Practical Milestone-Based R&D Budget Allocation for Biotech and Deeptech Startups

The Two Clocks: A Founder's Guide to R&D Budgeting

For founders in Biotech and Deeptech, the central tension is managing two conflicting timelines. The first is the R&D Clock, which is unpredictable and driven by scientific milestones. The second is the Cash Clock, which is linear, relentless, and ticks down your runway every month. Attempting to manage the former with tools built for the latter, like a standard calendar-based budget, often leads to cash burn on low-impact science and difficult conversations with investors. The key is not to force scientific discovery into a rigid monthly forecast, but to build a financial framework that embraces uncertainty. A structured approach to allocating capital, forecasting progress, and tracking expenses can bring a crucial layer of predictability to the inherent chaos of early-stage research and development.

This guide provides a practical, three-part system for technical founders. It covers how to strategically split your R&D budget, how to translate that plan into a realistic forecast that accounts for scientific delays, and how to set up your accounting to maximize non-dilutive funding from the start.

Part 1: How to Split R&D Budget for Startups Using the Core vs. Explore Framework

Without clear commercial data, deciding how to split R&D budget for startups can feel like pure guesswork. A common mistake is to fund projects based on which team advocates most effectively, rather than on a coherent strategy. To solve this, you can separate all research activities into two distinct buckets: 'Core' and 'Explore'. This framework provides a logical, defensible way to approach startup R&D spending, even in the earliest stages, and directly addresses the pain of allocating funds for development with imperfect information.

The Core Budget: De-risking the Present

Your Core budget is the capital dedicated to your primary scientific hypothesis and the activities required to hit your next major investor milestone. It funds the critical path. This portion of your spending is rigorously planned and directly tied to the promises you made in your last funding round. For an asset-based biotech, this is everything related to advancing your lead drug candidate. For a deeptech platform company, it is the work needed to prove the foundational technology works as promised at scale.

Activities funded by the Core budget are non-negotiable. They should be clearly defined, with specific success metrics and timelines, even if those timelines are subject to scientific risk. This is the budget that keeps the company on track to secure its next round of financing.

The Explore Budget: Investing in the Future

The Explore budget is a smaller, ring-fenced allocation for testing new, high-potential ideas that sit outside the primary focus. This is your hedge against the possibility that your core hypothesis is wrong, and it is a critical source of future value, intellectual property, and team motivation. This could be exploring a secondary application for your technology, testing a novel delivery mechanism, or running a low-cost experiment on a completely new target.

Managing this budget requires a different mindset. Failure is an expected and acceptable outcome for Explore projects, as long as the experiments are cheap and generate clear learnings. These projects provide strategic optionality and can often uncover unexpected breakthroughs that become the company's next 'Core' focus.

A Practical Allocation Heuristic

A proven heuristic, often used in conjunction with zero-based budgeting, is to allocate 70-80% of the R&D budget to 'Core' projects and 20-30% to 'Explore' projects. This ratio ensures the majority of your resources are focused on hitting the milestones that secure your next round of funding, while still allowing for structured innovation. It provides a clear answer to the question of how much research vs product funding is appropriate, creating a disciplined balance between execution and discovery.

Instructional Example: A Pre-clinical Biotech Startup

Consider a biotech startup developing a new cancer therapy with an annual R&D budget of $5 million. Their allocation might look like this:

• Core (80% or $4M): Funding for final lead optimization, in-vivo animal model testing, and initial toxicology studies for their primary drug candidate. These are the non-negotiable steps required to reach their next value inflection point and present a compelling case to Series A investors.
• Explore (20% or $1M): A small project to test their compound against a different, unrelated disease target that appeared in early screening data. Alternatively, they might use these funds to experiment with a new, cheaper manufacturing process that could provide a competitive advantage later. This work does not derail the main effort but could unlock significant future opportunities or serve as a backup plan.

Part 2: Building a Milestone-Based Forecast to Manage R&D Expenses

Once you have a high-level allocation, the next challenge is converting your multi-year R&D plan into a realistic cash-flow forecast. A standard monthly financial projection is insufficient because it ignores the R&D Clock. Instead, you need milestone-based forecasting, which ties spending directly to scientific outcomes rather than calendar dates. This approach is fundamental to effective innovation investment strategies.

The most effective way to implement this is with three-scenario planning: 'On-Track', 'Delay', and 'Breakthrough'. This method forces you to confront uncertainty head-on and communicate its financial implications to your board and investors.

1. On-Track Scenario: This is your base case. It assumes key experiments succeed and milestones are met within the expected timeframe. All your direct costs, like salaries and consumables, are mapped to this timeline. This scenario forms the foundation of your operating plan and is what you use for internal goal setting.
2. Delay Scenario: This scenario models the financial impact of a predictable setback, such as a three-month delay in a critical experiment. It is not just three extra months of burn; it also pushes out the subsequent milestone and, crucially, the start of your next fundraising process. A scenario we repeatedly see is founders underestimating the total cash impact of a delay, which includes both the direct costs and the erosion of their negotiating leverage with future investors.
3. Breakthrough Scenario: This optimistic case models what happens if an experiment yields results faster than expected or opens up a new, immediate commercial opportunity. While less common, planning for this helps you think through how you might strategically deploy extra capital to press an advantage, rather than simply letting the cash sit idle.

