How biotech startups are funded, from seed round to IPO
A drug company can spend a decade and very large sums before it sells anything. No bank lends against that, and no single investor wants all of it. So biotech money arrives in layers, each one paying to answer a specific question and each one taking a slice of the company in return.
The examples below use made-up companies and round numbers. They show how the mechanics work, not what any real company raised.
Before there is a company
Most biotech startups begin as a result in an academic lab. Under the Bayh-Dole Act of 1980, US universities can own inventions made with federal research funding, so a founding team usually licenses the core patents from its university's technology transfer office. The license typically includes an equity stake for the university, milestone payments and a royalty on future sales.
The first outside money is often non-dilutive, meaning it does not cost the founders any ownership.
Government grants come first for many teams. The Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs, run at NIH and other agencies, fund small companies in phases: Phase I to test feasibility, Phase II for fuller development. STTR requires a formal partnership with a research institution, which suits companies still working closely with a university lab. These programs lapsed on October 1, 2025 when Congress missed the reauthorization deadline, and agencies could not make new awards for about six months. The Small Business Innovation and Economic Security Act, signed on April 13, 2026, reauthorized both through September 30, 2031, according to the Congressional Research Service.
Patient foundations are the second source. Some fund research directly; a few invest in companies in exchange for a share of future revenue. The Cystic Fibrosis Foundation is the best-known example: it helped pay for drug discovery work on cystic fibrosis, and in 2014 it sold its royalty rights for $3.3 billion.
University gap funds, state economic development programs and prize competitions fill in around the edges.
Angels, seed and incubators
Angel investors are wealthy individuals, often former executives or physicians, who put in their own money early. Seed funds do the same on a slightly larger scale. At this stage the deal is often a convertible note or a SAFE (simple agreement for future equity), which turns into shares at the next priced round, usually at a discount.
What seed money buys is the experiment that makes the company fundable: repeating the key academic result in the company's hands, often at a contract research lab, and building a basic patent position. Incubators with shared lab benches matter here, because building a lab from scratch would eat most of a seed round.
Venture rounds: Series A, B and C
Once a company raises a priced round, investors buy preferred stock at a set price per share. Preferred stock carries rights common stock does not, such as getting money back first if the company is sold (a liquidation preference) and board seats.
Series A is usually the first institutional round, led by one or two venture firms. The money is meant to take a lead program toward the clinic: manufacturing, GLP toxicology and an investigational new drug application. Biotech A rounds are often tranched, meaning the full amount is committed but paid in pieces as the company hits agreed milestones.
Series B often pays for early clinical data, typically a phase 1 trial and sometimes the start of phase 2. Series C and later rounds, when they happen, frequently bring in "crossover" investors, funds that hold both private and public stocks and that join a late private round expecting the company to go public soon.
| Stage | Who usually pays | What the money is meant to prove | What the investor gets |
|---|---|---|---|
| Grants and foundations | NIH SBIR/STTR, patient groups | The idea is feasible | No ownership (sometimes a revenue share) |
| Seed | Angels, seed funds, incubators | The key result repeats outside the original lab | Convertible notes, SAFEs or early shares |
| Series A | Venture firms | The product can be made and is ready for human testing | Preferred stock, board seats |
| Series B | Venture firms, sometimes corporate funds | First human safety and dosing data | Preferred stock |
| Series C and crossover | Crossover and late-stage funds | Enough data to support an IPO | Preferred stock that converts at IPO |
| Partnership or license | Larger drug companies | A partner values the program | Rights to the drug, in exchange for payments |
| IPO and follow-ons | Public market investors | The company can keep raising in public | Common stock |
Venture creation studios
A different model starts the company inside the investment firm. Rather than waiting for founders to pitch, the firm's own scientists generate an idea, test it quietly, then form a company around it with an interim management team and the firm as the main owner. Flagship Pioneering, the firm behind Moderna, is the most cited example of this approach. Founders who join such a company later often own much less than in a classic university spinout, but the early funding risk sits with the firm.
