Show Me the Money: Funding Alternatives – Finance Online

Professor Alan Barrell is the Entrepreneur in Residence at the Center for Entrepreneurial Learning, Judge Business School, University of Cambridge. He has spent more than thirty years in senior executive positions in technology-based industries, mainly Healthcare and Medical Products, and has been CEO and Chairman of private and public companies in UK, other European nations and China. Alan was a GapSummit 2016 speaker, and was kind enough to share some insights into how to go about financing your biotech venture.

Finding Funding for the new business is as much a challenge for the Bioscience start-up entrepreneur as any other. In some ways more so. Bioscience and Biotechnology initiatives can often take longer in gestation and transition from laboratory to market than other types of technology business. And some require more funding to get from great science or technology to revenue-generating products than new companies in other technology fields. This makes careful and well informed preparation and planning even more important and, in most cases, finding trustable mentors and advisors is a good first step to undertake.

In well-developed entrepreneurial environments – an example would be my home city of Cambridge, there are significant numbers of well qualified, experienced and willing mentors who can be found to help. In locations less developed in terms of entrepreneurial support systems, it will be more difficult. But the internet and potential for online advisors and mentors to connect through Skype or other means has made online mentoring a very practical process. Many of us now work this way across borders. The mentor or advisor can be consulted and will be helpful in the initial process of deciding what source or sources of finance are likely to be most appropriate for the individual business. This will depend upon the stage of development of the business, nature of the intended product, the people / team involved and the amount of funding required. These principal questions will be key to the early stage business; whatever source of finance is decided is best for the point in time. Whatever the source of finance is to be, there are crucial considerations which must be worked out in advance:

  • Very clear description of the planned product;
  • Ability to demonstrate to investors that there is a market and to quantify it;
  • Knowledge of the practices and competition in the market;
  • Basic definition of The Business Model – is this a simple drug discovery company, which will license the technology it develops? Or is it a company that will develop a finished product and market it worldwide? Or a technology company developing and making products for others to sell? There are more variations on the theme of course. But a clear Business Model and how it will generate revenue is essential;
  • An outline of the timetable “from laboratory to market” and the outline of the financial plan – “budget” – the money needed to develop the product and get it to the revenue generating stage;
  • Clear ideas on the team needed to get things moving and how the organisation may need to grow as progress is made – and the costs of this to be factored into the financial plan; and
  • An attractive and clear way of presenting all of the above to those who may provide funds.

I do not advocate spending time at the very early stages of business development on generating detailed and time consuming Business Plans. I am an advocate of “the lean start-up” – there is a book with that title some may be familiar with. My suggestion here is for careful, sensible construction of the basics of the business – which can then be attractively assembled to present to those who might provide necessary funding.

Sources of Funds

We will consider in a moment some specifics of “Alternative Finance”, but to put that exploration in context let us consider the most likely sources of funds to be considered overall and have in mind that a single source may not be the answer for all businesses. A mixture of financing is often the way that early stage companies proceed. The likely sources of money for your business will be:

  • Your own money.
  • Family, Friends and “Fools” – who may fund for emotional reasons – not just to make a return and because they have available funds.
  • Grants – which do not result in equity being exchanged. Could be government grants, in UK – Innovate UK or other funding / grant giving bodies.
  • Loans – banks are rarely enthusiastic about early stage, relatively high-risk investments, but there are other sources of loans – not all very safe for the borrower – so take care.
  • Business Angels – experienced business people who have accumulated some wealth and invest in new companies. They are often fund in organised groups in the western world and increasingly in emerging markets but many operate single-handed. They are most likely to seek equity – a share in the company – in exchange for their money and can be helpful as coaches and Board members and in particular by making their networks available for future funding and for access to customers and eventually potential acquirers if the business is offered for sale.
  • The Venture Capital Industry – funds which make investments in exchange for equity in the business.
  • Alternative Finance.

Alternative Finance

So we have arrived at the main topic of our piece – but with some proper context in which to consider it. What is meant by “Alternative Finance”?

