Fits & Startups: Investment Capital for Early-stage Biotech Companies

Amy Keller | 2/27/2012

Randy Scott's funding structure kept the company operating long enough to be bought by GlaxoSmithKline in 2009 for $135 million. [Photo: Jon M. Fletcher]

In 2003, Randy Scott, president of USBiomaterials, decided to take the firm's tooth remineralization formula and spin it off into a company called NovaMin Technology. NovaMin's ingredients had proven effective at strengthening teeth, eliminating tooth sensitivity and fighting cavities, and Scott and the company's other founders thought they had a winner.

Scott, starting with just $350,000, began combing through a list of potential investors, calling as many as he could every day. "I was constantly pinging on people," he says.

Scott got a nibble from a venture capital firm, Durham, N.C.-based Intersouth Investors. The firm had the kind of resources Scott was looking for, but it told him it would consider writing a check only after Scott met a list of objectives.

To keep the company going in the meantime, Scott turned to a group of friends, acquaintances and previous investors in USBiomaterials and raised $600,000. He lumped those creditors into a limited liability company, which held a convertible note that would later turn into equity in the company.

That structure enabled his investors, as shareholders of the LLC, to elect a managing member who would speak for the group — a move that proved beneficial for both sides. "From our perspective, we got a single point of contact, and from the individual investors' perspective, they now had a little bit of leverage and clout."

As NovaMin began to ramp up production and generate sales, Scott needed another round of short-term funding. This time, he turned to his board of directors, company employees and other insiders and pulled together $760,000.

Scott structured the debt differently this time around, turning the debt into bridge notes — intended to take NovaMin to the point of profitability — that came with an interest rate and a repayment plan structured as a percentage of revenue.

Tying the payback plan to the company's revenue stream was important, Scott says. With revenue still unpredictable, he needed to avoid running out of operating funds. "If revenues are low, the payments will be low and the company will be OK, but if revenues are high, then the payment will be higher and we'll be able to afford it."

By 2005, NovaMin had accomplished the goals that InterSouth had laid out. The VC firm stepped up with the first round of what was ultimately $10 million in financing. In 2008, Harbert Venture Partners of Birmingham, Ala., kicked in another $2.5 million.

The happy ending? A year later, drug giant GlaxoSmithKline bought NovaMin for $135 million.