The Current State of Scientific Funding in America:
From Research Lab to Venture Backed CompanyJavier Noris wrote this on Jan 20, 2016
Alberto Gandini was a senior researcher at Carnegie Mellon University in the summer of 2011. He was working on novel new microfluidics point-of-care diagnostics for malaria patients.
It was during this time when he realized the commercial potential of his work. He always had an entrepreneurial spirit and began looking for ways to fund the commercialization of his research. After exploring for a few weeks he ran into what is commonly referred to in the industry as "The Valley of Death".
His options were limited and it seemed like academia and industry were not set up to bridge further research & commercialization of his technology.
Alberto's story is commonplace at research institutions across the nation. The current system is not setup to take innovations from academia to industry or what is commonly known as "Translational Research".
This post focuses on demystifying the entire scientific funding cycle. We hope this provides a rubric and go to guide for future scientist entrepreneurs to use as they look to bring their discoveries to market.
We take a different approach than others have when trying to outline the different stages of scientific funding. We stay away from the traditional segmentation of Basic/Commercial or Basic/Translational/Commercial as it is typically seen in literature and focus on an outline that more efficiently outlines scientific funding sources based on dollar volume at various stages. Through this lens we then also explore where the "The Valley of death" in translational research is most prominent.
This is the phase where basic research is carried out. The experimental method is employed and researchers test hypothesis to gain insights. There is usually no commercial objective, instead researchers seek to build upon and further the total scope of human knowledge. The science in this phase is highly theoretical and is usually undertaken in an academic setting. Examples of things that are undertaken in this phase are:
The financing of basic research has changed dramatically over time. In the 19th century most of basic research was funded by wealthy patrons. It was in the middle part of the 20th century we first began to see the rise of federally funded basic research.
For about half a century we continued to see the rise of federally funded research. However, in 2004 something unusual happened. Federal funding for basic research peaked and began a decade long period of stagnation.
As a percentage of GDP, federal research has decreased strongly in the past decade.
Founded in 1887 the NIH is the largest federal agency funding science in the US. It is composed of 27 separate Institutes & Centers.
The NIH is of particular importance to us because it is typically the first source of funding for young researchers starting off their careers in science. R01 Grants are the grants that these young researchers typically compete for and their ability to land one during their postdoc years can have long lasting implications on the rest of their careers. When speaking with researchers at academic institutions they overwhelmingly say that R01 Grants are harder to attain than ever before.
Later in the NIH grant funnel are the P-Series and U-Series awards. P-Series awards are larger awards that allow for entire labs to be run for an extended period of time. U-Series awards are some of the largest awards and typically require some form of organizational co-operation from multiple research teams to make them work.
In 2012 under the leadership of Francis Collins, the director of the NIH, a new program called The National Center for Advancing Translational Sciences(NCAT) was approved. Collins has been very vocal in his view that there is huge opportunity laying dormant in the translational science space. The goal of NCAT awards are to advance translational research for treatments and cures for disease, so they can be delivered to patients faster.
NCAT awards are very new and not much data is available yet. However, we are very enthusiastic about its potential moving forward.
The NSF funds 24% of federally supported academic research. The NSF is the umbrella federal agency and the only one who supports all fields of fundamental science and engineering, with a budget of 7.3 Billion in 2015. The NSF is tasked with maintaining the US at the leading edge of scientific innovation.
NSF will invest $20 million to The BRAIN Initiative project. NSF also proposed a cyber-infrastructure initiative that will accelerate the pace of discovery in virtually every research discipline, by advancing high performance computing, creating new research networks and data repositories, and developing new systems to better visualize data (CIF21). It allocated $125 million for its cyber-infrastructure initiative.
This department is the largest employer in the world. It serves many purposes, one of which is maintaining America's scientific excellence and military edge through science and technology.
In 2015 the DOD had $64.4 billion of its budget allocated for research and development. The budget includes $11.5 billion for the DOD’s Science and Technology (S&T) program and $2.9 billion for DARPA (Defense Advanced Research Projects Agency).
