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There are a variety of funding sources available for small start-up companies that have generated proof of concept (POC) data, as well as for those companies that have yet to do so and are seeking funds to establish POC. The available sources of financing at this stage in a company’s life cycle will generally include a combination of non-dilutive capital from the federal / state government, angel investors, disease foundations and potentially VC’s and/or industry partners.
At the Federal level, two available sources of financing for start-up companies include the Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer (STTR) program. SBIR grants provide for up to $1.5 million over two years and are geared towards small businesses at the early stages of R&D. STTR grants provide for up to $1 million of funding over three years and are focused on small businesses that have a formal cooperative R&D effort with a US research institution. The total available funding for these programs in FY2012 was approximately $715 million.
Angel investors and disease foundations represent two additional sources of capital early during a company’s life cycle. Angel investors who may have a specific interest in the area of research due to personal or other altruistic reasons should be considered. For example, Tech Coast Angels (based in San Diego) has invested over $120 million in 200+ companies across a variety of industries. Disease foundations such as the Michael J Fox Foundation, The Muscular Dystrophy Association and the Juvenile Diabetes Research Foundation (to name a few) all invest in early stage R&D and represent an alternative source of capital prior to more traditional funding sources such as venture capital and industry partnerships.
In addition, foundations such as The Thiel Foundation’s Breakout Labs provide funding to “spur innovation by filling the funding gap that exists for research and development outside the confines of an academic institution, large corporation, or government facility.” Brekout Labs funds transformational ideas and will generally not consider applications from companies that have raised over $1 million.
Once proof of concept has been established, the available sources of funding may broaden to include traditional venture capital investors and industry partners. VC’s each have unique styles and there are several firms in the life sciences space that will typically invest before a product reaches human clinical trials, such as Third Rock, Atlas and Versant (to name a few). Other VC’s prefer to wait to see human clinical data. Traditionally, to generate interest from Big Pharma (although not always) human proof of concept data was required, however, given the lack of productivity in their pipelines, the breadth of late stage product failures, and the need to externalize R&D costs there has been a general shift in the landscape and Big Pharma has recently been willing to invest in earlier stage assets.
Overall, early stage start-up companies have a variety of funding alternatives to help advance their technology and will typically need to secure funding from multiple funding sources to be successful. These will typically include the federal and/or state government, angel investors, disease foundations, other non-profits organizations as well as more traditional sources of financing such as venture capital investors and industry partners. Once proof of concept has been established, the more accessible traditional sources of funding will become, however, it will come at a cost and so alternatives forms of non-dilutive financing should still be pursued.