Bringing innovative ideas and technologies to market in the highly competitive life science industry is a challenging task for companies. To raise the investment needed to achieve this goal, venture capital is a popular option, but it is often a time-consuming process and hard to secure. Particularly early-stage companies looking to reduce pressure and maintain control are exploring innovative ways of funding their business. Here are some non-dilutive financing options to consider when raising capital.
What is non-dilutive financing?
Unlike equity financing, which is a dilutive option, non-dilutive financing enables companies to raise capital without sacrificing equity or control. This type of funding does not change the company’s capital structure and is especially attractive to life science companies in their early stages of development, as it offers more flexibility and allows them to extend their cash runway, preserving equity for later rounds of financing.
Here is a list of some of the most common non-dilutive financing options that are worth considering for life science companies.
Venture Debt
Venture debt is typically used by early-stage biotech companies that have already raised equity capital and are looking to expand their operations or launch new products. Life science start-ups can most likely receive debt from government (grant-like), existing investors but possibly also from private equity firms or banks from which they borrow money and pay back the loan over a set period of time, with interest. Fully commercial-focused lenders will typically require securities for the loan. To raise this type of loan, it is important for biotech start-ups to be able to present a solid business plan demonstrating the ability to generate revenue.
Venture debt can be a suitable funding form for several reasons:
- It helps bridge the gap caused by long development periods associated with high costs.
- Companies don’t have to give up equity or control.
- It offers more flexibility regarding the use of funds as the loan can cover a variety of operating expenses instead of growth funding only.
On the other hand, companies should take into account potential risks and drawbacks:
- Risks involve the inability to repay debt if planned milestones or clinical data aren’t met on time.
- The company may be unattractive to new investors if it is still paying off a debt.
- Be aware of potentially high interest rates.
- Venture debts can include restrictive terms that may negatively affect strategic decisions.
- Lenders require securities to secure loan.
If debt is later converted into equity, so-called convertible debt, it can combine the advantages of equity and debt and eliminate some of the downsides of the two instruments as well.
Government research or industry grants
Funding from foundations, non-profit organizations or government agencies like the U.S. National Institutes of Health or the European H2020 program are another popular non-dilutive funding choice.
- The good news is that there is usually no need to pay back the grants.
- However, grants are typically awarded for specific projects or initiatives that align with the goals of the funding organization and therefore come with strict requirements regarding the scope and reporting.
Crowdfunding
Crowdfunding allows life science companies to raise capital from a larger number of individuals, usually through an online platform. Companies launch a campaign outlining their business plan and (funding) goals. Often, investors can contribute funds in exchange for rewards, such as products or services, instead of repayment.
Pros include:
- It can be particularly useful for companies in their initial growth phase that are looking for seed funding to get their business off the ground.
- Crowdfunding provides exposure and helps promote a company.
While on the downside:
- This financing option is competitive and often unpredictable.
- It often requires a lot of effort to meet regulatory requirements, and ensure the company can deliver on the rewards.
- For Biotech companies requiring big amounts with long investment timelines and not being able to provide short-term products or services in exchange, often this is a difficult avenue.
Revenue-based financing (RBF) or Royalty financing
RBF provides companies with capital in exchange for a portion of their future monthly revenue without sacrificing control or diluting existing shares. The amount that will be repaid (usually within the space of a few years) is tied to the company’s revenue – if the revenue grows, the repayment amount will increase, and vice versa. Royalty financing is similar, where a company sells its future royalty stream for an up-front cash payment, thus able to pre-finance future revenues. The amount is calculated based on the time and risk involved in receiving the royalties.
- RBF is a valuable option for early-stage companies to support growth as it usually comes with more flexibility.
- However, it is crucial to carefully consider the terms as they may require the repayment of a high percentage of the company’s revenue down the road.
- The company can reduce its risk exposure but will also not participate in the up-side.
In conclusion, non-dilutive financing options, such as venture debt, can be an interesting choice for life science companies to create value over a short period of time when needed as a bridge until the next capital injection. But it is essential to carefully weigh the advantages as well as potential risks to find the right option for your company’s needs.
Summary:
| Debt Financing | Grant / Government | Crowdfunding | Revenue, Royalty Product Financing | |
| Size | Open | < EUR 3.5m | Open | > EUR 7m |
| Company type | Mature companies | Innovative, R&D, early stage | Early stage with B2C product | Mature, later stage |
| Total capital requirement | High | All | Low | High |
| Exit | Repayment | None | Repay / None | none |