Hurdles and High Jumps – Chapter 3: Show Me the Money!
Research scientist-turned-investor Alex de Winter helps you run the funding gauntlet
Rich Whitworth | | 4 min read | Learning
In May 2022, we launched a short survey asking you about the challenges on your translational journey – thank you to everyone who has got involved so far (it’s not too late to get involved)! Using your anonymous responses and questions, we’ve been busy seeking out mentors to help you – and many other translational researchers who face the same problem.
For Chapter 3 (and – spoiler alert – Chapter 4), we tackle a hurdle raised by many survey respondents – and one that will inevitably attempt to trip up all translational scientists at some point or another.
“Looking ahead, I want to know when and how to obtain different kinds of funding – and why!”
– Anonymous survey respondent, July 2022.
At what stage(s) should translational scientists start thinking about funding? What specific points should translational scientists keep in mind?
Translational scientists, at least those who are at startups, should always be thinking about funding. Specifically, how much funding will it take to get to the next proof point, whether that’s an in vitro proof of concept, a demonstration in a model system, or a clinical trial. Keeping in mind that it’s impossible to schedule innovation, it’s a good idea to forecast capital requirements needed to reach each of those milestones and then plan for how to fund those milestones.
What are the pros and cons of different sources of funding?
- Pro: Relatively quick and easy source of capital.
- Con: Can strain personal relationships, if the angels are family and friends.
- Con: Angels may have shorter investment horizons, so may want their money back before the startup is ready to exit, leading to strains between the founder and investor
Grants/Small Business Innovation Research (SBIR) funding
- Pro: Non-dilutive funding
- Pro: Limited oversight (no one looking over your shoulder)
- Con: Takes time and effort to apply for the grant
- Con: May not be that much funding relative to the effort and time required to secure funding
Venture capital (VC) investors
- Pro: Can provide large amounts of capital
- Pro: Usually provide good advice on building companies, managing through business hurdles, and hiring
- Con: Takes a lot of effort to raise funding from VCs (have to pitch many firms, be on the receiving end of endless diligence calls)
- Con: Some VCs are better than others (do your research)
Corporate venture capital (CVC) investors
- Pro: Can provide connections to parent corporation for expert advice and partnership opportunities
- Con: Usually don’t write large checks
- Con: May add strings to their investment (find out why they are investing)
- Pro: Finally, an exit for the founders, employees, and investors
- Pro: Can provide significant capital at the time of the initial public offering (IPO) and through later sales
- Con: Public investors have shorter investment horizons and will punish company (lower share price) if it underperforms quarter to quarter
What’s the main pitfall for scientists attempting to secure funding?
Going for venture investment too early – either before the technology is mature enough or because the actual investment pitch isn’t as polished as it could be.
To help make the technology more mature, it’s generally a good idea to apply for grant/SBIR funding. Such funding can get the research to a more advanced state (de-risking the technology), is non-dilutive, and provides another point of validation (to investors) that the research is worth further investment.
It’s true that you don’t get a second chance to make a first impression, so scientists should make sure their pitch is really ready before going out for venture funding. There are many resources out there on how to make a great investment pitch (for example, Pillar VC has an excellent series of videos).
Meet Your Mentor, Alex de Winter
After a stint at Pacific Bioscience as a senior scientist, I’ve worked at three different VC/CVCs – Mohr Davidow, GE Ventures, and now Danaher Equity Ventures. At each place, we’ve selectively funded seed stage startups, where there is just a proof of concept and the scientists need funding to start a company, hire a management team, license the technology, and repeat the experiments outside of the academic lab.
When it comes to seed investing, the Valley of Death feels very real – there is inevitable risk. But the rewards are also very real. And there’s a reason I’ve been in this game since 2009.
Alex de Winter is Vice President of New Ventures at Danaher Corporation, Cambridge, Massachusetts, US.
What advice can you offer to someone seeking funding at different stages along their translational journey?
Network to find a friendly founder who can act as a mentor, ideally someone in a similar but not necessarily competitive field who has successfully started a company and/or received investment. You may be able to find a mentor through the alumni network at your university or through LinkedIn. The mentor can help you with the initial process of starting a company, reviewing your grant or investment pitch, and can help you navigate some of the pitfalls associated with running a startup. Also, if the mentor is high profile enough (and once you’ve formally incorporated a startup), you may want to add the person to your advisory board or board of directors, to formalize the relationship and give the person a stake in your startup’s success.
Just how competitive is the funding landscape for translational research?
It has always been competitive, thanks to a well-documented “Valley of Death” for startups transitioning from preclinical proof of concept to clinical trials – caused by management issues, technical/scientific challenges, business model failures, or a combination of the three. Though there are grants (and some seed investors) available to fund early R&D, it is much more difficult for researchers to find the money to advance these experiments into the clinic. Many of these discoveries fail to obtain the funding needed to progress beyond the lab bench, which further contributes to the Valley of Death. Unfortunately, the recent downturn in the public markets and resultant pullback in venture investing will make the funding of translational research much more challenging, as VCs may become more risk averse.
How has the pandemic affected that landscape?
The pandemic temporarily increased funding for technologies related to COVID-19, so new tests and vaccines made it to market under the FDA’s Emergency Use Authorization. The funding that brought those technologies to market wasn’t technically translational funding, but the surge of funding (and interest) in diagnostics and therapeutics had a knock-on effect, increasing translational funding for earlier stage technologies that could also address the pandemic.
Much of translational research is funded by healthcare VCs (at least, by the early-stage VCs). According to Silicon Valley Bank’s Healthcare Investments and Exits 2022 Annual Report, the amount of capital that Healthcare VC firms raised to invest (at least partly in translational research) increased by 14 percent annually from 2011 to 2019 (from $3.7B in 2011 to $10.7B in 2019). Then, from 2019 to 2021, that amount jumped by 63 percent annually (to $28.3B in 2021). That’s a huge increase in money available for translational research. And it’s not all due to the pandemic, the last two years also saw an unusually active IPO market, which allowed private companies to go public, increasing the returns of VC firms and allowing them to raise more money.
This huge amount of VC funding seems at odds with my earlier statement that it’ll be more difficult for startups to raise translational funding, but VCs will likely use their giant funds to support existing portfolio companies (which will be less able to raise funds in the public markets) and generally will be unwilling to fund riskier research because the good times are on pause (or maybe the good times are over).
Can you share an example of (stellar!) success when it comes to getting a venture off the ground?
I would say that Pacific Biosciences, where I worked as a research scientist, is a case study in funding success! The company spun out of Cornell University after receiving seed funding from Cornell’s student-run Big Red Ventures (BRV) fund. Pacific Biosciences then raised Series A from Mohr Davidow Ventures, received grant funding from the National Human Genome Research Institute’s $1,000 Genome Program to help extend the runway, then added funding rounds and investors ($350M in private investment) until it went public in 2010. It’s now a one billion dollar company that makes an instrument for long-read DNA sequencing…
Any final advice on the topic of funding for translational research?
Apply for a grant with the National Cancer Institute SBIR program! I’m somewhat obliged to say that, as I review grants for the NCI – but, if your translational research is geared towards helping cancer patients, there are few better sources of early stage funding.