How to Build Your First Use of Proceeds Model for Biotech Startups

Why a Use of Proceeds Model is Critical for Biotech Startups

For early-stage biotech founders, the journey from scientific breakthrough to a fundable company often hinges on a single, critical document: the Use of Proceeds (UoP) model. It’s more than a list of expenses. It is the financial narrative that convinces investors you have a credible plan to turn their capital into scientific progress and increased company value. Creating this forecast without a dedicated finance team can feel daunting, especially when estimating fluctuating lab and vendor costs. A well-constructed UoP model serves as the operational blueprint for the next 18-24 months of your seed or Series A round.

A Use of Proceeds model is not a static budget but a dynamic, time-phased forecast that maps your spending to specific milestones. The goal is a defensible forecast, not a perfect one. Investors understand that early-stage R&D is unpredictable; they want to see that you’ve thoughtfully considered the major variables and built in resilience. Your model must demonstrate that the capital you are raising is sufficient to reach one or more value inflection points, which are the key scientific or development milestones that significantly de-risk your program and increase the company’s valuation. For most pre-seed to Series A startups, the model's purpose is to translate your scientific strategy into a financial story that justifies your funding ask and operational plan.

How to Allocate Seed Funding in Biotech Startups: Start with the Science

Your financial model must be anchored to your scientific roadmap. Before you can build a credible budget for your seed funding allocation, you need a detailed R&D plan, often visualized in a Gantt chart. This plan should outline every major experiment, study, and development activity required to hit your next value inflection point. This process answers the core question: how do you translate a research plan into a financial forecast?

First, identify the one or two major milestones this funding round will achieve. For an asset-based company, this might be completing in-vivo proof-of-concept studies. For a platform company, it could be validating the technology with a key dataset. With these endpoints defined, work backward. Break down the high-level goals into quarterly and monthly tasks and assign direct costs to each activity. This bottom-up approach to R&D expense planning forms the scientific core of your UoP, covering reagents, consumables, animal models, and specific assays. Every dollar requested should tie directly back to an activity that drives the science forward.

Forecasting Major Expenses: Headcount, Lab Buildout, and CROs

While the R&D plan details variable costs, effective biotech startup budgeting must account for large, structural expenses. These are your 'big rocks'. These major cash outlays often have long lead times and significant variability, making them a primary source of forecasting error. Getting them directionally right is essential for runway accuracy.

Headcount Planning

Your team is your greatest asset and typically your largest expense. As a rule, headcount accounts for 40-50% of a biotech startup's burn. Your forecast should include salaries, employer taxes, benefits, and recruiting fees for both your current team and planned hires. To accurately phase these costs into your monthly burn, you should list each role and their anticipated start date.

Estimating Lab Setup Costs

For many startups moving into their first dedicated space, the lab buildout is a major one-time capital expenditure. Initial lab setup costs for a small team of 5-10 people can range from $250k to $750k, excluding major equipment. This covers benches, biosafety cabinets, basic consumables, and permits. Founders often underestimate these costs, which is why a 20-25% contingency buffer is recommended for any lab buildout estimate.

Managing CRO Contracts and Budgets

Outsourcing key studies to a Contract Research Organization (CRO) is standard practice, but it requires careful financial and operational planning. Vendor quotes for similar preclinical CRO studies can vary by 30-50%, so it is crucial to get multiple bids. Timelines are also a major factor in CRO contract management. Booking a non-rodent toxicology study with a CRO may require 9-12 months of lead time. A complete IND-enabling study package from a CRO can cost between $1.5M and $3M and be active for 6-9 months. You must model not just the total cost but the payment schedule.

