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Filling the gap in funding for startup life science companies

on January 24, 2012

When it comes to funding for startup life science companies, it isn’t always just a matter of venture capital versus angel investing.

A panel at the Health Innovation Summit in San Francisco last week brought together experts representing four different funding sources for startups: angel investors, venture capital firms, incubators and accelerators, and the government.

“Right now there is the unfortunate situation of few angels and lots of really great ideas” that aren’t yet ready for venture funding, said Halle Tucco, co-founder and CEO of Rock Health, an incubator for health companies.

She’s talking about a known gap in funding for early-stage companies whose products haven’t yet been completely developed and tested. And while angel investors will sometimes step in to provide small investments, they more often choose options that are less risk-averse, as do venture firms.

“The medical venture industry has a hard time getting exits, because the FDA has been so unpredictable,” said Anne DeGheest, an angel investor and the co-founder and managing director of HealthTech Capital. “And there hasn’t been a proven model to make money, because it’s a changing industry.”

Most often, venture capitalists are looking for later-stage products. Rowan Chapman, a partner at Mohr Davidow Ventures, said that when investing in therapeutics, her firm chooses lower-risk companies that have already done trials and know the side effects and risks of their products.

But the good news is, even the earliest stage companies can win funding and support from other outlets like accelerators and incubators. “We love risky ideas; entrepreneurs that come to us don’t even have to have a product,” said Rock Health’s Tucco. “We’re looking for confident, energetic individuals with an idea there’s a market for.”

“Bootstrapping is great too,” she added. “I think there’s tremendous value in building your company as long as you can with keeping all the equity, and then you create an even bigger demand from the investors.”

Other often-overlooked sources for seed money are foundations and government-sponsored grants and loans. Some entrepreneurs resist these options because of the loan and grant application process, but Chapman said this is a mistake, because life science companies are often times good candidates for Small Business Innovation Research grants.

Jennifer Shieh, a science and technology policy fellow at the National Institutes of Health, said startups shouldn’t be afraid of the government, because the application is just an explanation of things you should already know.

Grant success rates at the National Institutes of Health are around 17 to 18 percent, higher than rates for any of the other funding methods. And, Shieh added, even if a grant isn’t approved, applicants will still get feedback from peer reviewers.

Although digital health companies may not be used to writing grants, Chapman suggested that these companies leverage their relationships with clients and partners in the clinical setting for help and feedback with federal grants. This could be especially helpful when the government begins offering grants specifically for consumer health apps this spring, according to Shieh.

Another thing that will help mobile health companies secure more funding, according to DeGheest, is that the FDA plans to back off on some of the proposed regulation of mobile health. “There is still uncertainty, but they are having so many problems on the oversight,” she said.

Regardless of what type of funding you’re seeking, the panelists agreed that the make-or-break element of a pitch to investors is the personality and temperament of the entrepreneur himself.

“The entrepreneur is No. 1,” Chapman said. “Regardless of the technology, it has to be about the people who have the drive and passion to succeed.”

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