This article is written by James Sibi who is pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
Biotechnology is one of the most emerging sectors in the world. Especially in these difficult times, we can understand the need of having more biotech startups. Indian biotech industry is on a growth trajectory and has a significant role in the economic growth of the country. It is expected to grow at an average growth rate of around 30 % a year and is set to reach a USD 100 billion market by 2025. These numbers are significant only to the big players in the industry, a lot of startups are still facing difficulty in raising funds. Currently, there are almost 2700 biotech startups in India. It is expected to grow significantly over a couple of years which could be possibly as large as 10,000 startups.
One of the main obstacles that a lot of Biotech startups face is the difficulty in finding the right sources of funding. It can be very difficult initial years when a lot of funding is required and the risk is also very high. Usually, investors tend to support biotech startups that are doing great in the market and tend to overlook the possibilities of an emerging startup.
The main stages of funding a biotech startup include:
- Government Schemes;
- Private investors;
- Angel investors;
- Bank loans;
- Initial public offering.
Stages of funding a biotech startup
Government Schemes
These are some of the main sources of funding for a biotech startup. These schemes are provided by the government to support and encourage innovations by startups in the field of biotechnology and the health sector. These are especially useful for academicians and researchers who need help in setting up a biotech startup. Given the biotechnology industry’s current growth trajectory, a variety of programmes are available to assist startups at various stages of development.
It is a highly difficult task for a startup to find the right sources of funding. Often startups find it difficult to get loans due to a lack of collateral. Besides, the risky nature of these startups makes investors disinterested in them. In that case, biotech startups can seek the benefits of government funds.
Some of the important funding scheme opportunities are as follows:
- Biotechnology ignition grant (BIG): This scheme started by the government of India aims at providing support for those biotechnology startup ideas that are high risk, technology-intensive and have promising potential. Grants up to INR 50 lakhs can be granted according to this scheme. More details can be found here.
- Social innovation immersion program (SIIP): this program is for social innovators who come up with innovative ideas for medical facilities. The young social innovators are provided with grants to support their idea and a monthly fellowship. The program is implemented through BIRAC SIIP partners. The weblink (Social Innovation Immersion Program (SIIP) – BIRAC) could be accessed to view further details.
- Social Innovation Program for Products (SPARSH): This scheme is aimed at creating and supporting innovations that would make healthcare facilities available and accessible for all. Capital and technical assistance are provided to social innovators who come up with ideas that could bring significant social impact. Sparsh – BIRAC
- Bio design innovation and translation: There is a need to foster India’s medical technologies. One of the most important programs under this scheme is the Stanford India Bio design program which is made in collaboration with Stanford University, USA. Under this scheme, Indian fellows at Stanford are trained which is followed by a second phase wherein the fellows apply their learnings to identify the shortcomings of Indian medical facilities. http://www.dbtindia.nic.in/stanford-india-biodesign-sib-programme/.
Other government schemes for assisting startups include:
- Sustainable entrepreneurship and enterprise development fund (SEED fund): Seed fund provides capital assistance to startups that have meritorious ideas, technologies and innovations. These are done through bio incubators, which assist in the form of infrastructure, mentoring as well as platforms for networking that startups could use in their initial days. Each incubator is provided up to 200 lakhs for implementing seed funds. http://www.birac.nic.in/seedFund.php.
- Accelerating entrepreneurial (ACE fund): To meet the challenges of a startup journey, the government has implemented a scheme that consists of both financial and technical support. http://www.birac.nic.in/aceFund.php
- E-YUVA: A scheme is made to foster research-oriented innovation. http://www.birac.nic.in/desc_new.php?id=262.
- Students Innovations for Advancement of Research Explorations: This scheme is available for college/ university-level students. This is aimed at encouraging students and researchers in the field. http://www.birac.nic.in/desc_new.php?id=261.
