Non-dilutive financing to power your leverage startup – part 1

Mar 08, 2019
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In this post, we will discuss the use of non-dilutive financing to incubate early-stage technologies with commercial potential prior to company formation. This strategy is designed to advance technologies originating from, or based in, an academic environment. In a later post, we will explain how the non-dilutive financing strategy can evolve when the startup company is founded.

Non-dilutive finance and the Leverage Startup

Non-dilutive financing is a central tenet of the Leverage Startup Model. This model is a capital-efficient vehicle to advance research-intensive technology, through its earliest and riskiest stage, toward commercialization. The Leverage Startup is designed to leverage established resources available to the biotech community: non-dilutive financing, R&D facilities, technical expertise and commercialization resources, and could be used to advance technology in several distinct environments, from an idea incubating in an academic laboratory to an emerging technology in an established company.

Non-dilutive financing can create value prior to company incorporation

The savvy entrepreneur will consider a non-dilutive financing strategy as a vehicle to develop the technology prior to licensing intellectual property (IP) and creating a company. Innovation emerging from an academic institution can be significantly de-risked and/or expanded in scope using pre-company non-dilutive funding. Used strategically, these funds can positively impact the short- and long-term success of a future company, and are frequently necessary to advance a technology sufficiently to attract future investment. This category of non-dilutive financing can be sourced from research grants, translational grants and translational centres, which are discussed below. Before embarking on this strategy, the entrepreneur should ensure that the academic institution’s technology transfer office agrees in principal to license the technology to the proposed start-up company; otherwise, a third party may benefit from these pre-company dollars.

Non-dilutive financing is not necessarily “free”

Prior to engaging a non-dilutive financing strategy, it is essential to recognize that this money is not necessarily “free” and potential company founders should carefully assess the costs, and other pros and cons of each potential funding source. We will highlight the potential “cost” of research dollars using examples from North America, which reflect our experience as founders of a biotech start-up based in Vancouver, Canada. Please add any additional sources and insights from North America and other regions to the comments below.

Research grants

Basic research grants provide the greatest diversity of opportunities, and cumulatively the largest source of funds to support research in an academic laboratory. These grants range from small-scale seed grants for risky research (no preliminary data) to large-scale, multi-year grants to support multi-faceted programs (preliminary data required). These grants offer not only much needed dollars, but also an opportunity for the entrepreneur to build, and test drive the start-up team, prior to incorporation (we will discuss this further in a later post). The “cost” associated with academic grants is generally minimal. For example, the Canadian Institute for Health Research (CIHR) the primary government funder for the life sciences in Canada claims no rights to any IP generated, or to future revenues enabled, by the funded research. The National Institutes of Health (NIH) has a more stringent IP policy, which includes a formal grant of a limited use license to the subject invention to the United States government. There are additional stipulations for foreign grantees.

Translational grants

Translational grants are designed to accelerate academic research with commercial potential. Generally, the technology focus of the grant is the subject of a patent application (US Provisional, or PCT), or has significant basis for an application in the future. These grants are usually short-term (1 year duration) and are often submitted in conjunction with the academic institution’s technology transfer office. Applications are evaluated on the basis of both the technology development plan, and the business development plan (a good opportunity for the future “founding team” to have an independent critique of their preliminary business plan). An example available through the CIHR is the Proof-of-Principle: Phase 1 competition. The objective of this grant is to develop academic innovations toward commercialization. The “cost” associated with Proof-of-Principle: Phase 1 funding is as described above for CIHR research grants.

Translational centres

Translational centres are increasingly evident in the academic life sciences community. Their mission is to fully capitalize on the R&D emerging from (usually affiliated) large academic institutions/hubs. These centres come in many flavours from fully equipped and staffed organizations designed to mimic a biotech company (an example is the Centre for Drug Research and Development (CDRD), based in Vancouver, Canada, to virtual centres with experienced ex-industry staff (such as MaRS Innovation, Toronto, Canada). Common to all is a source of independent funds that can be used to de-risk technology. However, the origin (e.g. Big Pharma partner) and “cost” of these dollars varies and must be carefully considered. For example, in return for financial support, the translational centre (or its funding partner) may acquire certain IP rights, such as a first-right-of-refusal; alternatively, the centre may seek an equity stake in any resultant company, or rights to any future revenues generated by the supported technology.

Non-dilutive financing can be used to “test-drive” the technology, team and business plan

This post provides an overview of potential non-dilutive funding sources that can create value by de-risking technology, building a founding team, and incubating a business plan prior to company incorporation. This is a strategy that we have used successfully and we would love to hear of other examples of creating value before establishing a company. In a following post, we will discuss how these concepts can be extended once the resultant company has been formed and the technology licensed from the associated research institution.

James Taylor and Euan Ramsey

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