Why the Right Financial Plan is Critical for Biotech Startups

Kevin Musni
Kevin Musni

Real Estate and Biotechnology

Why the Right Financial Plan is Critical for Biotech Startups
According to The Wall Street Journal’s reporting and data analysis hub WSJ Pro, venture capital (VC) investments in biotechnology are holding strong. Despite sharp declines in stock prices and fewer initial public offerings (IPOs) this year, US biotech venture investments stood at a whopping $8.8 billion as of March. And if the trend continues, there is a chance that 2022 could reach last year’s record high of $37.3 billion. But despite the massive amount of money still being invested in the sector, the same WSJ report cautioned that the corresponding deal volume has slowed.

Given the current market conditions, a slowdown in private equity investment within the sector is to be expected. Over the last two years, VC funding and IPOs for biotech reached record levels. However, sustaining that year-over-year growth when up against headwinds like stock market volatility, rising inflation and rumors of a recession would be a Herculean task. As such, the funding environment for the remainder of 2022 is likely to look much different than what we’ve seen in recent quarters.

A Time of Volatility for Biotech Startups

What that means for early-stage biotech startups is that raising a new round of funding over the next year could become much harder and take longer than expected. Things could get better if the stock market recovers. But until that happens, private equity investors will continue to proceed with caution, especially if institutional investors begin to renege on their fund commitments. And given its focus on inflation control, the likelihood of a Fed rescue is slim to none.

Early-stage biotech companies shouldn’t panic, though. Although a storm is brewing, a total crash isn’t necessarily imminent. The only thing current market activity is signaling is that we’re in the midst of a market correction. To weather the storm successfully, biotech startups need a clear view of their finances.

Navigating Risk and Uncertainty

When you’re the founder of a hot, newly funded biotech startup, it can seem as if VC money will just keep coming in. And because of that, a lot of early-stage founders don’t keep proper tabs on metrics like burn rate, accounts payable turnover, debt-to-equity ratio, working capital, etc. After all, you’ve got to spend money to make money, right? Not in biotech, because profits can be years away thanks to long research and development timelines, delayed government approvals and lengthy sales cycles.

It’s no secret that startups face a high level of risk and uncertainty. Even VC-funded startups aren’t immune to this. According to CB Insights, 70% of venture-backed startups with more than a million dollars in initial funding fail within 20 months. And the biggest challenge for most startups that fail is cash flow management.

Having a Financial Plan is Critical

Without a proper financial plan, managing cash flow effectively is nearly impossible. That’s why biotech companies need a trusted partner that can help them understand their financial situation down to the penny. This often entails running sophisticated financial models so that companies can better understand how different scenarios will impact their future. For example, can the business afford to spend the extra money on that swanky new office space or those free lunches?

Whether you’re developing new pharmaceuticals, gene therapies, medical tests or devices, biotech companies need to invest as much as possible in their science and intellectual property. One study, which included 63 of 355 new therapeutic drugs and biologic agents approved by the US Food and Drug Administration between 2009 and 2018, found that the estimated median capitalized research and development cost per product was $985 million. This means that even the most well-funded biotech companies need to manage their money effectively. This includes running extremely lean teams.

Outsourcing Can Save the Day

To increase operational efficiencies and streamline their processes, outsourcing the chief financial officer (CFO) and accounting functions makes good business sense. According to BSG, biotech CFOs average around $480,000 in total compensation in Boston alone. In addition, each accounting person within the department only adds to the overhead. By outsourcing these job functions, particularly through fractional CFO services, companies can save significantly on staffing costs.

Additionally, VCs and other investors often have specific financial reporting requirements. Add to the mix a long list of regulations and other compliance requirements, and the finance and accounting function of a biotech startup gets complicated in a hurry. Even if an organization has an experienced and capable CFO, having a team with knowledge of all these factors is essential. No single person can do all that’s needed to keep a biotech company’s finances in top shape.

Scrubbed is the Partner You Need

Both startups and mature companies rely on Scrubbed to help ensure they have the positive cash flow it takes to keep their businesses running. Scrubbed provides founders and business leaders with a wide range of financial planning and analysis services that help them budget with confidence, forecast with greater accuracy, and allocate their resources effectively.Schedule a call with Scrubbed to learn how our services can help your business grow and thrive!

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