Special Topic: Biotech & Seed Money 2025 & 2026
- Rebecca Tabert, CPA
- Oct 21
- 7 min read
How do biotech startups secure the funding needed to turn scientific discovery into viable innovation? Understanding how seed money works in the biotech industry can help founders attract the right investors and build a strong financial foundation from the start.
Seed money refers to the very first round of funding a biotech company receives to get off the ground. It’s typically used to cover essential startup costs, such as lab space, equipment, early testing, and securing patents, before the company has revenue or proven results.
In practical terms, seed funding bridges the gap between a scientific idea and a viable business model. For biotech founders, it’s about having the right capital structure, investor support, and accounting framework in place to build credibility and attract future rounds of investment.
What is seed money in the biotech industry?
Seed money is the initial capital invested in a biotechnology company to develop early-stage research into a viable commercial product. Unlike later funding rounds, seed money is meant to validate the science, business model, and team before large-scale investors get involved. This stage is often considered the riskiest for investors and the most critical for founders.
In the biotech industry, seed money typically covers:
Research and development (R&D): Early experiments, proof-of-concept studies, and lab setup.
Intellectual property protection: Filing patents, licensing technologies, or securing proprietary rights.
Regulatory preparation: Meeting early FDA or international compliance standards.
Business formation costs: Incorporation, accounting, and initial legal work.
Talent acquisition: Hiring scientific, operational, and financial professionals.
Seed funding can come from several sources, including angel investors, government grants, incubators, and specialized venture capital firms that understand biotech risk profiles. The goal at this stage is to demonstrate the company’s scientific validity and commercial potential so it can advance to larger Series A or B funding rounds.
Who are the best investors for seed money in the biotech industry?
Finding the right investors in biotech is about finding partners who understand the science, the long timelines, and the regulatory hurdles unique to this industry. The best investors offer both capital and strategic value, helping startups navigate complex commercialization paths.
Key types of seed investors in biotech include:
Angel Investors
High-net-worth individuals, often with backgrounds in healthcare or pharmaceuticals, who are willing to take on early-stage risk in exchange for equity.
Biotech-Focused Venture Capital Firms
Funds that specialize in life sciences and bring expertise, lab access, and deep industry connections. Examples include ARCH Venture Partners, Flagship Pioneering, and Sofinnova Partners.
Government Grants and Public Funding
Programs such as the NIH Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) grants offer non-dilutive capital—meaning you don’t give up equity to receive funds.
University and Research Incubators
Many biotech founders spin out from academic institutions. University-affiliated incubators can offer seed capital, mentorship, and access to shared lab facilities.
Corporate Partnerships
Large pharmaceutical or biotech companies often invest early in promising startups to gain access to emerging technologies or joint development opportunities.
How is seed money in biotech accounted for?
Accounting for seed money in a biotech company requires careful classification and documentation from day one. Because seed funding can come in different forms, equity investment, convertible notes, grants, or SAFE agreements, each type carries specific financial and tax implications. Proper accounting ensures compliance, transparency, and credibility with future investors.
Here’s how seed money is generally accounted for in biotech startups:
Equity Investments
Recorded as paid-in capital on the balance sheet. The funds received increase the company’s cash assets and reflect ownership given to investors in return.
Convertible Notes or SAFE Agreements
Initially recorded as liabilities (or temporary equity), since these instruments may later convert to stock at a set valuation or event (like Series A funding).
Grants (Non-Dilutive Funding)
Recognized as income when earned, usually tied to specific milestones, research phases, or allowable expenses under the grant’s terms.
Founder Contributions
Treated as additional paid-in capital or loans, depending on the structure of the contribution and repayment expectation.
Expenses Tracking: All expenditures, especially those related to R&D, intellectual property, and regulatory compliance, should be tracked separately to support future R&D credit claims and potential investor due diligence.
Accurate accounting at the seed stage sets the tone for future financial reporting, especially when applying for R&D tax credits, preparing audited statements, or raising subsequent rounds. A dedicated accounting system designed for biotech operations helps ensure every dollar of seed capital is properly documented and defensible.
When should a biotech seek seed money?
A biotech company should seek seed money once it has moved beyond the concept stage and can clearly define the problem it’s solving, the technology or research behind it, and the potential market application. Investors at this stage want to see that the idea is not only scientifically sound but also financially feasible.
Key milestones that indicate it’s time to pursue seed funding:
Proof of Concept
You have demonstrated your scientific or technological concept works in early-stage experiments or prototypes.
Defined Business Model
You have a preliminary understanding of how your product or research could generate revenue or create commercial value.
Intellectual Property Protection
You have filed for or secured patents that protect your innovation, making it more attractive to investors.
Founding Team in Place
Investors look for a capable core team, typically combining scientific, operational, and business expertise.
