For the uninitiated, non-dilutive funding is financing where you don’t have to resort to selling a share of your startup. There are myriad benefits to using these non-dilutive resources. As James Taylor (not the folk singer of Fire and Rain fame), writer for Nature Biotechnology, put it, “Non-dilutive funds offer startup founders the resources to support their startup’s development while maintaining control of their company categorically.”
Here is a list of non-dilutive funding sources and their various uses.
Government research grants
These grants usually work to support basic research with stages of development made clear in all proposals. These funds support salaries, though there are limits to what they can do for overhead expenses. “A great example of GSGs is the National Institute of Health. Here, companies vie for grants parallel to applicants from academic institutions,” said Taylor.
Government industry grants
These grants target commercialization of new technologies. They place importance on the commercialization of research and the application process calls for the applicant to convince the granter of the market viability of the product. “GIGs fund commercialization related expenses more so than the research itself. I’ve seen businesses use them to support IP filings, market research, and other biz dev type activities,” explained Taylor.
These partnerships often involve a transfer of tech from biotech startup to corporation, typically in return for money or rights to develop a product in partnership with you. “The value of these partnerships lies in the fact that they usually present the first validation on a major scale of your technology by a major biotech company,” Taylor said.
These types of funds, while they may not involve selling shares of a company, do involve licensing rights of IP. “You have to remember how important it is to keep licenses non-exclusive or close to it so that your startup maintains its position for growth in the long run.”
Particularly for biotech startups, venture debt is useful because you can use it to extend an existing financing round. That allows your startup to reach proof-of-concept before follow-on investments. “A follow-on investment is made by an investor who has a history of making investments in the same company. The follow-on investment is usually seen at a later stage, hence its name,” explained Taylor.
“There is risk involved, however. Like with any debt, you have to really think hard about taking on this fund.
Obviously, the idea for any company is to build itself on a consistent and rich stream of revenue. But that’s much easier said than done for startups. “For biotech startups with minimal regulatory involvement, it’s generally recommended to establish a customer base to use and test prototypes,” said Taylor. “Bigger companies with bigger regulatory hurdles to jump see that revenue can be generated through services like consulting. Auxiliary services.”