DARPA is a particularly interesting sub-agency within the DOD. It is responsible for the development of emerging technologies for use by the military. However, research funded by DARPA has produced significant technologies that revolutionized many non-military fields, such as computer networking and graphical user interfaces in information technology. DARPA unlike most other agencies with federal funding, has almost free reign with its research projects. Their broad mandate has allowed the agency to continually outperform other agencies in innovation efficacy historically.
The DOE had a $12.3 billion R&D budget in 2015, a $950 million (8.4%) increase over the 2014 budget. DOE’s Office of Science (DOE SC) invests in basic research and research infrastructure to keep America competitive. It received $5.1 billion of the R&D budget.
NASA's R&D portfolio was for $11.6 billion in 2015. There seems to be a general perception that NASA research is not very applicable to the daily lives of human beings here on earth.
The truth is that there is a very long list of spin-offs from NASA's derived technology, such as - memory foam (originally named temper foam), freeze-dried food, firefighting equipment, emergency "space blankets", dustbusters, cochlear implants, and more. Much of this work is done through the NASA Technology Transfer Program which claims over 1800 successful spin-offs in its portfolio.
NASA also has prominent programs like the National Space Biomedical Research Institute (NSBRI) and the Earth Observing System (EOS) satellites program that have many earth bound implications.
Science Philanthropy has been on a steady rise in the US. People like Zuckerberg, Gates & Ellison have been leading the way and are putting significant amounts of money to work for science. Similarly, leading foundations have continued to see growing support especially in medical research.
We are very bullish on Science Philanthropy. We have seen positive trends develop in this sector. Two particular areas that seems to have started to get a large amount of attention in the past decade are medical research for childhood related diseases and age related diseases. The Bill Gates of the world are working to rid the world of childhood diseases while the Peter Thiels are trying to figure out how to live longer, healthier lives.
The trend of giving from billionaires seems to be particularly on the upswing. The recent effort from Bill Gates and Warren Buffett to establish a "Giving Pledge" to inspire billionaires to give at least half of their fortunes to charity is just one such example. As of this writing there are 147 commitments on the Giving Pledge website.
Crowdfunding platforms for basic research have begun to pop up in recent years. They are a new source of capital available to researchers willing to go the extra mile to secure funds. These crowdfunding websites act as donation platforms where a researcher's peer network (colleagues, family & friends) help fund smaller research projects.
Although this approach is better suited for smaller research projects, we began to see a few larger projects being funded through these platforms in 2015. This group shows promise and could potentially grow to be a significant part of the solution to funding gaps in the basic research space.
It's interesting to note that these crowdfunding platforms were founded in the most part by former researchers themselves. The platforms were born from the frustrating experiences each set of founders had when looking for money for their own research.
It seems likely that these crowdfunding websites will not be able to take on the full burden of basic research funding. The typical raise amount is not large enough to cover funding cycles for the prototypical lab (100K-250K/year). However, these platforms can fill critical gaps with regards to smaller research projects, last-mile funding and time sensitive funding projects.
Federal Agencies, Foundations & Crowdfunding platforms are the major sources of capital available to researchers at this phase.
Although there may appear to be large amounts of money in the system there is a growing feeling among researchers that we do not have adequate support for basic research nationwide. There are two factors at play here:
Compounding the problem is a very bureaucratic system that typically rewards good fundraisers and grant makers. Ideally the system would reward the best science. There needs to be a re-shuffling of priorities in basic research to align incentives and promote better research funding mechanisms going forward.
Overall there is still a very large pool of capital available to researchers at this stage. However, it's becoming an increasingly competitive fundraising process and changes need to be made if the US is to maintain its lead in Science & Technology moving forward. Brace yourself, the scarcity of funds gets even more frightening in the next couple of stages.
This phase typically comes when a scientist or a group of scientist has made an interesting discovery. They begin to question whether this discovery may have the potential to have some commercial value. At this stage there is still large amounts of research to be undertaken and the concept still has a very high degree of risk.
This is a stage where many scientists begin to fall-off and stagnate at. They may look around for options on how to proceed but are often underwhelmed by their possibilities. The traditional researcher skill-set is not strongly geared to do some of the business development, fundraising and networking that are necessary to transition successfully to this stage.
