The proliferation of biotech and life sciences companies in the past decade has led to significant innovation in these fields. However, lack of access to reliable sources of adequate funding remains a key reason that new or emerging biotech and life sciences companies too often fail before reaching their potential.

What is apparent is that although there is no blueprint or one-size-fits-all path for capital formation, funding options available to businesses have evolved dramatically over the past decade, and biotech and life sciences companies have potential access to a wider than ever variety of funding options. It appears this trend will continue in the next decade. For example, the US Securities and Exchange Commission (SEC) recently announced a proposed amendment to the definition of accredited investor that will significantly expand the range of individual and entity investors that will be able to participate in Regulation D offerings (the SEC’s primary “private placement” exemption).

Below is a non-exhaustive list briefly discussing the funding options available to biotech and life sciences companies that are beyond the self-funded and “family and friends” funded capital-raising stages.

• Traditional Non-Dilutive Funding. Many businesses utilize traditional non-dilutive funding, if and when available, at some point during their existence, the most common being traditional bank loans or lines of credit. When a company has the balance sheet and/or assets to secure bank financing, such traditional non-dilutive funding is attractive because it does not require the founder or entrepreneur to surrender any ownership or control of a company in exchange for the funds. In addition, obtaining traditional non-dilutive funding is significantly less complicated than obtaining funding from other sources, which frees up management time to seek additional, potentially more permanent, sources of capital or to operate and grow the business. Traditional financing has its drawbacks, most importantly the need to make repayments on borrowed amounts. Lenders may also require collateral, guarantees, or other types of security before they will provide funding. However, depending on the source of the loan or line of credit and the business seeking funding, repayment options can often be negotiated and include terms that somewhat align the interests of the startup and the lender (e.g., revenue sharing).

• Non-Traditional, Non-Dilutive Funding. Beyond bank financing arrangements, yet still in the non-dilutive financing category, some biotech and life sciences companies are able to enter into revenue royalty financing arrangements whereby investors are entitled to receive a certain percentage of a company’s revenue generated from specific products or operating lines or divisions of a company. As with traditional non-dilutive financing, royalty participation arrangements do not dilute the ownership percentages of founders or entrepreneurs, but they allow companies to raise capital without the drawbacks of borrowing money as noted above.

• Angel Investors. “Angel” investments are typically made in the development-to-early stage of a business. These investments are typically made by individual investors or groups of investors (often referred to as angel groups or networks). In exchange for the investment, angel investors will typically require a certain percentage of ownership of the company, a certain level of control (usually in the form of consent or veto rights) over the decision-making of the company, or some combination of both. Beyond simply providing funding, these relationships can be valuable for early-stage biotech and life sciences companies because angel investors often have the ability to provide invaluable expertise in a given field; can be useful mentors in areas such as capital formation, business development, and people and process management; and can provide access to networks of other investors.

• Venture Capital. Venture capital investments are typically made after the startup stage. Venture capital funding in the biotech and life sciences sectors typically comes from venture capital firms that specialize in, and have an understanding of, the biotech or life sciences industries. Venture capital investments are typically higher-dollar investments that are made with the expectation of high returns within a defined period of time. In addition, these investments typically require the business owner to give up a certain percentage of ownership and control of the business to the venture capital firm, and they also often come with restrictions on the ability to undertake certain corporate actions. Furthermore, these investments are often hybrid investments that include a combination of debt and equity features. However, specialized venture capital firms can provide invaluable expertise on operating and growing a Biotech or Life Sciences company, including access to networking opportunities within the industries and help with identifying executives with successful records in those fields.

• Federal and State Government Grants/Awards. Many US federal agencies provide grants to early-stage companies and startups in the biotech and life sciences fields, including Small Business Technology Transfer and Small Business Innovation Research grants. While these types of grants do not typically require the owners to surrender any ownership or control of a company, they often contain strict requirements with respect to the number of employees and the ownership and control of the grant recipient. These restrictions may limit the ability of a company to undertake certain actions or enter into certain strategic partnerships or ventures while the grant recipient is still using the funds. In addition, the grant process is lengthy and competitive and requires a significant amount of time devoted to grant writing. In addition to federal funding, many US states, cities, and regions have economic development agencies or public universities or institutions that provide grants, awards, or venture financing.

