Pre-Seed Fundraising in the UK for Biotech and Deeptech Startups: The Grant-to-Equity Bridge

Pre-Seed Fundraising: A UK Guide for Biotech and Deeptech Startups

For UK founders in biotech and deeptech, the path from a laboratory breakthrough to a commercially viable company is uniquely challenging. Unlike software startups, your milestones are not measured in user acquisition but in successful experiments and complex IP filings. The capital required is significant, timelines are long, and revenue is often years away. This guide provides a practical framework for navigating the critical pre-seed stage of UK biotech fundraising. It focuses on the three foundational pillars of an early-stage capital strategy: securing non-dilutive grant funding, structuring a successful university spinout, and justifying your valuation to pre-seed investors before you have a single pound of revenue.

Part 1: The Grant-to-Equity Bridge and Securing Non-Dilutive Funding

Before approaching equity investors, the most crucial step is to de-risk your technology using non-dilutive funding. This is capital, typically from grants, that you do not have to repay and that does not require you to give up ownership in your company. For scientific founders accustomed to academic grants for basic research, it is vital to understand the shift to commercialisation-focused funding. These grants are designed to bridge the gap between a scientific discovery and an investable business proposition. If you need interim financing between major rounds, see our guide on bridge rounds for biotech.

This non-dilutive capital is more than just money; it is a powerful form of validation. Securing a competitive grant signals to future investors that your science and commercial plan have survived the scrutiny of expert reviewers. It proves you can manage projects and deliver on objectives, building credibility long before you pitch for equity.

Winning UK Innovation Grants

The UK has a robust ecosystem for this type of funding. "Innovate UK is the UK's national innovation agency, focusing on industry-led, commercially-focused R&D." These are not academic grants for pure discovery. "Innovate UK grants are competitive and evaluated on national benefit and economic impact." Your application must tell a compelling commercial story. This means demonstrating a clear understanding of the market, a credible route to commercialisation, the potential for job creation, and the economic benefit to the UK. Key programmes to investigate include the broad SMART Grants and the more specialised Biomedical Catalyst. "Specific Innovate UK programs include SMART Grants and the Biomedical Catalyst."

Consider a fictional company, 'GenoThera', a biotech startup with a novel platform for cell therapy. To secure a Biomedical Catalyst grant, its founders must focus their application on the commercial pathway. The proposal would highlight the specific rare disease they are targeting, the significant limitations of current treatments, and the potential impact on UK patient outcomes. They would detail how the grant funds will be used for specific, value-inflecting experiments, such as demonstrating in-vivo efficacy, which are essential milestones to attract future venture capital.

Exploring Other Translational Research Funding

Beyond Innovate UK, other significant sources of translational research funding exist. "UK Research and Innovation (UKRI), including the Medical Research Council (MRC) and Biotechnology and Biological Sciences Research Council (BBSRC), have translational funding streams." These bodies, traditionally focused on academic research, have specific programmes aimed at pushing discoveries towards commercial application. Furthermore, major charities play a key role in therapeutic development. For instance, "The Wellcome Trust offers funding for therapeutic and health-tech innovations through specific translational and venture-focused programs." Securing this type of funding is the first step in building your pre-seed round narrative.

Part 2: The University Spinout and Structuring for Future Success

For many deeptech and biotech companies, the journey begins within a university. Navigating the spinout process correctly is fundamental to your future fundraising success and ability to secure academic spinout finance. The university's Technology Transfer Office (TTO) is your primary counterparty in this negotiation. It is tempting to view the TTO as an adversary, but it is more productive to see them as a co-founding partner whose incentives are, at a high level, aligned with yours: creating a valuable, successful company.

Negotiating the Core Agreements

Two documents define this relationship: the IP licence agreement and the shareholder's agreement. The IP licence grants your new company the rights to use the background intellectual property developed at the university. Key terms to scrutinise are the scope of exclusivity, the defined field of use, rights to sublicense to future partners, and any reach-through rights or royalties owed to the university on future revenues. Ambiguity here can be a major red flag for later-stage investors, who will conduct extensive due diligence on your IP ownership.

The second critical negotiation is the university's equity stake. This is compensation for the years of publicly funded research and infrastructure that produced the core IP. "University equity stakes in spinouts typically range from 5% to 25%." The exact percentage depends on the maturity of the IP, the direct financial contribution of the university, and the level of founder involvement pre-spinout. Your goal is to agree on a stake that is fair but leaves the founding team with a large enough share to be motivated and, crucially, leaves enough room in the capitalisation table for future employees and investors.

Achieving a 'Clean' Cap Table

A scenario we repeatedly see is the creation of a 'messy' versus a 'clean' cap table. The structure of your initial shareholder's agreement sends a powerful signal to the market.

