The biotech industry is riding high. Even with the recent downturn, the NASDAQ Biotechnology Index (IBB) has increased 250% in the past five years. M&A activity is at an unprecedented level and private funding for biotechnology companies has also reached an all-time high. However, data from the National Venture Capital Association (NVCA) shows that most of the growth in private funding has been driven by late-stage financings and crossover investors rather than by traditional venture capital (VC). Early stage financing has remained relatively flat in comparison, as has the total number of early stage companies receiving capital.

What are other ways that emerging companies can raise capital outside of traditional VC? Certainly, traditional VC is an important option given the magnitude of capital available and the wealth of expertise that partners can bring to the table, however, it can often come at a steep cost. There are several other innovative approaches.

First, all early stage companies should consider routes of non-dilutive financing in the form of grants. The reasons are obvious: they allow a company to raise capital without giving away a slice of the pie. There are several routes to raise non-dilutive capital, most notably via foundations and government organizations.

Disease-specific foundations are well known for taking an active interest in funding biotech research. A widely cited example is the Cystic Fibrosis Foundation (CFF), which invested approximately $150 million in the early-stage research that would ultimately lead to Vertex’s revolutionary treatment Kalydeco (ivacaftor). Other organizations include the Bill & Melinda Gates Foundation, ALS Therapy Development Institute (TDI), and the Michael J. Fox Foundation. On the government side, the National Institutes of Health (NIH), the Biomedical Advanced Research and Development Authority (BARDA), the Defense Advanced Research Projects Agency (DARPA), and other agencies have taken interest in funding the biotech industry. The NIH is the most commonly known, and focuses broadly on revolutionary treatments across therapeutic areas. BARDA and DARPA take a more targeted approach, focusing primarily on infectious disease in the interest of national defense. BARDA has funded early stage research at companies such as GSK, AstraZeneca, BioCryst, and Visterra. DARPA has made a few headline investments, including a $25 million seed funding for Moderna in 2013.

If a company’s technology falls within the interests of one of these organizations, grants are often a good way to raise capital. However, just like all routes of financing, there are caveats as well. In this case, the caveats mainly stem from the disease-specific nature of the grant. Accepting funding may commit a company to a therapeutic area that other downstream investors or potential acquirers may not find of high value. Although they come at seemingly low cost, in an environment limited by time and resources, grants must fit within the strategic interests of the company.

Outside of grants, there are several routes of dilutive funding in the form of direct investment. The most common is traditional VC. In recent years, other innovative financing partners have also arisen, including corporate venture capitalists (CVCs), family offices, angels, NGOs, and international government agencies.

Corporate venture capital has risen to prominence in the biopharma industry within the past five years. Although CVCs generally behave similarly to traditional VCs, there are a few differences. First, rather than being driven by pure investor return, CVCs often have the mission to gain access to early stage innovative assets for the parent company. As such, CVCs maintain a focus on investing in earlier stage deals. Second, while traditional VCs may be more active in managing their portfolio companies, CVCs are known for taking a more passive role. Along the same lines, CVC investment rarely leads to an acquisition of the portfolio company. However, gaining a CVC investor can be an indication that pharma has validated the technology for potential future investment or deal creation.

Another emerging source of venture funding comes from international government agencies. Many countries, in particular South Korea, Singapore and Russia, have been active in funding early stage biotech in hopes of attracting innovative research domestically. For example, Watertown, MA-based Selecta Biosciences is developing a novel class of targeted antigen-specific immune therapies. In addition to receiving funding from several high profile traditional VCs including Flagship, Polaris, and OrbiMed, Selecta in 2012 received a $25 million investment from RUSNANO, the $10 billion Russian Federation fund created in 2011 to support high-tech and nanotechnology advances. As part of the agreement, Selecta established a wholly-owned subsidiary in Moscow for the purpose of research.

All forms of financing have advantages and disadvantages and, therefore, the process is more of an art than a science. Before beginning to raise capital, it is important that a biotech assess not only the external funding landscape, but also its own internal strategic interests.