Wednesday, February 4, 2009

Strategic Partnerships and Government Grants Key in Some Emerging Growth Sectors

In some emerging growth sectors, such as biotech and cleantech, the most promising source of financing is often not selling equity to a financial investor but instead is from either strategic partnerships with major players in the industry or from government grants and contracts. Or, as we like to call it now, stimulus.

Recently, I have been writing a lot about raising venture capital and angel financing and the different sorts of financing techniques available to an emerging growth company. However, the angel financing/venture capital model does not always work in all emerging growth sectors. For example, in the biotech and cleantech industries, venture capital funds and angel investors may not be the primary source of capital for a successful start-up. More after the break.

These industries are characterized by massive capital requirements and very long runways. That is, they cost a lot and it takes a long time for anyone to make any money. A classic example is an experimental new drug -- the FDA approval process will often take 7 to 10 years or more and the costs of clinical trials in the various phases can run through a hundred million dollars. For a biotech start-up with no revenues, these are daunting hurdles. Similarly, many of the clean-tech concepts require huge capital investments in factory and plant.

It can be very difficult for an early stage company to raise this sort of money from venture capitalists and angel investors. This is why many entrepreneurs in the biotech and clean-tech fields will instead pursue strategic investors. For example, a biotech start-up can form a strategic alliance with one of Big Pharma that will pay for its clinical trials and FDA submissions. Similarly, a clean-tech start-up may be able to partner with an established utility, automobile or energy company to build its plant.

In addition to financing, these strategic investors may also be interested in providing manufacturing services, in supplying raw materials or in distributing the finished goods, energy or drugs. Because of these other "strategic" goals, a strategic investor will typically be a bit less focused on the absolute financial return that can be obtained from the investment. That is, they may be willing to take an instrument with a lower return on its face because they see other value in the strategic relationship.

Another important avenue of opportunity for biotech and clean-tech start-ups is the government. The government is paying particular attention to the health and energy sectors and the opportunities for stimulus packages, grants or contracts are many. Moreover, the House of Representatives recently passed its stimulus bill which included $72 billion for clean energy programs, and another $20 billion for clean energy tax incentives. Initial indications are that the Senate bill will at the very least maintain these levels of cleantech support.

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Dividends and Preferences by Hank Heyming is licensed under a Creative Commons Attribution 3.0 United States License.