Instructional Example: The Cascading Impact of a 'Delay Scenario'

Imagine a deeptech startup with a $3.6M annual burn ($300k/month) and 18 months of runway. Their 'On-Track' plan has them starting their Series A fundraise in 9 months, at which point they will have 9 months of cash remaining. Now, model a 3-month delay in a key proof-of-concept experiment:

• Direct Cost of Delay: 3 months x $300k/month = $900k. This is the most obvious impact.
• Runway at Fundraise Start: Instead of 9 months of runway, they now have only 6 months remaining when they begin investor outreach. This dramatically weakens their negotiating position.
• The Real Impact: The original 18 months of runway is now effectively 15 months. The delay consumed cash and eroded the critical time buffer needed for a successful fundraise, which can often take six months or more.

This is why a crucial rule of thumb for fundraising timing is to begin the process with 9-12 months of runway remaining, based on the 'Delay' forecast scenario. This conservative approach to managing R&D expenses protects you from being forced into a down round or an acquisition from a position of weakness.

Part 3: Tactical Expense Tracking for R&D Tax Credits and Grants

For many technical startups, non-dilutive funding from R&D tax credits and grants is a vital source of capital. However, correctly capturing and categorizing R&D expenses to qualify requires a different level of detail than tracking for an internal budget. This is not an afterthought for your accountant to solve at year-end; it requires building a system for tracking for compliance, not just budgets, from day one. This process is a key part of technical team budget planning.

Your accounting system must be configured to easily report on the key qualifying expense categories defined by tax authorities. While rules vary, they generally focus on three areas. Per accounting standards like IAS 38, these costs relate to the "development" phase where technical feasibility has been established.

Key Qualifying Expense Categories

1. Direct Staff Costs: This includes the gross salaries, employer NI/taxes, and pension contributions for employees directly engaged in R&D activities. If an employee splits their time (e.g., a CEO who is 50% R&D, 50% commercial), you must have a reasonable, documented method for apportioning their costs.
2. Consumables & Software: These are items directly consumed in the R&D process, such as lab supplies, raw materials for prototypes, and specific software licenses used exclusively for research. General overheads are typically excluded.
3. Subcontractor Costs: These are payments to third parties who perform R&D activities on your behalf, such as a Contract Research Organization (CRO) or a specialized engineering firm. This is where geographic rules diverge significantly. For US companies reporting under US GAAP, costs for US-based contractors are often fully claimable; see the IRS Form 6765 instructions. Claim rules vary by jurisdiction. In the UK, however, the rules under FRS 102 are stricter. For instance, HMRC CIRD guidance means claims for subcontractors are often limited to 65% of the cost.

Instructional Example: Chart of Accounts Setup

In your accounting software, you should use categories to tag every relevant transaction from the beginning. In QuickBooks, this is typically done with 'Classes'. In Xero, you use 'Tracking Categories'.

• Setup: Create a Tracking Category in Xero called "Project" with options like "Core-ProjectA," "Explore-ProjectB," and "G&A."
• Execution: When your bookkeeper enters a bill for lab consumables, they code it to the standard 'Cost of Goods Sold: Lab Supplies' account and also tag it to the "Core-ProjectA" tracking category.
• Reporting: At year-end, you can run a Profit & Loss report filtered by the "Core-ProjectA" and "Explore-ProjectB" categories. This instantly isolates all qualifying R&D expenditures for your tax credit claim, saving dozens of hours of work.

Instructional Example: Time Allocation Records

For staff who split their time, contemporaneous documentation is critical. This does not need to be overly complex. A simple monthly spreadsheet or memo is often sufficient. A founder could document: "For October 2023, my time allocation was 70% towards activities related to Core Project A (technical development and lab oversight) and 30% towards G&A (fundraising and administration)." This provides the evidence required to support a claim during an audit.

A Disciplined Framework for Managing Uncertainty

For an early-stage deeptech or biotech startup, effective R&D budget management is about creating a system that acknowledges scientific uncertainty while imposing financial discipline. The process does not have to be complex, but it must be intentional. By adopting this three-part framework, you can turn your budget from a static accounting document into a dynamic strategic tool.

First, reframe your thinking around the R&D Clock versus the Cash Clock. This fundamental distinction informs a more realistic approach to planning. Second, use the 'Core vs. Explore' model as a practical tool for allocating funds for development, ensuring you balance de-risking your core mission with investing in future opportunities. This is a simple but powerful way to decide how to split R&D budget for startups. Third, shift from calendar-based projections to milestone-based, three-scenario forecasting. Planning around your 'Delay' scenario is the single best way to protect your runway and negotiating leverage. Finally, configure your accounting tools like QuickBooks or Xero from day one to track expenses for compliance. Tagging every R&D cost by project transforms a painful year-end scramble into a simple reporting exercise, maximizing your access to non-dilutive funding. For more resources, see the central budgeting hub for related guides and templates.

Frequently Asked Questions

Q: How often should we review and adjust our R&D budget?
A: Your high-level 'Core vs. Explore' allocation should be reviewed annually or after a major funding round. However, your milestone-based forecast is a living document. It should be updated monthly against actual spending and at least quarterly to reflect scientific progress, delays, or breakthroughs, ensuring your runway calculations are always current.

Q: How do we present a milestone-based forecast to investors who expect a monthly budget?
A: Present both. Show investors a traditional monthly cash flow forecast based on your 'On-Track' scenario, as this is what they expect to see. Then, introduce the milestone chart and the 'Delay' scenario as a risk management tool. This demonstrates financial sophistication and shows you have a credible plan for handling inevitable setbacks.

Q: What is the biggest mistake founders make in R&D budgeting?
A: The most common and damaging mistake is managing the company as if only the Cash Clock exists. This leads to pressuring the R&D team to meet artificial deadlines, which creates stress and rarely accelerates science. A close second is failing to track expenses properly for R&D tax credits, leaving significant non-dilutive funding unclaimed.