3 tips for biotech startups seeking non-dilutive capital to weather the downturn

Future-proofing the finances of your biotech startup through a market collapse means more than just raising capital or rushing to close your round.

I perform due diligence on dozens of life science companies each week whose technologies might help future-proof the world against the next biothreat, pandemic or otherwise. I see everything from neural probes and artificial intelligence for clinical trials to synthetic biology and quantum sensors. Every startup coming across my desk was well capitalized, but trouble might be on the horizon.

With inflationary market dynamics now firmly here and fiscal tightening ongoing, it’s natural that more speculative ventures with higher cash burns, such as biotech — especially the deep science stuff — suffer the most and suffer first.

But government investment cycles oppose private investment dynamics. When the economy is doing better, it requires less intervention and support. During times of crisis, monetary and fiscal policies are meant to resolve economic burdens swiftly. This is as true today as it was during the early 2000s or after 2008.

Founders of biotech startups are most vulnerable in these conditions and must look beyond classic fundraising to survive. In a downturn, non-dilutive grants or contracts from the government should be seen as more appealing than ever because they provide runway without dilution and make for great headlines.

Our team built our venture capital firm through advisory work. Since 2019, we’ve worked with over 100 startups in every sector from across the country, securing them over $350 million to innovate emerging technologies.

We take a broad view of national defense and consider any technology that might help future-proof our way of life, life sciences included. Most founders don’t know it before they engage with us, but there are large pots of non-dilutive capital out there earmarked for applied life science research that have 100% success rates. You just have to know where to look.

So how should you go about sourcing non-dilutive capital from the government for your biotech startup?

Don’t ignore the DOD

We support health startups all the time that aren’t aware of how much life science research and development funding the U.S. Department of Defense has; some of it even dedicated to small businesses.

The Army, Navy and Air Force each have their own strategic health and life science priorities, but so do the Defense Health Agency, Defense Innovation Unit, the Congressionally Directed Medical Research Program, Defense Advanced Research Projects Agency and NASA, just to name a few.

It’s true that the largest source of non-dilutive capital for health startups is the National Institutes of Health. But by stepping back and viewing your startup’s mission as relevant to society and the government, you can also unlock funding from many other government agencies. The best part is, there’s no ultra-competitive nine-month peer-review process for most of them, as the NIH is notorious for.

The master list of current and upcoming opportunities from across the federal government is constantly updated on grants.gov.

As a startup, it’s easy to focus on dilutive capital raises, even if the macroclimate may not be the best for it. It’s important to think outside the box in tough times to get your technology across the finish line.

Focus on framing

Years ago, our firm discovered that if a founder’s mission and the needs and interests of the government align, then chances are the government will find a way to support it. In our experience, this happens sector-agnostically. But as a founder, it’s up you to describe your technology and applications in the most relevant way when competing for non-dilutive capital.

For instance, it wasn’t until the COVID-19 pandemic that face masks and respirators could unarguably have been cast as pressing national security interests that necessitated the use of the Defense Production Act.

It’s useful to assess your technology road map as an outsider. Look further out in time past your first use case. Try to identify government agencies that may be interested in your second, third or fourth use cases. DARPA’s funding of Moderna in the early 2010s directly supported mRNA technology that enabled the COVID-19 vaccine years later, but a COVID-19 vaccine certainly wasn’t the initial aim.

We are increasingly working with startups looking for non-dilutive capital that have robust platform technologies. For instance, ones with next-generation wireless charging, which is just as applicable to electric vehicles as to medical devices. You might want to get funding for both applications, but it’s doubtful to happen from the same agency. Know your audience and frame-up accordingly.

Make sure you want it

Non-dilutive capital from the government comes with a set of unique and unwritten challenges. Founders must first be willing to take the time to complete lengthy applications and need to plan accordingly. Application windows can be open for as little as two weeks, so you should have materials ready.

Delays in federal funding can also pose a challenge as startups often must pivot to survive and must do so quickly.

Alignment of what the government is asking of you and your own corporate interests or timelines is critical. If a funding opportunity calls for deliverables that don’t align with your company’s road map, then it’s worth reconsidering. In other words, injections of non-dilutive capital can keep your startup afloat but shouldn’t programmatically detract from your company’s primary commercial mission.

What we tell the companies that we work with is that the only thing worse than not having funding in the first place is being unable or unwilling to deliver on milestones or deliverables to get the funding you already won.

At the end of the day, health plays a role in nearly every government agency stateside, abroad or in space. As a result, most have mechanisms by which they can support innovative life science startups doing commercial research that aligns with their mandate. Leveraging them might just be the ace up the sleeve you need to make sure you survive the next market downturn.