Meanwhile, there is pressure to remain in the status quo and it is dangerous to leave an academic career for something as risky as starting a company. It’s important to understand that tenure positions are very few and difficult to attain. Leaving such positions is a highly risky endeavor.
This is the beginning of the “Valley of Death” where ideas go to die. Due to the small amounts of capital required at this early stage there is still a decent amount of support for researchers here. However, until recently, if you happened to miss out on Small Business Innovation Research Grants there were not very many alternatives you could go to.
These programs have been around since 1983 but they have started to become more of an emphasis in the past decade. As stated on the SBIR website:
Both the SBIR & STTR Programs give out Phase I & Phase II awards. Phase I awards are meant to test feasibility and had an average value of $159,296 in 2012. Successful results from a Phase I Grant are needed to be considered for Phase II Grants. Phase II Grants are awarded based on commercial potential and averaged $831,154 in 2012.
SBIR / STTR Grants are very competitive, the following chart demonstrates the competitiveness of attaining an SBIR Grant from different agencies. The right most column indicates the total acceptance rate.
To add to the difficulty, the grueling and exhaustive application process of SBIR Grants is a common complaint from researchers nationwide.
Despite it's downfalls we are very optimistic about SBIR and excited to see where it goes. There have been some great companies that have benefitted from SBIR Grants and we expect the number of success stories to continue to grow.
Recently Steve Blank, a very prominent venture capitalist began working collaboratively with the SBIR team to implement a more hands-on scientist entrepreneurship training program called I-Corps. Innovations like these are what makes this program exciting to people in the space. You can read more about the I-Corps program here.
Accelerator programs have been prevalent in startup land for over a decade now. With programs like YCombinator, Techstars and 500 Startups leading the charge. A more recent phenomenon is the development of Science/Health focused accelerator programs.
These programs are great options for "indie scientists" or people who want to leave the academic setting all together. They provide excellent resources and typically will help with connections to investors for follow-up funding. Some of them even have an equity stake in the companies, so it's in their best interest to help companies advance to the next stage.
We purposefully left out a few other accelerator programs that only offer facilities and support but offer no funding. Those non funding accelerators could still be great options and we list them along with other resources at the end of this post.
Another option for aspiring scientist entrepreneurs is to work in tandem with their university's Technology Transfer Office. Technology Transfer Offices work as a sort of mediator between scientist entrepreneurs and outside financiers that show interest in specific discoveries. Unfortunately, the numbers have not shown these offices to be very efficient at mediating the process.
In addition to that the system is highly centralized, with only the most prestigious institutions getting most of the benefit from these sorts of organizational structures.
Technology Transfer Offices have traditionally worked primarily as intellectual property licensing offices. There have been some recent efforts to alter this model and instead try to work with and support scientist entrepreneurs in creating viable companies. We feel that this trend will continue and Technology Transfer Offices will begin to spin off and function as something resembling University Science Incubators. This is similar to the path Dartmouth's Technology Transfer Office took with the Dartmouth Entrepreneurial Network and it's New Venture Incubator.
Foundations step in once again to fill some of the void left by federal agencies and private industry at this stage. The type of foundation that focuses on this stage of the scientific funnel is typically looking to support the de-risking of some novel technology. This group has shown tremendous support for helping to de-risk promising treatments in common diseases such as Parkinson's, Alzheimer's, HIV/AIDS and more.
There are some people starting to pay attention to the potential of philanthropy at this stage. There is a huge opportunity for those looking to push the envelope and come up with novel ways to mix philanthropy into science. One such person is Andrew Wong of Boundary Impact Ventures.
Andrew has been working on creating a new kind of fund that merges Science Philanthropy with a concept known as Impact Investing. He sees this as a way to get more value for your money and better support science enterprise at its early stages.
We already touched on why we are so bullish on Philanthropy in the basic research stage. The kind of philanthropy needed at Phase II is significantly different. We strongly agree with Andrew that new models merging Impact Investing and Science Philanthropy are likely to play a large role for early stage scientific funding going forward.
ScienceVest Seed is our attempt to fix the funding gap that exists at Phase II of the scientific funding funnel. On ScienceVest Seed you will see early stage science startups that are looking for their first private investment to de-risk their technology.
