Fundraising for Deep Tech Startups
Some learnings from raising $125M for dog longevity drugs
June 13th | written over a Tatte cappuccino!
I’ve raised $125M over four years for Loyal to develop and commercialize drugs to extend dog lifespan. Unlike many biotechs, we’ve raised from classic Silicon Valley VCs including First Round, Khosla, and Bain Capital, and numerous individuals + family offices. These are my (n=1!) most significant, and in many cases hard, learnings.
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Why is the technical risk worth underwriting?
Deep tech companies tend to fit this framework:
[product] would be objectively very valuable if it existed.
However, it does not exist yet because of [technical, regulatory, etc challenge].
We have a unique strategy to overcome [challenge] and bring [product] to market.
Profit.
Generally speaking, overcoming [challenge] will have a high degree of technical and capital risk. However, if achieved, it is relatively objective that this will be a valuable (billion+) opportunity.
Make sure your company narrative clearly explains the technical risks ahead and explicitly justifies the increased existential risk - yes, the path to build a deep tech company is hard, but look where it could take you!
Where things get difficult is when you have both significant technical and market risk. This was a problem for Loyal’s fundraising in the early days, especially when I was not adept at talking about the market economics, like many technical founders. Taking on regulatory risk and biology risk AND market risk was not a fundable proposition - I had to make clear why the market was not a risk, even though it’s new. More on this later on.
Absent traditional revenue metrics, raise around de-risking milestones
Loyal is pre-revenue. Yet we have consistently raised venture capital at mark ups, tracking roughly to tech industry standards or better. The ability to raise and the valuations was driven by the achievement of objectively valuable milestones that increased our probability of success (= a commercially successful dog longevity drug on market).
Seed milestone = n/a, raised purely on the concept.
Series A milestone = regulatory pathway unlock, lead drug identified, and studies showing dog efficacy.
Series B milestone = reasonable expectation of effectiveness dossier approval from the FDA.
Importantly, these milestones are objectively valuable because they
1 - actually improve the company’s probability of success, and
2 - are believed to be objectively valuable to the market AKA other investors who may follow on into the company:
Technical milestones are not always value inflection points!
Technically milestones are not always valuable to the investment market - understanding whether a technical milestone is also an objectively-valuable fundraising milestone is crucial to designing a successful fundraising strategy. This was a lesson that was hard-learned at Loyal with our Series B:
We had the FDA’s initial feedback on the LOY-001 effectiveness dossier a full year before the formal approval. With how the agency works, this feedback gave me near certainty we would eventually earn the approval - the question was how many revisions it would take. So it was shocking to me when the VC market didn’t give us “credit” for this significant company derisking.
What I failed to realize is that there was a massive difference in investor perception between feedback and approval. The feedback still required the investor to understand the FDA approval process, read and interpret the agency’s feedback, understand our response plan, and ultimately underwrite that we would indeed earn the final approval - complicated by the fact that for many investors, this was their first time even seeing an FDA letter! In contrast, the approval required simply reading a one-page PDF. Combined with a tough market (2022/23), the feedback was simply not a sufficiently strong fundraising milestone, despite being a valuable technical milestone for us.
Consider raising from non-traditional sources (individuals, family offices) between formal rounds
If you need capital in-between venture-fundable milestones, non-traditional sources such as family offices and individuals can be a great strategy. Loyal has raised on SAFEs between every formal fundraising round from these types of investors.
This is one of the areas that I believe deep tech have a big advantage over traditional tech companies. An investment in a biotech or space company can feel like creating the future; investing in SaaS just feels like making money. For someone who is not a professional investor and already has a lot of money, the former can be much more compelling.
Families/HNWIs tend to not have formal processes, and as such can take the time to deeply understand your company. At Loyal, we’ve had success raising ahead of milestones - we raised on the FDA feedback on the thesis that, if you were willing to dig in, you could get comfortable we would likely earn that approval and that the company was lower risk than the market currently believed. And for their efforts, they got a nice discount.
Reduce your future financing risk
Deep tech companies can be more difficult to fundraise for than traditional companies because they tend to:
need more capital,
not have the option to become default alive or otherwise reduce burn significantly,
be more complicated to diligence, and
have fewer investors who invest in the class.
As such, you should structure your financing round to help you reach your next objectively valuable milestone - that the market agrees is objectively valuable! - with ease and redundancy even if things go wrong. For Loyal, we sized our Series B around achieving two future milestones - market approval and the company being cash-flow positive.
By aiming for the latter with this capital, it gives us a ton of buffer to hit market approval. The market agreed that market approval would multiply the value of the company and unlock a new class of investor, reducing future financing risk, and the strategy of aiming for significant revenue meant that even in the almost certain case our projections are wrong, we still have plenty of time to hit that milestone before needing to hit the market again.
Reducing future financing risk is good for Loyal and good for our investors, and I found that in this market it is crucial to get a round done.
Understand & teach your economics - with specifics.
For deep tech companies, the technical insight = the company catalyst. The economics = the reason it matters (to investors).
It is less likely that the investor will have experience in your market. As such you need to educate them, as efficiently as possible. I don’t mean high level “the dog market is fifty trillion dollars” BS. I mean specifics!
At Loyal, this structure has been successful:
<general framework for what kind of dog drugs make venture-scale revenue>
<evidence for the framework - table of dog drug revenues including ramp, price per unit, estimated COGS, etc>
<how Loyal fits into this framework>
<explicit Loyal projections>
Figure out your MVS: minimum viable science
There will be time to dig into all the details in diligence. Your goal in your pitches isn’t to discuss every little detail of your technical achievements. It’s to earn their confidence in your tech and company so that they want to dig in further. If it isn’t crucial to the core story of the company - leave it off the main deck. You’ll have plenty of time later to subject them to all of your technical insights!
Common mistakes:
Not learning how to communicate deeply technical topics to non-technical audiences concisely and clearly.
Over-communicating the science/tech and under-communicating the business.
Not understand the industry incumbents inside and out.
Not understanding the economics and incentives of venture capitalists and their fund structure.
Being too dry - tell a story!
Huge shoutout to Blake Scholl, Josh Kopelman, Laura Deming, Irving Fain, Joshua March and many others who taught me many of the frameworks here - I am honored to pass them on!