Venture Capitalists

Venture capitalists (VCs) are usually corporations that collect investment dollars from wealthy individuals and companies, and that invest in diverse portfolios. Their investments are usually in the range of $50,000 to $5 million.

Corporations

PRE-SALES FUNDING

Because a biodefense start-up company is likely to have technologically advanced products and marketable technologies, it may able to secure advance-payment contracts that in effect fund production and operations. Government agencies, including the military, seeking to acquire products for the public good may choose to pre-purchase (in advance of production) some end-products and services.

Discounting can attract advance payments from corporations that are eager to secure products and technologies. For example, a biodefense start-up may be able to secure final development funding from a potential distributor or a contract manufacturer by offering a future fixed or percentage discount.

LOANS

Unlike grants, investments, and pre-sales funding, loans carry a significant disadvantage: They must be repaid, and with interest. In S-corps and small C-corps, the principals may be required to sign personally for loans, assuming personal responsibility in the event of corporate defaults.

Banks typically make secured loans that are guaranteed by fixed assets (such as the company's equipment or the entrepreneur's home) or by future receivables (such as corporate future sales or the individual's potential future wages). For example, an automobile loan is secured by the title to the vehicle, and a credit card is issued based on the consumer's current and potential future income.

Corporations also make loans, often in the purchase of bonds, which are guarantees of repayment. Typically only the spin-off company's assets, including intellectual property, secure these loans; if the company defaults, the entrepreneurs lose the company, but they maintain their private assets.

The Small Business Administration (SBA) and similar state agencies generally operate by guaranteeing bank loans; they remove the need for the entrepreneur to sign personally. The approval formula for SBA loans generally includes job creation, the social value of the company, and financial issues.

OTHER SOURCES OF FUNDING

Cost Controls

Cost controls are not generally thought of as fund-raising strategies, but reducing expenses conserves grant money, decreases debt, and preserves equity. Effective cost controls include: deferring executives' salaries, reducing employees' salaries by offering equity, using business incubators to reduce space requirements and laboratory expenses, using interns, and participating in a variety of hybrid spin-off arrangements, such as contractual licenses to provide stock to a parent university.

Licensing

Licensing a patent or technology does reduce potential income and profits; nonetheless, licensing represents an effective funding strategy for spin-offs, especially those more interested in science than in business. A patented technology is typically offered to a large or small outside company for research and development, regulatory approval, and production. On average, the farther along in the development process that the licensing occurs, the greater the value of the license and the greater the income for the spin-off company. Regulatory approval, such as new drug application (NDA) or biologic license application (BLA) approval, can maximize license value.

Additional Funding Sources

Other strategies for funding a spin-off include the production and sale of preliminary products, the formation of joint ventures with other organizations, and the sale of international patent rights to fund the development of US products.