Every startups that applies undergoes a thorough due diligence process. We strive to only list the most promising early stage scientific funding opportunities for investors looking at early stage deals in the sector. Deals on ScienceVest Seed will be under 1M and typically circle around 500K.
ScienceVest Seed provides investors with access to deals they otherwise would not have access to. We simultaneously help science start-ups by exposing them to our broad investor network.
It is important to note, that despite our efforts to list the most promising early stage startups, there is still significant risk involved for investors at this stage. Startups at this stage are de-risking a lot of their technology and still face significant hurdles ahead.
This is also an opportunity for investors to bring more impact to a science based company. Both through their financing and through their expertise.
ScienceVest Seed aims to attract scientific domain expert investors, impact investors, philanthropists, and early stage angels who are willing to take more risk in return for higher upside / lower price on each deal. You can browse the startups raising on ScienceVest Seed by navigating here.
SBIR/STTR, Accelerators, Tech Transfer Offices, Foundations & ScienceVest Seed are the primary options available to anyone at this stage. SBIR/STTR programs are a great option but are highly competitive and have several other issues. Although there are several Science / Health accelerators they are not enough to support the entire ecosystem. Most of them only have the capacity to take a handful of companies each funding cycle.
Tech Transfer offices are headed in the right direction but, are usually slow moving and highly inefficient. Similarly, Science Philanthropy at this stage has yet to take the necessary steps to make the meaningful impact we feel it will one day make.
With ScienceVest Seed we aim to support early scientist entrepreneurs who need further de-risking of their technology. We also aim to attract gutsy investors that have a unique risk/return profile in the impact investing space to be able to support this early stage science. By doing so we can play a significant role in closing the funding gap at this stage in the science funnel.
This phase is the biggest test for most early stage companies. The amount of capital that is raised at this stage is substantial. There is no large federal program that provides capital at this stage. Scientist entrepreneurs are thrown to the jungle and left to fend on their own. This is the do or die stage and it also coincides with the bottom most part of the infamous "Valley of Death".
There is further de-risking needed at this phase but it is expected that some significant validation will come from it. This can present itself in various ways but for therapeutics and some biotechnology companies, it comes in the form of successful completion of toxicity studies and clinical trials.
At this stage it begins to truly feel like a company and stops being just an idea. An overwhelming feeling creeps in that much work is left to do but there is never enough time.
The majority of companies that reach this stage will die. A large amount of these companies will die simply because they were not able to secure enough funding to progress down the science funnel. This is substantive amounts of money and is not handed out easily. The amount of capital is simply very constrained and unable to support most of the innovations coming through at this stage.
The number of Angel Investors in the US is growing rapidly. In the life sciences they typically want to see some sort of previous de-risking or validation and typically co-invest with other angels. A lot of companies we run into at ScienceVest are at this stage. Companies work on gathering numerous individual angel investments ranging from 50k-500K to reach their 500K-10M in fundraising goals.
The hardest part for most companies is getting your first 1-2 investments as there is a strong herd mentality from angels. Additional angels come on board much easier once peers have taken the first jump. Although the proliferation of angels has been growing steadily in the general startup space, this has not necessarily been the case in the life-science sector. We have seen many early stage VC shops and Angel Groups move out of the early stage life-science sector over the past decade and in particular the past 3-4 years.
Angels are a key part of our funding mechanism and we need to set up structures that encourage angels to continue to invest in life-science if we want to see the kind of scientific progress necessary. Angels are unique, they provide strong value adds by coming in as “smart money”. Angels are critical in providing product development expertise and are crucial in decreasing the time spent fundraising for early stage companies. They will typically use their vast network to help life-science companies connect with the right experts and investors.
A problem we have noticed with new angels coming into the investing landscape is that they are not comfortable with science. Most new angels do not have the ability to vet scientific deals. Science is inherently a highly technical field and it's easy for new angels to feel intimidated by highly scientific companies. Creating opportunities for angels to easily assimilate scientific concepts and understand the experimental results, clinical trial data and intellectual property details will go a long way to expanding the life-science angel base.
