Monday, September 14, 2009

Financing A New Business in the Life Sciences

Welcome back to our entrepreneurship series. In last week’s post, I discussed the importance of research funding to the business development (and economic development) pipeline. As promised, I’ll provide more information today about the critical step of acquiring financing—or money to run the business.

It’s nearly impossible to do anything these days without it costing money. The same holds true for starting a life sciences business. In fact, life sciences business takes a long time and a lot of money before they become successful. Unlike starting a pizza restaurant, for example, a life science entrepreneur may need to spend several years conducting additional research and testing their product before they can turn a profit (unless you’re conducting lots of chemistry research at your pizza parlor to create the perfect sauce).

For this reason, state governments have realized that they need to implement strategies to help life science entrepreneurs get access to the money they need to start their businesses. In fact, 35 states plus Puerto Rico and the District of Columbia have implemented strategies to facilitate growth in the life sciences. Some local governments have also implemented strategies, but usually to a lesser extent.

Table 1 (below) shows some of the main sources of financing available to entrepreneurs.
Let’s go through a few of these.

If you are sitting on a huge pile of cash, great! You can probably self-finance your new business. But if you’re not, you’ll likely need to rely on one or more of these other sources of financing.

Private sources are heavily relied on by new life sciences businesses. For example, when my fellow blogger Ilse becomes a multi-millionaire, she could chose to invest her money in new life sciences businesses; she would be an angel investor. When my fellow bloggers Ilse, Heather, Emily and I all become multi-millionaires, we could pool our money together to invest in multiple businesses. We would create a venture capital fund (also referred to as VC), and would expect a higher return in a shorter time frame. Basically, you (scientists with venture capital funding) need to pay up a lot, and pay it sooner than later!

One of the most interesting sources of public financing is silent-equity partnerships. A silent-equity partnership is when a state or local government takes a silent role in supporting a new business by investing public funds in the business. For example, Minnesota recently tried to use a state pension fund to support new life science businesses. Some state leaders wanted to take $200 million from the state pension fund to invest in life science businesses. If the businesses made money, so would the state pension fund. But the converse is also true; if the businesses lost money, so would the state. Using pension funds is risky gamble, but can be an effective way to help new life science business get access to the money they need.

A great resource to learn about the financing options for life science businesses in your states is the State Biosciences Initiatives report by Battelle Memorial Institute and BIO. This report provides detailed information about new state initiatives aimed to help life science entrepreneurs.

Next week, we’ll look at how three states implemented policies to help life science entrepreneurs gain access to financing. In the mean time, I’m curious to gauge your opinion about states that are “life science industry leaders.”

In your opinion, what are the top 5 “leading life science states?”


Posted by Matt Hanzlik at 9:45 AM
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