• A 'messy' spinout structure might look like this: The university holds 25% of preferred shares with complex anti-dilution rights, while two founders split the remaining 75% of ordinary shares. This misalignment of share classes creates complexity and can deter specialist investors who want clean, simple structures from day one.
• A 'clean' spinout structure is simpler: The university holds 10% of ordinary shares, with the two founders holding 45% each, all on the same terms. This aligns everyone's interests from the beginning. It signals to investors that the company is structured for growth, not internal conflict.

Getting this right is not about winning every point; it is about building a stable foundation for the next decade of growth and fundraising. A fair deal with your university is one of the first and most important signals you send to potential investors.

Part 3: The Pre-Seed Round and Justifying Valuation with Zero Revenue

With grant funding secured and a clean spinout structure in place, you are ready to approach pre-seed investors for your first dilutive equity round. This raises the most common and difficult question for deeptech founders: how do we convince investors to write a cheque, and how much is our company worth? At this stage, with no revenue or financial metrics, valuation is a narrative, not a calculation.

Your valuation story rests on three pillars: the team, the technology, and the market opportunity. These are the primary early-stage investor criteria.

1. Team: Investors in pre-seed deeptech are primarily backing the people. You must demonstrate that your founding team has the unique scientific expertise to solve the problem. Highlighting publications in high-impact journals, filed patents, and the credibility of your scientific advisory board is essential. If you have a commercial co-founder, their track record is equally important. If not, you must show commercial awareness and a plan to fill that gap.
2. Technology and IP: This is where your grant-funded work pays off. You can now present a data-driven case for your technology's potential. What key technical risks have you eliminated? How strong and defensible is your IP portfolio? A clear explanation of your freedom to operate and the competitive moat your technology creates is fundamental to building investor confidence.
3. Market Opportunity: Investors need to see a path to a significant return on their capital. You must articulate the scale and urgency of the problem you are solving. This involves credible market sizing, a deep understanding of the competitive landscape, and a realistic view of the regulatory and commercialisation pathway, including potential reimbursement challenges.

Framing the Ask: A Milestone-Based Fundraising Plan

Instead of arguing for a specific valuation number in a vacuum, you should frame the discussion around a milestone-based fundraising plan. The reality for most pre-seed startups is more pragmatic: you are not selling your current worth but the future value you can create with an investor's capital. For example, your pitch might be: "We are raising £800,000 to achieve three key milestones over the next 18 months: complete in-vivo proof-of-concept studies, file a crucial composition-of-matter patent, and hire a specialist bioinformatician. These achievements will unlock a £5 million seed round at a significantly higher valuation." This approach justifies both the amount of capital needed and the proposed valuation by tying them directly to concrete, de-risking events.

Finally, target the right investors. Generalist VCs often lack the expertise and patience required to evaluate deep technical risk. Your science startup fundraising efforts should focus on specialist biotech and deeptech investors, including university-affiliated venture funds, dedicated life science VCs, and angel investors with relevant domain expertise. These investors understand the long development cycles and know how to price milestone-based progress.

Practical Takeaways for Your Fundraising Strategy

Navigating the journey from lab to funded startup in the UK requires a strategic, sequential approach. The process is not a series of disconnected steps but a continuous narrative of de-risking your venture to make it progressively more attractive to investors.

First, prioritise non-dilutive funding. Use grant bodies like Innovate UK and UKRI to fund the pivotal experiments that prove your technology's potential. Arriving at an investor's door with third-party validation and key data from a prestigious grant significantly strengthens your negotiating position and preserves your equity.

Second, treat your university spinout negotiation as the foundation for your company's future. A fair IP licence and a 'clean' cap table are more valuable in the long run than a contentious negotiation that sours relationships and creates structural problems for future funding rounds. Think about the signal it sends to your first investors.

Finally, build your pre-seed valuation as a story about the future, justified by concrete milestones. What founders find actually works is shifting the conversation from "What are we worth today?" to "What incredible value will we build with your capital?" By focusing on the three pillars of team, technology, and market, and by presenting a clear plan for using funds to hit value-inflecting milestones, you can justify your valuation and attract the specialist capital needed to succeed. Continue your research at the Fundraising Stages hub.

Frequently Asked Questions

Q: How much non-dilutive funding should a biotech startup raise before a pre-seed round?
A: There is no single number, but a strong goal is to secure enough grant funding to hit a key technical milestone. This could range from £100,000 to over £1 million. The aim is to use biotech startup grants to de-risk the core science, making your company significantly more valuable when you do raise equity.

Q: What is a typical pre-seed valuation for a UK deeptech or biotech company?
A: Valuations are highly variable and depend on the team, technology, and market. However, UK pre-seed biotech valuations often range from £2 million to £5 million post-money. This is not a calculation but a negotiation based on the capital required to reach the next set of value-inflecting milestones.

Q: What is the biggest mistake founders make when negotiating with a university TTO?
A: The most common mistake is viewing the negotiation as purely adversarial. This can lead to founders fighting for every percentage point of equity, resulting in a complex structure that scares off investors. A better approach is collaborative, aiming for a simple, clean deal that aligns everyone for long-term success.