Projected Use of Funds
You can clearly outline how the money will be spent—such as for lab expansion, regulatory studies, or pilot production.
Timing is crucial: seeking funding too early may result in dilution or rejections from investors who see too much risk, while waiting too long may cause you to miss development windows or grant cycles.
Ideally, a biotech startup seeks seed funding when it can convincingly show that additional capital will accelerate progress toward measurable, value-building milestones, like achieving preclinical results or preparing for a Series A raise.
What are the steps for accounting for seed money in a biotech company?
Establish a Legal Entity:
Form a corporation, typically a C-Corp, which is preferred by investors for equity financing and future fundraising.
Register for federal and state tax IDs to ensure proper compliance and reporting.
Set Up a Chart of Accounts Specific to Biotech:
Include detailed categories for R&D, grants, intellectual property, lab equipment, and professional fees.
Separate R&D expenses early to support potential R&D tax credit claims and investor audits.
Document All Funding Sources:
Record whether funds are from equity, convertible notes, SAFEs, or grants.
Maintain copies of agreements, capitalization tables, and any investor correspondence.
Track Expenditures Accurately:
Record how funds are used, such as lab supplies, salaries, consultants, or regulatory filings.
Use an accounting system that supports cost-tracking by project or grant.
Reconcile and Review Monthly:
Reconcile all bank transactions regularly to ensure accuracy.
Review balances and prepare simple management financials to monitor runway and spending patterns.
Prepare for Financial Reporting:
Summarize capital raised, outstanding obligations (like convertible notes), and cash-on-hand for investor updates or audit requests.
Maintain a consistent accounting method, cash or accrual, to ensure comparability across reporting periods.
Consult a Biotech-Familiar Accountant:
Work with professionals experienced in life sciences to ensure your setup complies with GAAP, grant reporting, and R&D tax credit requirements.
Most common myths about
Myth: Seed money is only for new biotech startups.
Reality: While seed funding often supports brand-new ventures, established biotech companies may also seek it when launching new research projects or divisions. In these cases, seed capital helps fund innovation separate from the company’s existing operations, often attracting specialized investors or partnerships.
Myth: All seed funding must come from venture capital firms.
Reality: Many biotech startups assume venture capital is the only route, but that’s rarely true. Angel investors, government grants, and university incubators frequently provide early-stage capital, often on more flexible terms and without requiring equity dilution.
Myth: You do not need formal accounting until Series A.
Reality: This misconception can be costly. Biotech founders who delay formal accounting may lose eligibility for R&D credits, misclassify expenses, or risk investor mistrust. Clean, auditable records from the seed stage are critical for future compliance and valuation.
Myth: Seed money guarantees long-term success.
Reality: Seed funding provides opportunity, not certainty. Without a solid business plan, scientific validation, and careful budget management, seed funds can run out quickly, leaving promising research unfinished and investor relationships strained.
Myth: Grant money and investor funds are treated the same.
Reality: They are not. Grants are typically non-dilutive and come with strict reporting requirements, while investor funds represent ownership stakes or liabilities (in the case of convertible notes). Mismanaging these distinctions can create serious accounting and compliance issues later.
(FAQ) Frequently asked questions about
Question: How much seed money does a typical biotech startup need?
Answer: Most biotech startups raise between $500,000 and $3 million in seed funding, depending on research scope, lab costs, and regulatory requirements.
Question: Can biotech founders use personal funds as seed capital?
Answer: Yes, founders often contribute personal funds to cover incorporation, patent filings, or early research. These contributions can be recorded as paid-in capital or shareholder loans, depending on the structure, and should always be formally documented for clarity and future investor review.
Question: What are common mistakes in managing seed funds?
Answer: Common mistakes include mixing personal and business expenses, neglecting proper accounting, or failing to track how funds are allocated. In biotech, poor documentation can also lead to missed R&D tax credits or investor distrust during audits.
Question: Are seed investors involved in company decisions?
Answer: It depends on the agreement. Some investors take a hands-off approach, while others, especially venture capitalists or experienced angels, may request board seats, voting rights, or advisory roles to help guide the company’s early development.
Question: Can a biotech company apply for grants and accept investor funds at the same time?
Answer: Yes. Many successful startups combine non-dilutive grants (like NIH or SBIR funding) with private investment, using the grants to validate early research and private funds to scale operations. This dual approach can help extend runway and strengthen investor confidence.
More Reading
Final Thoughts
Seed money is the foundation upon which a biotech company builds its scientific credibility, operational structure, and investor trust. From accounting accuracy to strategic investor selection, how a startup manages its seed round determines its ability to grow and attract future capital. Proper documentation, clear financial reporting, and an understanding of grant versus equity structures protect both founders and investors.
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