute. Teams should be made up of people with exceptional abilities in their own right — and whose skill sets complement one another. This demonstrates to VCs that your startup has the tenacity and flexibility to meet early-stage milestones. Below are tips on how to connect with the right people for your team — and why doing so will give you an edge when seeking funding.

Take an honest look at your team’s strengths and weaknesses — including your own

It’s important to be honest about the areas in which you excel — and about the ones in which you don’t. Doing so will provide clarity on whom you will need to hire to fill potential gaps. A team made up of individuals with complementary skills will have improved collaboration, efficiency, and productivity — which are all key qualities VCs consider when making a determination on your startup.

"One thing that’s important to think about as you start your venture is complementary expertise on your team; to round out your own skill set; to be able to accomplish your early-stage milestones. Being reflective about your own skills and rounding out your team early on is critically important in trying to raise capital."

— Julie Grant, General Partner, Canaan

Explore your extended network

Some of the best people for your team may already be those you know well, but it’s also possible you’ve not met them yet. Bottom line, the more individuals you connect with, the greater your chances of identifying someone who is an ideal fit for your team. Reaching out to your extended network is a good way to ensure you’re being thorough and discerning in your search.

"I do think networking is a really important skill to develop as a prospective entrepreneur. Having the ability to find people with different skill sets is absolutely important. Yet oftentimes those complementary skills are not sitting right in front of you or in the lab next door.”

— Greg Yap, Partner, Menlo Ventures

Focus on trust

VCs want to feel confident in their investment. They are drawn to startups that establish smart goals and are reliable in meeting those milestones. Bringing together people who relentlessly pursue their goals will show potential investors your startup can be trusted.

“Because we're not often dropping in on every company to fill the operating roles ourselves, we're trusting the management team and the founder to get the job done.”

— Julie Grant, General Partner, Canaan

Led by a talented founder

In addition to innovative technology, reliability, and a drive to succeed, a biotech startup’s founder will naturally play a significant role in securing funding. Below are some insights on which characteristics and skills set a founder apart in the eyes of a VC.

“We’re not just evaluating whether or not someone has a great technology; we’re evaluating whether or not they can be a great CEO.”

— Julie Grant, General Partner, Canaan

The ability to recruit an exceptional team

The ability to attract and assemble a dynamic, skilled team is not only beneficial for the practical reasons outlined in the previous section, but it also demonstrates that people believe in you, your leadership, and your vision for success.

“Being able to recruit an exceptional team is one of the hardest things about our business and one of the greatest determinants of success. If you can show me that people will follow you, will become your advisor, will give you time and maybe quit their job to join you — there is no better validation than that in the market to capture my attention.”

— Julie Grant, General Partner, Canaan

Conviction in your vision

In order to get potential investors to buy in on your startup idea, it’s essential to show them how much you believe in your approach yourself. With so many different teams working on solving the same problems, this excitement about your mission will differentiate you from the competition.

“We really are looking for an entrepreneur that is going to come in and get us excited about their vision and about why they’re doing it and why they’re unique. What is going to allow you as a company to succeed when there are 400 programs that are near the clinic.”

— Greg Yap, Partner, Menlo Ventures

Clear, concise communication skills

Being able to articulate how your startup’s mission, teams, and technology differentiate you from the competition is a vital step in capturing the attention of a VC and securing funding. It’s important that your pitch meets your audience where they are at and efficiently conveys your key points.

“Being able to succinctly capture the differentiation is important in that early meeting where you’re probably walking in without a lot of depth of understanding of what they’ve been spending years working on. Communicating that quickly is a necessary skill to get that second meeting.”

— Greg Yap, Partner, Menlo Ventures

Who knows how to engage investors

Even founders supported by great teams and ideas can have trouble getting in touch with investors, much less convincing them to write a check to fund their startup. There are several key strategies to keep in mind to make the most of your outreach to investors and increase your chances for success.

Identify which investors are inherently interested in your technology’s value

When identifying a list of potential investors, remember that they are people too, and they each have their own unique interests. For this reason, it’s important that your technology is not only exceptional but aligned to the passions of the investor you’re contacting. Ultimately, this will be a long-term personal relationship, and therefore, it is important to get it right from the very start.

“I do think the introduction serves two purposes. One, that someone can get onto my radar through someone I know — but also so that the person who presumably knows me can match the right entrepreneur with what I’m interested in. I think it’s important that every investor has differences in what we’re all excited about, so that can help really focus us on finding that right match.”