We touched briefly on Impact Investing in the Science Philanthropy part of Phase II as we felt there were some synergies to be made there. However, where impact investors more naturally fit and where they can make the largest mark is in Phase III. Impact investors operate a lot like angel investors except that they seek investment opportunities that have significant social impact.
Depending on the impact investor, some are willing to take on more risk or slightly lower returns in order to gain impact value from their investments. All impact investors are not created equal and there is a broad range of risk tolerances and impact affinities. This is precisely why impact investors can play such a large role in early life-science funding. As an asset class, life-science provides a very large spectrum of impact/risk/return possibilities.
There has been tremendous growth in the impact investing landscape. The number of funds engaged in impact investing grew quickly over a five-year period and a 2009 report from research firm the Monitor Group estimated that the impact investing industry could grow from around US$50 billion in assets to US$500 billion in assets within the subsequent decade.
Despite the proliferation of Impact Funds and individual Impact Investors we have not seen a large increase in science focused impact investments. The field is still maturing and we foresee this trend changing rapidly in the coming years. Impact investors will seek to diversify their portfolios and begin investing in science as a means to achieve market returns in tandem with desired social impact returns.
ScienceVest Offerings is how we aim to bridge the financing gap for Phase III companies in the scientific funnel. We provide discovery and diversification opportunities for investors looking to get involved in the sector. Additionally, we are broadening access to this space by allowing individuals to be able to invest with as little at 10K.
Companies listing on ScienceVest Offerings have gone through a rigorous vetting process to ensure investors the best possible deals at this stage. Companies will be raising anywhere from 1M to 10M and will likely have already raised some sort of previous private round to de-risk their technology.
Companies at this stage still have further de-risking to do but, have gone through some of the heavy lifting that early stage science companies must go through. They are now ready to advance to further de-risking and more importantly validation of their technology (more advanced clinical trials, consumer product, etc).
The scientific investing world has traditionally been very exclusive in its nature. This is due in part to the high technical barriers involved. Overtime it has evolved to have highly centralized networks of activity that are hard for newcomers to navigate. Through ScienceVest Offerings we aim to expand deal access to "outsiders".
ScienceVest Offerings aims to attract current scientific angel investors and science impact investors. We are also expecting to attract first-time investors and investors from other asset classes that have previously found scientific investments inaccessible. You can browse the startups raising on ScienceVest Offerings by navigating here.
Angel Investors, Impact Investors / Funds & ScienceVest Offerings are the options available to scientist entrepreneurs at this stage.
Angel Investors are crucial for a healthy science pipeline. Providing ways for them to access deals and feel comfortable investing in science is crucial to the future of scientific innovation. The ecosystem also needs to attract more impact investors and demonstrate why science is the perfect asset class for this kind of investor.
This is the phase with the fewest and hardest to reach funding sources. It is critical we support the ecosystem and come up with new ways to support the scientific funnel at these crucial junctions.
By providing diversification and discovery opportunities we hope ScienceVest Offerings can play a role in fixing some of the deficiencies at this stage of the scientific funnel.
In Phase IV companies can no longer call themselves "startups". By this point the company has overcome numerous major hurdles and has been de-risked significantly. A company is likely to be deep into later stage clinical trials or product development. They need a last large influx of capital for go-to market expenses and customer discovery. They are entering what is known as the growth phase.
At this stage of the funding funnel the situation starts to improve in a dramatic way. There is a large influx of capital from large institutional investors. The risk/return profile is significantly more aligned with what venture capitalists are accustomed to. Similarly, Big Pharma steps in with acquisitions to fund further development and commercialization of technologies.
Venture Capital is strong within science and particularly in the biotechnology sector. Other sub-sectors like health-tech and therapeutics are also close behind. Despite talk of VC money leaving the sciences we have continued to have strong years. The data supports this.
The truth is that VC money coming in at this stage is not leaving science, it is money at the earlier stages that is leaving. The data shows that in volume VC money is actually increasing but it is increasingly moving to later parts of the funnel.
Venture Capital comes in at some of the very later stages of science companies. Venture capitalists are experts at customer discovery, achieving product market fit and brokering IPO's or acquisitions from Big Pharma.