Some people refer to “Online Finance” – and without the internet we would not have Alternative Finance as we know it. I describe it as “Finance obtained from sources other than the conventional lenders and equity investors, including venture capital funds and business angels.” It is all essentially related to funding obtained from sources which find, examine, select and invest using online methods. We categorize Alternative Finance as:-

Peer-to-peer (P2P) business lending: Debt-based transactions between individuals and existing businesses that are mostly SMEs (small to mid-sized enterprises), with many individual lenders contributing to any one loan.

Peer-to-peer (P2P) consumer lending: Individuals using an online platform to borrow from a number of individual lenders, each lending a small amounts; most are unsecured personal loans.

Donation-based crowd-funding: Individuals donate small amounts to meet the larger funding aim of a specific charitable project while receiving no financial or material return in exchange.

Reward-based crowd-funding: Individuals donate to a specific project with the expectation of receiving a tangible (but non-financial) reward or product at a later date in exchange for their contribution.

Equity-based crowd-funding: Sale of a stake in a business to a number of investors in return for investment (equity). Predominantly used in early stage firms.

Invoice trading: Firms sell their invoices at a discount to a pool of individual investors in order to receive funds immediately rather than waiting for invoices to be paid in full.

There are other types of Alternative Finance, including pension-led funding, Community shares, debt-based securities and types of bonds. But these may not be at all relevant to early stage Bioscience fund seekers.

Whatever form of Alternative Finance might be used – a presentation, often including a video will be out up on a web based platform as the primary means of communication with prospective investors.

Assuming the earlier attention to detail including seeking expert advice, has been followed, and it has been decided that online finance is appropriate for a company or project, the decision will be needed will it be borrowing (most unlikely for early stage pre-revenue companies) or one of the three categories of crowdfunding.

If the company is charitable or a social enterprise, donation-based crowdfunding might be possible, or reward-based funding – depending on the kinds of reward offered. But most likely for a company expecting eventual strong growth, and likely to need more substantial equity-based investment, equity-based crowdfunding will be the most appropriate.

There was a time not so long ago when many doubted that life science companies, especially deeper Biotech companies would no find equity crowd-funding possible. Those thoughts and ideas have been blown away by events and developments. There are now many examples of successful bioscience-based companies starting at early stages with crowd-funded equity, sometimes in parallel and indeed integrated with Business Angel investing. If rational thoughts supported by mentor or other informed advice indicates that equity crowd-funding is a good way to go.

Going Ahead – how to proceed:

  • Select the specific crowdfunding platform to approach
  • Make the application for attention – and have a good presentation and information pack ready to submit
  • Make the approach and follow through depending on the results of the approach

Advice in choosing the platform that might be the best for you – important for me would be assessing the thoroughness of the way the platform assesses and challenges my proposal. The best platforms do their due diligence well – due diligence being a thorough analysis of your planned approach. And when choosing a platform – find companies that have used those on your list of possibles and see what they have to say about the way the platform people worked with them and the outcome of the campaign.

There is no better source of reference than those who have “been there and done it”. In the UK specifically there is one crowdfunding platform which has done excellent work in the life sciences / health sector – working with a very effective hybrid model which involves only raising money in collaboration with or alongside Business Angels. This is Syndicate Room (www.syndicateroom.com). Excellent professional people with a very strong track record which can be checked on the website.

In Barcelona – Capital Cell has been successful being focussed entirely on Life Sciences sectors with equity crowdfunding and is launching as I write in the UK. You can check out www.capitalcell.com. The best crowdfunders will give you a tough time checking you out and if they take you on, will demand a great deal of time and attention  preparing you and your story for the campaign. Taking time at “pitching practice” and communication training for videos etc. will need to be thorough. Capital Cell, like Syndicate Room will work on the basis of co-investment approaches with Angles and VCs.

written by

Professor Alan Barrell

Further videos from Alan like the one above:


Categories: Blog

Tags: GapSummit 2016, Funding Gap

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