How much capital do you (actually) need?

Greetings everyone and happy Sunday!?

Your feedback and engagement with the inaugural issue was nothing short of inspiring - thank you!?

Whether you were an experienced life sciences veteran who reached out and offered to be an advisor, an investor who was interested in early-stage companies better aligned to their investment thesis, or a founder who reached out to work together, I am incredibly humbled and grateful. Please keep the ideas and feedback coming!

Today, we dive into the important topic of your first investor funding - the why, when, and how.?

This is a topic that many of you expressed a keen interest in and one that’s surely top of mind in the current funding environment. This is also a very rich topic, so we'll be breaking it down into a multi-part series and some free resources (see the link at the bottom of this issue for some goodies ??).

Today we will focus on the limiting factors of academic grants, and how to estimate your funding requirements. In the following issues, we will explore how to communicate this depending on your audience, the types of funding instruments available to you as a founder, and how to set yourself up for success as you begin to have your first conversations with investors.

So, grab a cup of coffee ? and let’s jump in!?

First, let’s set the scene. You’re an early-stage founder. You’ve successfully spun your technology from an academic lab and are supported by academic grants. However, as you consider the journey to filing the IND (Investigational New Drug) application or entering Phase 1 trials for your lead asset, several limiting factors appear:

1. Scope of Funding: Grants often provide funding for specific research questions or projects and typically cover salaries, materials, and direct project costs. However, they usually do not fund the broader operational and administrative costs necessary to run a startup, such as legal, HR, patent filing, regulatory consulting, facilities, and more.

2. Size of Grants: The funding provided by academic grants, while significant, often falls short of the tens of millions of dollars typically required to conduct the extensive preclinical research, IND-enabling studies, and Phase 1 trials.

3. Time Constraints: Grant funding operates on fixed timelines and often requires regular progress reporting. However, scientific research can be unpredictable and may not align with these schedules. Moreover, the application and review process for grants can be time-consuming, which could delay the progression of the project.

4. Dilution and Control: While academic grants do not dilute founder equity or exert control over the company's direction (a significant advantage), they also do not provide the strategic guidance, industry networks, and market-oriented direction that investors can bring.

5. R&D Focus: Academic grants are primarily designed to fund research, not the development, manufacturing, or commercialization aspects that are integral to bringing a therapeutic product to market. These later stages can be even more capital-intensive than the initial research.

With this in mind, you may ask yourself, “How much funding does my startup actually need?” The answer isn't straightforward because the funding requirements can vary dramatically depending on the type of technology, the stage of development, the targeted indications, the strategic plans for growth, and many other factors.?

But, here are some key considerations and potential milestones to guide your financial planning based on your stage of development:

1. Drug Discovery and Preclinical Development: The first stage of biotech development involves identifying a viable therapeutic target and conducting early-stage laboratory research. This can be a time and resource-intensive process requiring funds for research personnel, lab equipment, reagents, and consumables, and may also include costs for early-stage patent filings.

• Milestones: Discovery of therapeutic target, successful laboratory research, identification of lead compound.
• Cost Sub-categories: Research personnel (scientists, lab technicians), lab equipment and upkeep, reagents and consumables, data analysis and storage, and early-stage patent filings.
• Factors to consider: Your burn rate during this phase will heavily depend on the complexity of the technology, the need for specialist expertise, and the duration of the discovery phase. It's crucial to have a clear research plan and timeline in place.

2. IND-Enabling Studies and Regulatory Submission: Once you've identified a promising drug candidate, you'll need to conduct additional studies to apply for an Investigational New Drug (IND) application. These preclinical studies often involve in-depth in vitro and in vivo testing, toxicology studies, and the production of the drug under Good Manufacturing Practice (GMP) conditions. You’ll also need to consider costs for regulatory consultants and the actual IND submission to the FDA.

• Milestones: Successful completion of in-depth in vitro and in vivo testing, toxicology studies, production of the drug under GMP conditions, and IND submission.
• Cost Sub-categories: Testing, manufacturing, regulatory consultants, IND submission fees, data management systems, and further patent filings.
• Factors to consider: Understand the regulatory requirements and consult with experts to ensure your studies meet FDA criteria. Depending on your therapeutic modality, consider the manufacturing complexity and cost early on.