For science focused companies Venture Capital firms mostly invest in deals of 10M and more. They may sometimes go a bit lower but basically never invest in raises below 5M.
This was not always the case, but it has become a general trend in the sector which has left Phase III companies with a gaping financing shortfall. Meanwhile companies that manage to make it to Phase IV usually have a much easier time closing their rounds.
Big Pharma plays a crucial role in the scientific funding pipeline. Big Pharma is one the primary exit strategies for young biotechnology companies and the state of Big Pharma influences the pricing of rounds all the way down the funnel
Over the past decade Big Pharma has undergone many changes. They have fiduciary pressure to produce new revenue generating drugs due to large portfolios of patents expiring in the next few years. On the other side they have drug discovery processes like "small molecule discovery" that are producing diminishing returns.
As a result, Big Pharma is becoming more and more dependent on young biotechnology companies.
Despite all of the changes, 2014 was a great year for Big Pharma in many respects. Drug approvals were at historically high levels with numerous very promising candidate drugs also entering late stage clinical trials.
Big Pharma is a crucial stakeholder in the scientific funding landscape. Big Pharma no longer holds the stranglehold it once did on the drug discovery process but it still influences pricing all the way down the supply chain. Biotech companies often plan their financing strategy with a target to become acquired at some point during Phase IV of their life cycle.
Big Pharma will begin to change as many new biotechnology companies are also opting to go at it themselves and IPO, rather than submitting to Big Pharma acquisitions. Innovation is needed within traditional Big Pharma to retain their competitive edge.
There is lots of capital deployed at this stage. It doesn't seem to be slowing and, even with a significant retraction of capital the supply of capital would still be significantly stronger than in earlier funding phases.
Venture Capital and Big Pharma will continue to drive financing for most late stage science companies. There is a disconnect between angel investors from phase III and venture capitalist from phase IV. Venture capitalist have seemingly moved further down the funnel exacerbating the lack of capital for earlier stage companies.
There is a chance that this trend will continue but market pressures may actually cause it to reverse. Deals for venture capitalists are becoming overpriced and more competitive. This may lead groups of venture capitalist to return to earlier stages of the scientific funnel to find more adequate priced deals. Only time will tell.
Meanwhile Big Pharma will continue to be a major source of acquisitions. Big Pharma will need to innovate internally to be able to keep up with the times but in the meantime they will continue to increasingly source potential drugs from biotech companies at this stage.
This has been an overview of the scientific funding landscape from basic research all the way to venture backed company. If you are a researcher you should now feel more comfortable with the landscape and ready to pursue entrepreneurship. Investors should get a better idea of where they fit and what they can do to support a scientific funnel that has some key weak points.
We would like to end the post by emphasizing how imperative it is that we as a society support scientific enterprise. It goes without saying that scientific innovation has the potential to affect us significantly within our lifetimes. The majority of the most significant events (genetic editing, artificial intelligence, brain understanding) will for the most part be related to numerous scientific breakthroughs.
We need to start viewing science as an asset class in all of its phases and create a system that supports scientific enterprise through the entire scientific funnel. This is what we are trying to do with ScienceVest, we hope you come along for the ride!
Sign up below if you'd like to come along for the ride as we dig deeper into everything -- from scientific funding policy to learning how to generate quality deal flow as an angel investor.
If you are a startup in Phase II (ScienceVest Seed) or Phase III (ScienceVest Offerings) go ahead and submit your startup for consideration, we are always on the lookout for new companies to help fund. If you are investor sign up to browse deals on our platform and feel free to reach out should you have any questions.
Special thanks to Alberto Gandini from Accel Diagnostics, Ethel Yang from Accenture, George Church from Harvard Church Lab & Editas Medicine, Natalie Jonk from Walacea, Angela Braren from Instrumentl, Nick Dragojlovic from Funded Science, Lisa Suennen from Cardeation Capital, Meg Bouvier from Meg Bouvier Medical Writing, Jan Kralj from Stanford University, Andrew Wong from Boundary Impact Ventures, Christian Darabos from Dartmouth College, Shruti Verma from USC and Viputheshwar Sitaraman from Draw Science for providing interviews, sharing your experiences and for helping to debug these thoughts.
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