The first human case of COVID-19 was diagnosed by health officials in Wuhan, China, in December 2020. So far, more than 100 million people worldwide have been diagnosed with the virus, and more than two million have died. The number of those afflicted has risen significantly in recent months, and many experts believe that things will get even worse, before they get better.
We may be seeing the light at the end of the tunnel, though. In November 2020, US pharmaceutical company Pfizer announced that it had successfully developed and tested a vaccine to combat COVID-19, followed quickly by therapeutics company Moderna, a stunningly fast development time. Both vaccines are based on the use of mRNA to “train” the immune system to develop antibodies to COVID-19 before the coronavirus responsible for the disease can debilitate the respiratory system.
This is the first time mRNA is being used for vaccines against any disease, although the technology for the development of these vaccines has been around for years. Previous virus vaccines largely relied on introducing the virus into the body and prompting the development of antibodies; mRNA technology thus marks a sea change in the treatment of viral disease.
The vaccines themselves were the result of the hard work, brilliance, and determination of an army of scientists and researchers, and the collaboration between government and the private sector to quickly deliver the vaccine to the public—collaboration that has resulted in the lightning-fast development of a much yearned-for solution to the suffering COVID-19 has been responsible for.
Yet, there is another factor that was integral in their development: a steady flow of government funding going back decades, enabling companies, researchers, and labs to continue doing the research required to successfully develop mRNA vaccine technology. In fact, according to a recent article in Scientific American, mRNA relies heavily on two discoveries that were the result of research funded by the US government: the viral protein developed by Barney Graham and his colleagues at the National Institutes of Health (NIH), and the concept of RNA modification, first developed by Drew Weissman and Katalin Kariko at the University of Pennsylvania.
These discoveries, as well as research by other small life science startups—many of them also funded by government programs—helped researchers at Pfizer, Moderna, and other companies to move forward with the development of the vaccines.
While it has received significant attention of late, US government funding for researchers or companies working on game-changing technologies has been around for decades. It was these programs, which provide non-dilutive funding to small life science startups and groups of researchers, that set the stage for the development of COVID-19 vaccines and the technologies behind them. The NIH and its Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, along with other programs, such as those sponsored by BARDA, DARPA, and other agencies, offer non-dilutive funding to life sciences companies for research and development of technology, resources, and products.
One of the reasons this funding is so important is because it is often difficult for small life science companies and startups to raise funds for very early-stage programs. Life science research can take many years, and many venture capital (VC) investors prefer investments that yield results—such as a salable technology—more quickly, such as in IT, social media applications, etc. In addition, life science startups often have higher expenses than other high-tech startups, as they need to acquire or rent lab space with specialized equipment in order to do their research.
While companies can—and should—apply for funding from all sources, VC funding is more likely to go to more established companies with a track record, indicating that they are a safer investment. This, of course, is an issue for startups in general, and it's one that is multiplied several-fold for companies in the life sciences sector, where research usually takes years and is costly, thereby demanding of investors a great deal of patience, and faith.
That's been the case for many years. Although there is plenty of investment money around today, venture capital firms, angels, and other investors are understandably a lot more conservative with their funding now. Given the limitations on travel, the year-long vacuum of conferences where startups can present their ideas and projects, and the general atmosphere of conservatism that takes hold when a major economic catastrophe takes place, early- or even mid-stage startups that are still doing R&D are likely to have a harder time raising money on the private market.
Private funding can, of course, be an important part of a life science firm's funding structure, but government funding can help them get those investments. Private investors appreciate the importance of non-dilutive funding and place great value on companies with NIH grants, as they demonstrate high-quality science, peer reviewed by the top researchers in the world.
In fact, VCs often encourage their life science portfolio companies to pursue grants, which can cover large portions of the R&D costs, thereby effectively increasing a company’s valuation. For early-stage startups not yet backed by VCs, receiving government funding can raise their profile and attractiveness, gaining the attention of investors and other downstream partners.
With more than $3 billion annually in direct support for for-profit organizations from these programs, the odds of getting funding are far better for non-dilutive government funding than in the private market; the NIH receives 6,000-7,000 applications from companies annually and funds between 1,300-1,400 of them, with about a third of applications from first time applicants (although most NIH-funded firms are privately held, public companies are also eligible). The success rate for applicants to the NIH programs is 18-20 percent for a Phase I SBIR and 35-40 percent for SBIR Phase 2.
Unlike with VCs, government agencies that provide non-dilutive funding do not take a share in a company’s equity or seek a return on investment, and are agnostic to the potential for an exit. The SBIR itself was designed to fund feasibility studies, pre-clinical and early clinical trials, with grants given over multiple years for ongoing projects. One project can string together as much as $7million-$8 million over five or six years in aggregate awards.
The lesson is clear: Non-dilutive funding must become a strategic source alongside the other available investment sources supporting the industry. With more than $3 billion annually in direct support for for-profit organizations, money that comes with no strings attached (unlike all other sources), non-dilutive funding must be the first to be looked at and taken into account throughout the entire company life cycle from early-stage idea generating startups to later clinical stage companies and beyond.
While funding for research and early-stage development can come from anywhere, leaders of small and startup life science firms should take advantage of government programs for their own sakes, as well as for the world's. Just ask the millions who are waiting with baited breath for their COVID-19 vaccine injections, in the hope that life will return to normal—and whose hopes are due in no small part to the government-funded research that led to the development of those vaccines. The research firms and startups of today are developing the technologies that will save the world tomorrow.
Ram May-Ron is managing partner, FreeMind Group.