For Startup Founders, This is the Classic Dilemma

December 18, 2023

The following article was written by Dr. Steven Gould, consulting director for Polsky Science Ventures, and originally published in Crain’s Chicago Business on December 18, 2023. Read the original article on Crain’s.

I recently met with a researcher who has identified multiple novel drug targets that may allow the development of new therapies to improve the outcomes of several diseases with no good current treatments. It was an exciting conversation that quickly led to a discussion around forming a biotech startup and raising $50 million as the initial round of financing.

And then reality struck: Was that a realistic plan? Does a biotech startup need that much at this stage? Will it result in majority ownership by the investors and dilute the founder(s)? This is the classic dilemma faced by every founder, no matter the sector: How much to raise and when to raise it?

I am surprised how few founders think strategically about the right amount of capital for initial financing. The critical task is to craft the story around the startup, identify the milestones that must be accomplished to raise the next round at a higher valuation, and determine the timelines and the right amount of money to achieve those milestones — all while factoring in the existing funding environment.

The story
The story should frame the narrative of the unmet need, the unique solution, the existing evidence that validates the proposed solution and the business opportunity that comes with successfully developing this scientific discovery. Think of the mRNA research that enabled the extraordinary clinical and commercial success of COVID vaccines within one year of the onset of the pandemic. The story needs to be sufficiently compelling to attract investors.

The milestones
For biotech companies, the milestones to get from the bench to the bedside are crucial. Getting into clinical trials is the most important step to discover whether the product will be safe and effective. The early biotech pre-clinical and clinical milestones for FDA approval are well known to biotech investors and should guide the plan.

The amount of money and the timeline
Rather than beginning with a plan to raise $50 million, the story should precisely define the amount of money and time needed for each of the critical milestones. Each milestone achieved should demonstrate capability of executing on time and on budget while adding value, so investors will be enthused about the next round. It is not wise to raise more money than necessary for each stage.

The next round
You will always need the next round. But the other key element often overlooked by founders is factoring in the time to complete the next raise. It takes up to six months to complete any venture financing. If you spend the last dollar completing the final milestone without proper positioning for the next stage, things will come to a crushing halt. This is the art of raising capital at this early stage.

The funding environment
Most of the steps above are in the founder’s hands. The wild card is the broader funding environment. We are in a very challenging time for venture funding. According to PitchBook, third-quarter 2023 deal value fell to the lowest figure since second-quarter 2018, and first-quarter pre-seed and seed activity slumped to a 12-quarter low. Yet as challenging as this may seem, founders should not be discouraged, as there is a huge amount of dry powder sitting on the sidelines with VCs waiting for the right opportunities.

I remain an eternal optimist: Great ideas that solve great problems will always attract thoughtful investors. But the same intellectual rigor, discipline, planning and execution that leads to cutting-edge scientific discoveries must be applied to the business of raising capital to deliver those discoveries to the world.

Dr. Steven Gould is consulting director for Polsky Science Ventures at the Booth School of Business and is responsible for leading the formation and launch of new science-based ventures from University of Chicago faculty research.