— Greg Yap, Partner, Menlo Ventures

Leverage mutual connections and beyond

As mentioned, a mutual connection can help match you with a like-minded investor. In addition, a warm introduction can also provide credibility and capture the attention of a potential investor, as cold outreach often tends to get lost in the mix.

“The number one way to get funded is an intro from someone else in our network. That’s actually very doable if you think of it as second or third-degree relations. My guess is that I have connections to tens of thousands of people by second degree who may be willing to write an introduction and say, ‘Hey here’s why I think this company is interesting and why you need to meet this person.’ I generally reply to those emails; I think it’s the cold emails that have no connection point that are often the most difficult.”

— Julie Grant, General Partner, Canaan

Understand this is a long term relationship

Investment in a biotech startup is much more than a financial decision. It’s a long term personal relationship where both parties commit to helping each other succeed, no matter the circumstances.

“The investment really is marriage without the possibility of divorce — you’re with this person for a long time. It should be someone you not only know has money but it's someone that actually is a good match for you as a person or as an entrepreneur.”

— Greg Yap, Partner, Menlo Ventures

With a robust R&D and operational roadmap

Have a clearly-defined idea of your vision as a startup — and ensure you are able to communicate that to potential investors. Keep the following requirements in mind in regards to your R&D and operations when seeking funding.

A clear problem statement

Some startups set out to solve problems that have been around for generations; others are working on problems few people even know exist. To this end, it’s imperative to clearly define what you are trying to solve, and why this matters to the world.

“I like to see a clear problem statement: What is it and why is it worth trying to do? Entrepreneurs are trying to do everything, and every startup is hard — so what makes this one worthwhile? And worth the energy and the sweat and the blood and tears of the next several years?”

— Greg Yap, Partner, Menlo Ventures

Unique insight from your previous experience

Biotech startups are built on years of previous experience and education, so it’s important to lean into those credentials when convincing investors to fund your idea. Starting a company based on unique insight from your past experience is sure to get investors interested.

“So many of our founders are also coming out of academia and spinning out. What is the fundamental insight they spent years of their Ph.D. and postdoc on? Whether it's a new way to make protein for human nutrition, a new therapeutic platform, using bacteria to convert carbon dioxide into a high-value product — whatever it is, the fundamental insight that differentiates them is a key part of it.”

— Alex Kopelyan, Senior Director & Partner, IndieBio at SOSV

Think digital early

Being forward thinking will help you in many aspects of building a company, but especially when thinking about how to centralize and standardize your R&D data. Digital solutions will pay dividends for years to come, so it’s best to implement them early.

“Tracking things digitally in the right way will save you a lot of hassle later on, as it often takes 10 years or more for products to come to market and you actually have to document it through lawsuits, so I will just say think digital early.”

— Julie Grant, General Partner, Canaan

Based on the 5 P’s of biopharma success

Raising venture capital funding can seem daunting, but Greg Yap, Partner, Menlo Ventures, has a simple framework for success. Maintaining excellence in the following five pillars will help any biotech startup to impress potential investors.

  • Program: Is the lead program clearly articulable and making good progress towards the clinic?

  • Platform: How differentiated is the platform technology?

  • Portfolio: Will the platform create a successful portfolio of lead candidates?

  • Partnership: Can the portfolio be advanced to the clinic faster through external partnerships?

  • People: Is the team being built with the right people to reach the next level?

Final thoughts

Genuine passion and curiosity are paramount

You can’t buy passion and curiosity, but they are incredibly important for pushing through the challenges of building a company and raising funding. Investors will value your commitment to your company's success.

“In our screening process, we often look for people who really have a fundamental desire to seek the truth around their science, their market, and the best way to build their company.”

— Alex Kopelyan, Senior Director & Partner, IndieBio at SOSV

Be open to chance & enjoy the ride

New opportunities often present themselves when you least expect it. Starting a biotech company and securing venture capital investment is a grind, but it can be incredibly rewarding. It’s important to step back from time to time to reflect and celebrate all the little wins that lead to large accomplishments.

“Really enjoy the ride. Enjoy all the small things; enjoy the tee-shirt competition; enjoy the little piece of data that gives you hope; enjoy drinks with people; enjoy the random encounters at a conference waiting in line for a badge that sometimes ends up being magic. A lot of my co-founders and some of the companies I’ve incubated have been through chance. So, you have to be open to chance. It can be an incredible, magical ride.”

— Julie Grant, General Partner, Canaan

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