For example, a $2M IND-enabling package might have a payment schedule structured like this:

• Q1 (Initiation): $500,000 Down Payment
• Q2 (Execution): $400,000 Monthly Payment 1
• Q3 (Execution): $400,000 Monthly Payment 2
• Q4 (Reporting): $700,000 Final Report Delivery

Building Your Runway and Aligning with Investors

With your bottom-up R&D costs and top-down 'big rock' estimates complete, you can assemble the full financial picture. This is where the model transitions from a spreadsheet into a compelling story that proves you are asking for the right amount of money. Combine all projected monthly expenses to calculate your total monthly burn rate. From there, you can map out your cumulative burn and cash runway.

The standard investor expectation is for an 18 to 24-month runway, which allows 12-18 months for execution and a 6-month buffer for the next fundraising cycle. A simple cash runway projection shows this clearly. For example, a model might show that with $5,000,000 in starting cash and a month-one burn of $200,000, you end the period with $4,800,000. Extending this month by month demonstrates exactly how you plan to deploy capital over time.

To build confidence, incorporate buffers into your plan for early-stage biotech finance. In addition to specific contingencies for lab buildouts, a 15-20% unallocated contingency on the total funding 'ask' demonstrates prudence. Finally, institutionalize this prudence through scenario planning. Your 'Base Case' is your main UoP, but you should also build a 'Downside Case' that models potential delays or cost overruns and accounts for 3-6 months of additional runway. Presenting this shows you have stress-tested your plan and are prepared to navigate the uncertainties of biotech R&D.

Practical Principles for Your UoP Model

Building your first Use of Proceeds model is a foundational exercise in strategic finance. It forces clarity on priorities and transforms your scientific vision into an executable, fundable plan. Keep these principles in mind:

• Anchor Everything to the Science: Your financial forecast is only as credible as the R&D plan it supports. Start with your milestones and build the budget from there.
• Budget for Uncertainty: Contingency is not optional. A 20-25% buffer on a lab buildout or a 15-20% unallocated buffer on your total ask are essential risk management tools that investors expect to see.
• Plan for External Timelines: CROs operate on their own schedules. The fact that booking a non-rodent toxicology study may require 9-12 months of lead time means you must plan far in advance. Remember to budget for regulatory compliance budgeting, such as current MHRA fees in the UK or PDUFA fees for the FDA in the US.
• Embrace Scenario Planning: A 'Downside Case' isn't pessimistic; it's pragmatic. Showing you have a plan for what happens if a study takes three months longer demonstrates operational maturity.
• Your Model is a Living Document: The UoP you present to investors is version one. As you receive actual quotes and timelines, update your model continuously. It is your primary tool for managing cash and making strategic decisions long after the fundraise is complete.

Ultimately, a strong UoP tells a coherent story. It connects your science, your team, and your funding request into a logical narrative, giving investors the confidence to back your vision.

Frequently Asked Questions

Q: How detailed should my R&D plan be for the Use of Proceeds model?
A: Your R&D plan should be detailed enough to identify all major cost drivers for the funding period. Break down key milestones into monthly or quarterly tasks and assign specific costs for consumables, assays, and external studies. The goal is to show a clear, logical link between your requested funds and scientific progress.

Q: What is the biggest mistake founders make when estimating lab setup costs?
A: The most common mistake is underestimation. Founders often focus on major equipment but forget the cumulative cost of smaller items, permits, and modifications to the space. Including a 20-25% contingency buffer specifically for the lab buildout is a prudent step that experienced investors look for in biotech startup budgeting.

Q: How do I budget for CROs when I don't have firm quotes yet?
A: Start by getting several preliminary or budgetary quotes from different CROs to establish a realistic range. Plan your CRO contract management using the higher end of that range in your 'Base Case' model. Also, be sure to model both the total cost and the payment schedule, as large upfront payments can significantly impact your cash flow.

Q: Should I include a general buffer or contingency in my total funding ask?
A: Yes. A general, unallocated contingency of 15-20% on top of your itemized budget is standard practice and demonstrates foresight. It shows investors you understand that R&D is unpredictable and have a plan to manage unexpected delays or costs, preventing a mid-runway cash shortfall.