3. Clinical Trials: Clinical trials are often the most costly part of drug development. You'll need to factor in costs related to patient recruitment, clinical site costs, manufacturing at a larger scale, data management, and regulatory oversight. Remember, costs will increase with each phase, and there could be unexpected expenses.

• Milestones: Successful patient recruitment, completion of Phase I, II, and III trials, data analysis, and preparation of a New Drug Application (NDA).
• Cost Sub-categories: Patient recruitment, clinical site costs, large-scale manufacturing, data management, regulatory oversight, clinical trial insurance, and NDA submission fees.
• Factors to consider: The cost of clinical trials depends on the number of patients, the complexity of the trial design, and the trial duration. The clinical indication you are targeting also plays a crucial role. Rare diseases might have smaller, but more complex and costly trials. Larger indications might need larger trials but might be easier to recruit for.

4. Infrastructure: As your company grows, you'll need to invest in infrastructure, such as expanding your team, investing in specialized software for data analysis or project management, and potentially leasing larger lab or office spaces.

• Milestones: Team expansion, acquisition of specialized software, relocation or expansion of lab/office space.
• Cost Sub-categories: Salaries, recruitment costs, training, software licensing fees, lease or rent payments, utilities, equipment, furniture, maintenance.
• Factors to consider: The timing and rate of team expansion should align with your growth strategy. Be mindful of the cost of living and competitive salaries in your location.

5. Intellectual Property (IP) Management: Protecting your IP is crucial in biotech. You'll need resources for patent drafting and prosecution, possible patent opposition proceedings, and maintaining issued patents.

• Milestones: Patent filing, patent issuance, maintaining patent portfolio.
• Cost Sub-categories: Fees for patent drafting and filing, patent attorneys, opposition proceedings, maintenance of issued patents, and international patent filings.
• Factors to consider: Developing an IP strategy early on is critical in biotech. Balancing the need to protect your invention with the high cost of patenting is essential.

6. Business Operations: Beyond research and development, don't forget costs related to business operations, including salaries for non-research staff, legal and accounting services, insurance, marketing, and sales.

• Milestones: Establishment of legal and accounting processes, setting up of insurance, execution of marketing and sales strategies.
• Cost Sub-categories: Salaries for non-research staff, legal and accounting services, insurance premiums, marketing and sales expenses, travel expenses, professional development.
• Factors to consider: The scope of business operations will scale with the growth of your company. Ensure to budget for these less obvious, but essential costs.

7. Contingency Planning: Biotech development involves a high degree of uncertainty and risk. You should factor in a contingency amount for unexpected costs, delays, or roadblocks.

• Milestones: Any unexpected roadblocks or delays.
• Cost Sub-categories: Unpredicted experimental costs, additional personnel, unplanned regulatory hurdles, and market changes.
• Factors to consider: It's prudent to set aside around 20-30% of your budget for contingencies given the high uncertainty in biotech development.

Understanding your financial needs is the first step in creating a robust fundraising strategy. In the upcoming posts, we will discuss strategies for securing this funding. We'll explore how to create an attractive proposition for different types of investors, the types of funding instruments available to you as a founder, and some best practices as you begin to have your first investor meetings.?

Did you find this post helpful? Are there any major funding categories that we missed, or is this breakdown shifting with the current funding challenges ? Is the cost to get a biotech off the ground lower now than it was before due to technological innovation ? Let me know, I would love to hear about your experience!?

As always, thank you all for your support, and see you in the next one!

Best,?

Vadim

PS: Are you creating this type of budget in Excel and are annoyed because no one should have to do it from scratch? I couldn’t agree more, so I created a template that captures these categories and over 80 itemized sub-categories over a 5-year horizon, which I am fondly calling the Biotech Founders’ Pocket Budget Calculator ?? Grab it here for free and let me know if you find it helpful!