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.
Private and public corporations invest in spin-off companies to secure new technologies and to reap immediate financial returns.
A biodefense spin-off may have success seeking funding from a corporation that serves the biomedical industry (providing products
such as equipment or media) or one that possesses related technologies (such as other vaccines).
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
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.
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
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 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 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.