DeepTechU Day 2: Securing venture capital funding and federal grants that “take the risk the private market can’t”

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The second day of DeepTechU featured practical advice for tech startups seeking funding, including when to start conversations with venture capitalists and how to use federal government grants to prepare investors.

But first, Bill Jackson, executive director of the Discovery Partners Institute, delivered introductory remarks highlighting the strength of the deep tech ecosystem in the Chicago area, where an array of institutions work together to merge science, engineering, business and design thinking to create opportunities for high-tech companies.

“We are creating this ecosystem not to compete but to cooperate in order to win,” said Jackson, who leads the University of Illinois-led initiative to develop technology talent, applied research and business in Chicago. Deep tech, Jackson added, “is the future” and “will be at the heart of Illinois and especially Chicago.”

For the startups driving the deep tech innovations of the future, the long trail before revenue makes fundraising a particularly challenging endurance sport.

During a panel discussion on “Securing Venture Capital Investments to Fund Your Innovation,” moderator Margarita Chavez, Managing Director of AbbVie Ventures, asked panelists at what stage in a startup’s evolution should innovators start engaging with VCs.

Jamie Kasuboski, an investor at OMX Ventures, said he liked to see “at least some traction on science” and “widespread proof of concept.” Its portfolio companies are typically three or four years away from clinical use of their innovations and at least a few more years from revenue generation, so the technical potential of science is at the forefront.

Gerald Beechum, managing director of White Cornus Lane Investments, said it’s never too early to talk to investors, largely because they can guide founders on what they need to address and what steps they need to take. they should achieve. He looks for companies that have at least a business concept, which should be well thought out before the founders come up with a pitch deck.

Stephanie Wisner, MBA ’20, co-founder of Centivax, a startup developing broad-spectrum vaccines against infectious diseases, suggests founders approach VCs on the basis that they’re looking for advice, not advice. money, so they can make a good first impression even if they aren’t ready with a sales presentation yet.

For Leon Chen, a partner at Collum Group, a healthcare startup investor, researchers should start conversations about venture capital early and not worry about the business side. His company does not expect founders to have a business plan in place and focuses its discussions on the basic science that researchers are working on. Chen’s company writes the business plans and pitch decks for 80-90% of his companies and helps them recruit and hire the executives to build a profit-making business.

“Our view is that you don’t need traditional commercial oversight,” Chen said. “What you need is the best scientific organization. You can hire a full-time CEO much later.

Bringing deep tech innovations to market is “a marathon,” Kasuboski said, so startups need to keep pace by targeting milestones specific to their businesses.

Wisner urges founders to map their startup’s “value inflection points” — milestones that reduce the company’s risk enough to put it in a better position for additional funding. For Centivax, she found that investors are very concerned about the time it will take to access phase I or II human data and the cost of the manufacturing structure to produce enough drugs.

“Think about inflection points in value and think about them early,” Wisner said.

A key tool for taking a deep tech startup to the next inflection point is to find funding through federal grants, including grants for Small Business Innovation Research (SBIR) and technology transfer for small businesses (STTR). The second panel of the day, “Securing SBIR/STTR Before, During, and After Equity,” moderated by Pat Dillon of the Minnesota SBIR/STTR Accelerator, focused on how startups can use these federal funds as a bridge to attract business. Capital city.

“SBIR can take you through Valley of Death to reduce risk and get money from third parties,” said Becky Aistrup, managing partner at BBC Entrepreneurial Training and Consulting.

Under the SBIR program, 11 federal agencies allocate a total of $4 billion in grants each year to research-based startups, many of which are based in universities. Nearly half of companies funded each year are new to the program, which focuses on long-term projects that VCs and angel investors don’t want to fund, said John Williams, chief innovation and technology officer. to the Small Business Administration, which oversees the SBIR. program.

Anna Lisa Somera, CEO of medical device startup Rhaeos and SBIR/STTR grant mentor at Argonne National Laboratory, said startups should establish a time-to-market and plan how federal grants can help them transition from one step to another.

“Look at each of these funding mechanisms as a means to achieve these milestones,” she said. “Because it will resonate with investors.”

Indeed, said Josh Nichol-Caddy, director of technology commercialization at the University of Nebraska, securing SBIR funding is an important piece of evidence for investors.

“Invest Nebraska likes to invest in SBIR companies because they have already been rated,” Nichol-Caddy said.

Still, panelists warned startups that ceding too much equity to outside investors could disqualify them from future SBIR funding in some cases.

Concluding the morning sessions, Andrea Belz, National Science Foundation, delivered a keynote address on the economic importance of science-based startups as engines of job creation. About 30% of Nasdaq’s value comes from federally funded university research projects, she said.

She also expressed concerns about the changing landscape.

Despite the enthusiasm for startups, the rate of startup creation has declined over the past 40 years, and in some industries venture capital investment has not fully recovered since the dot-com collapse. com,” Belz said. Investors are also looking for greater certainty early on, with two-thirds of seed-stage companies already generating revenue, up from just 9% a decade ago.

“Risk appetite has changed,” said Belz, director of NSF’s division for translational impacts. There is a need for more funding at the initial stage of a startup, she said. Moreover, while universities do most basic research and industry dominates development research, there is a gap in applied research.

NSF programs help fill some of these gaps. Companies that received the agency’s SBIR grants went on to raise $14 billion in follow-on funding and achieved more than 200 successful exits.

The seven-week I-Corps program, which trains customer discovery innovators and offers $50,000 in grants, has funded 2,000 teams to date, half of which have gone on to build companies that have raised $500 million in follow-on funding.

“We take the risk that the private market can’t,” Belz said. She added: “The need for these programs is probably greater than ever.”

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