Private Investors
A lot of startups depend on funding from private investors. They may be interested in the idea of the biotech startup or the product. It could even be from friends or family where it is easier to convince. It could include investments made by biotech experts.
These may not be sufficient. So, to get a substantial amount of fund startups usually approach angel investors. They are people who invest their capital in new businesses.
An angel investor will usually ask for a bigger proportion of the startup than friends or family. However, you may get an advantage from their experience and advice.
Angel investors prefer to invest in companies that show potential. The startup must be introduced to them from their trusted sources. Angel investors could also be interested in inexperienced startups that have a dedicated team. They could act as mentors and startups can seek guidance from them. So, it is important to discuss with an angel investor how the company can benefit from working with them (apart from their investments).
There are associations called Angel groups that regularly hear from startups and decide on whether to invest in them. The investors will do a screening before investing. It is for the investors to decide on whether they should be active or passive investors. A corporate lawyer is usually aware of some angel investors in an area.
Bank Loans
Before applying for a business loan it is very important to have a comprehensive business model. Unless the startup already has paying customers, it would be difficult to obtain a business loan. If that is not the case, a viable option would be to obtain a personal loan just to get started.
While the amount of funding you receive from “debt” financing (loans, lines of credit, and credit cards) would be lesser than from investors, you prove to investors that you believe in the business and are ready to take risks for the startup.
Venture Capital for biotech startups
Venture capitalists similar to angel investors are interested in large control over operations and decision making but it is a popular source of funding among biotech startups. The venture capitalist will also support the company, assisting with administration, promotion, and network to protect their capital which can be in amounts of money. A venture capitalist will help to recognize possible goals and identify a path to accomplish them. It is important to seek advice from a corporate lawyer before receiving funds from investors.
VCs understand the future of the biotech industry. Well-respected firms are aware of the majority of the issues with the startups in this field.
Venture capitalists do more than just invest in businesses. They may also act as important consultants, guiding a business through various stages of growth. The best venture capitalists have worked in the industry, transforming startups into established companies, allowing them to appeal to entrepreneurs more effectively. They have extensive networks and can assist in the recruitment of and hiring.
Typically, venture capitalists demand a majority stake in the company. Without a doubt, venture capitalists are savvy investors who understand the worth of their capital. If they have more negotiating power, which is usually the case, they will negotiate for more equity than the founders are willing to give up. At the same time, they are not so ignorant as to deny founders their incentive to work.
Finding successful venture capitalists might be a hard task. As a result of the sudden influx of funds, many venture capitalists who may not be qualified to do so are distributing other people’s money. Many people who poorly invested their first fund would not be able to raise money again and will be forced to leave the market.
Receiving funds from a firm with a poor reputation might prevent you from getting funds from good firms later. When looking for a VC, look for one that has a proven track record of co-investing with other credible VCs.
Every year, venture capitalists receive thousands of ideas, many more than they can accommodate, and they focus on those that come from reliable sources. More importantly, VCs specialise in specific industries and are more likely to choose a company that has a specific market practice, innovation, disease focus.
Initial public offer
Going public is typically reserved for larger, more developed businesses, but it can be a useful way to raise additional funds to complete a project and bring it to market. However, selling shares might not be the best of business practices, so the different advantages and disadvantages of an IPO must be evaluated before launching an IPO.
One of the main disadvantages of an IPO is that it increases the exposure of your data. Startups will be under a lot of pressure to deliver short term results even if it means sacrificing long term benefits. But the advantage of going public, such as the opportunity for the promoter to spread their money in the company out in public, exceed the benefits of remaining private.
Conclusion
It is a fact that India is currently experiencing a peak in its working population (15-64 years). With increasing literacy rates and increased R&D spending, the number of biotech researchers and startups is expected to grow exponentially.
With a booming biotechnology industry, India appears to be better positioned than ever to raise private investment in the sector. The private sector will inevitably become more involved in the industry as the number of researchers and research infrastructure improves.
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