Partnerships and licensing deals
Many biotech companies fund themselves partly by selling rights to larger drug companies. A typical deal includes an upfront payment, development and regulatory milestones, sales milestones and a royalty. Headlines often add these together and report a deal "worth up to" a large figure, but only the upfront payment is guaranteed. Milestones are paid if and when the drug clears each hurdle, which, given how often programs fail in mid-stage trials, is a big if.
Partnerships can also take the form of options (the partner pays now for the right to license later), co-development with shared costs, or regional deals in which a partner takes one territory. The terms show up in the company's filings, and our reference page on reading a biotech company's filings explains where to find them. Earlier in the chain, companies often work with hospitals and university centers on the clinical side; translational medicine covers how that collaboration runs.
Going public
An initial public offering lets a company raise from public market investors and gives earlier investors a way to sell eventually. Biotech IPOs come in waves. When investors are optimistic, companies with only preclinical or phase 1 data can go public. In 2020 and 2021 the window was unusually wide; in 2022 it narrowed sharply, and many companies that had planned IPOs raised private money or merged instead.
After an IPO, money comes from follow-on offerings, shelf registrations that allow quick sales of stock, and at-the-market programs that sell shares gradually into normal trading.
The less familiar routes
Reverse mergers
In a reverse merger a private company merges into a public one and its shareholders end up owning most of the combined company. In biotech, the public partner is often a company whose own lead drug failed but which still has cash and a stock listing. The private company gets a listing and the cash; the old shareholders keep a small stake. These deals are frequently paired with a PIPE. Reverse mergers into empty shell companies are a different matter: exchanges adopted seasoning rules in 2011 that generally require a period of trading before such companies can list.
PIPEs
A private investment in public equity is a sale of stock by a public company to a small group of investors, usually at a discount and sometimes with warrants attached. The shares are later registered for resale. PIPEs are fast, which is their appeal after good trial data or when a public offering would be hard.
Royalty financing and debt
A company with an approved drug, or a strong late-stage one, can sell part of its future royalties or revenue for cash now. Royalty Pharma is the largest buyer of such interests. Venture debt, loans from specialist lenders, usually comes with warrants and works best for companies that already have equity backing and a clear next milestone.
What dilution means, in one worked example
The figures below describe a hypothetical company and are invented for illustration.
Hypothetical Company K starts with its founders holding 10 million shares, 100 percent of the company.
- Seed: investors buy 2.5 million new shares at $0.80, putting in $2 million. Total shares: 12.5 million. Founders now own 80 percent.
- Series A: investors buy 12.5 million new shares at $2.40, putting in $30 million. Total: 25 million. Founders own 40 percent.
- Series B: investors buy 10 million new shares at $5.00, putting in $50 million. Total: 35 million. Founders own about 29 percent.
- IPO: the public buys 15 million new shares at $10.00, putting in $150 million. Total: 50 million. Founders own 20 percent.
The founders' percentage fell at every step, yet their 10 million shares went from a paper value of $8 million at the seed price to $100 million at the IPO price, because each round was priced higher than the last. That is dilution working as intended.
Reverse the prices and the picture changes. If Series B had been priced below Series A, a "down round," the founders' shares would be worth less and the earlier investors' anti-dilution terms could give them extra shares, shrinking everyone else further. Option pools for employees, warrants and convertible debt all add shares too. That is why serious investors and founders look at the fully diluted share count, not just the shares issued today.
Scientists considering a move into company building can read more in moving from the bench to the business side of biotech. Anyone offered founder shares should ask for the fully diluted capitalization table and the liquidation preferences on every class of stock ahead of theirs, because those two documents decide what a share is worth when the company is sold for less than its last price.
This explainer is general information, not medical advice. Decisions about treatment, donation or trials belong with a clinician who knows your history.