• Crowdfunding. In late 2015, the SEC adopted rules providing an exemption from SEC registration requirements to companies seeking to raise capital from the general public through “crowdfunding,” which is a relatively recent, “virtual” method of effecting a private offering of capital (either debt or equity) via small investments from a large number of investors. These rules allow companies to raise up to a little over $1 million in any 12-month period. In addition, the company will not be subject to state “Blue Sky” requirements and is allowed to advertise about the offering on a limited basis. However, the rules cap the amount that individuals may invest in any 12-month period at $2,200 or 5% of the annual income or net worth of an investor for investors with annual income or net worth below $107,000, or 10% of the lesser of the investor’s annual income or net worth up to a maximum of $107,000 for investors with annual income or net worth of $107,000 or more. The rules also require that crowdfunded offerings be made through a registered broker-dealer or through a registered “funding portal,” that companies are required to disclose information to potential investors about their business and the securities being offered, and that the company offering the securities be subject to certain ongoing reporting obligations with the SEC.

• Strategic Transactions and Outsourcing. In certain cases, the easiest way to obtain funding is for a company to align itself with another company that already has sufficient capital and liquidity to be a source of funding. Although not seen as a “traditional” source of funding per se, certain strategic transactions and the outsourcing of certain work can greatly benefit the bottom line of early-to-middle-stage biotech and life sciences companies. These transactions can take many forms, including joint ventures, mergers, or partnerships with similarly situated or larger Biotech or Life Sciences companies; utilizing shared spaces and incubators; and outsourcing certain work to contract research organizations (commonly referred to as CROs), which can provide certain scientific work for a fee at a much lower cost to a company than if the company had performed the work. However, in each such case, the party seeking funding should be prepared to surrender some degree of autonomy in exchange for access to the capital (e.g., ownership, control, and, in the case of outsourcing, exposure of potentially valuable intellectual property to third parties).

• Initial Public Offering. Middle-to-late-stage biotech and life sciences companies that have additional capital needs may also choose to conduct an initial public offering (IPO) of their capital securities, typically in the form of an offering of newly issued and previously issued and outstanding common stock. The principal reason that companies conduct an IPO is to raise a significant amount of capital. In addition to raising additional capital, an IPO can raise the public profile of a company, potentially leading to an increase in a company’s goodwill or market share. Conducting an IPO is an expensive and time-consuming process that requires the preparation and filing of a registration statement with the SEC and applying to list the common stock on a national securities exchange. Furthermore, after forming the IPO, the company will be subject to ongoing ownership, quarterly, and annual reporting requirements with the SEC. The SEC’s rules and regulations governing public companies typically require significant upgrades to the corporate governance infrastructure of companies going public, which also cost significant time and money. With that said, IPOs have the potential to be lucrative exit strategies for founders and early-stage investors. While IPOs are a potentially lucrative funding option, IPOs are generally only conducted by relatively mature companies with demonstrable operating and financial performance histories (median annual revenue of companies conducting IPOs was $68 million and $101 million for 2018 and 2017, respectively). Additionally, IPOs are generally only conducted for large amounts of funding (the median offering size for IPOs has hovered around $100 million for the past 20 years).

Please note that any capital formation efforts will require a company’s records to be in good order. Therefore, prior to seeking funding, companies should review their articles of incorporation/organization, bylaws/operating agreements, real estate property records, licenses, permits, and contracts with the assistance of counsel and other professional advisors, as necessary. Companies seeking funding will want to put their best foot forward to achieve their funding goals, optimize valuation, and attract the right kind of investors.

Please also note that many of the transactions related to obtaining the above-listed funding must strictly comply with numerous federal and state rules and regulations. These transactions will likely require the preparation and execution of numerous legally binding documents and may require the filing of certain documents with federal and state agencies, all of which should be prepared in consultation with legal counsel.