Funding options for life science (and almost all) Startups
Psst- that won’t dilute your ownership
Capital efficiency and cash preservation are two of the biggest challenges for entrepreneurs as they grow their startups, particularly in the early stages of the financing journey. As companies compete for funding, talent, and time, founders need to demonstrate early traction to set their company apart and capture investors’ attention.
The most common funding options aren’t necessarily the best for companies in industries that require large inflections of capital early on, such as life sciences. Fortunately, there are other options that can help.
Non-dilutive funding
Most, if not all, traditional fundraising paths dilute a founder’s ownership stake in their company. But there is money available for startups that doesn’t require them to part with any portion of their company, i.e. it’s ‘non-dilutive’. Taking advantage of non-dilutive options can extend a startup’s runway by an additional three to six months on average — or even longer with certain larger grants and contracts. And yet, billions of dollars are left on the table each year.
Two sources of non-dilutive funding for early-stage US startups come straight from the federal government:
- R&D tax credits
- R&D grants and contracts
Both provide funds that do not need to be paid back to the government, nor require you to give up ownership in your company — essentially “free money.” The IRS anticipates they will distribute roughly $148 billion dollars to eligible applicants between 2020–2026 alone. Most companies aren’t aware but >$500B in grants and contracts are awarded to for-profit companies every single year through Federal agencies. As of today, R&D tax credits, grants, and contracts serve as the government’s primary mechanisms of awarding non-dilutive funding to a business.
3 myths about R&D tax credits, grants, and contracts
Myth 1: Most companies don’t qualify for R&D tax credits
According to a blog post by TaxTaker, roughly 90% of startups qualify for R&D tax credits each year; however, 80% are not aware these credits are available to them. When legislation changed in mid-2017, it made it possible for startup companies to take advantage of these credits as a way to offset their payroll tax liabilities.
Myth 2: Grants are only for universities and non-profit organizations
When most people hear the word “grant” they think of universities and non-profits, and rightly so. However, the federal program Small Business Innovation Research (SBIR) has set aside funds for small businesses that conduct innovative R&D, i.e. startups. Other organizations, such as universities, are not even eligible to receive these grants.
Texas was among the top 10 most funded states through SBIR/STTR dollars in 2018, according to the SBIR Annual Report, with a significant majority of awards going to Austin-based startups.
Myth 3: R&D tax credits and grants are limited to specific healthcare and life science sub-sectors
While healthcare and life science companies often dominate this space (particularly in NIH funded programs), R&D tax credits and grants are awarded to startups in all areas of science and technology — from education, energy, and space to transport, security, agriculture, ocean sciences, and more.
Life science startups should also consider looking beyond SBIR grants from the traditional NIH route. Agencies such as the DoD, DARPA, DHA, NSF, USDA, EPA, NASA etc. also routinely fund life science-based startups working toward products and solutions that could have an impact on advancements in human health.
With its strong Defense ecosystem and community, Austin is among the best-known homes for startups applying for SBIRs to DoD components, such as Air Force (AFWERX), Army and others.
Who qualifies for R&D grants and credits?
To dramatically simplify: You must be a startup with an innovative product that requires sufficient R&D work, all the work must be performed on US soil, and there must be a technical team within your startup that will conduct a majority of the work.
Funding resources
So if these non-dilutive funding programs are so great, why aren’t more startups adopting this fundraising strategy as a norm?
1. Lack of awareness. The government isn’t exactly paying to spread the word about these programs.
2. Lack of ease. Like many government programs, the R&D tax credit and SBIR application processes are quite antiquated and bureaucratic.
3. Lack of democratization of the process. Since the process of applying is so complicated, these grants and credits often go to richer startups who can afford the expensive dedicated human support.
Fortunately, you don’t have to navigate the funding world alone — there are organizations now that provide resources to help other companies grow and be more efficient with their time and money. Companies like TaxTaker and TurboSBIR (from OmniSync) have over the past couple of years created unique solutions to modernize these legacy-type govt. systems, making them practical and feasible for busy entrepreneurs. With the events of 2020, we’d all want these entrepreneurs to remain focused on the next big drug or medical device, and not waste precious time navigating complex govt. processes.
The tech and software industries have long been at the forefront of bundling tools that work in sync through direct integrations. With product offerings like TaxTaker and TurboSBIR collaborating for non-dilutive funding assistance is now thankfully more resourceful and easier to take advantage of than ever.
Regardless of where you are building in the U.S., TaxTaker wants to ensure you do not leave money on the table. Both TaxTaker and Omnisync would love to support you and your team through these lucrative alternative funding opportunities. With our support, we can help your business unlock hundreds of thousands of dollars in non-dilutive funding.
