How Should a Health-Tech Startup Allocate Its $750K Seed Funding?

As the founder of a startup in the digital health sector, you finally secured seed funding amidst the chilling autumn winds before the winter downturn, backed by preliminary clinical data obtained through collaborations with Principal Investigators (PIs) at hospitals and supported by multiple patents.

As the first payment hit the company’s account, you instinctively thought, “How should I spend this money?”

This brief question, like a loose thread on a sweater, unraveled countless new issues with just a gentle tug.

“How should R&D and operations be allocated?”

"What Is the Optimal Team Size?"

“Which supplier should we source the equipment from?”

“When does the next round of fundraising begin?”

Admittedly, you have already simulated and elaborated on these issues in your business plan and numerous internal meetings. Yet, when faced with the actual funds in your account, your dry, itchy throat and slightly accelerated heartbeat serve as reminders that having capital to deploy has become your latest reality as a company executive.

Seed funding is typically the first significant capital injection a startup receives, with average financing amounts ranging from hundreds of thousands to millions of RMB. However, the total investment can vary substantially depending on the project’s level of proof-of-concept validation, the team’s track record, the investors’ profiles, and the industry sector. For instance, Nvelop Therapeutics, a newly founded company developing novel delivery technologies by Harvard University’s gene-editing pioneer David Liu, secured $100 million in seed funding—a feat undoubtedly bolstered by his distinguished background.

While different types of startups have specific priorities for deploying seed-stage funding, the overarching purpose is to demonstrate that the founder is not only intelligent and diligent but also driven by a grand vision. This capital serves to validate the founder’s ability to build a team, penetrate the target market, identify potential customers, and establish effective collaborations with them.

From a short-term perspective, seed-round expenditures may cover the following areas:

1. Hypothesis testing and further proof of concept;

2. Develop a Minimum Viable Product (MVP) to demonstrate the commercial viability of the company’s technology (this approach is more applicable to products such as medical devices, in vitro diagnostics (IVD), and medical services that can enter the market in the short to medium term; for products requiring longer development cycles, such as new drugs and innovative therapies, early-stage data accumulation is more critical);

3. Explore Product-Market Fit (PMF) and allow lead time for strategic adjustments;

4. Further technological research and development, as well as refinement;

5. Hire the right personnel to accelerate MVP development.

In most cases, founders struggle to achieve product-market fit (PMF) on their first attempt, so the initial funding must be allocated with careful planning.

It would be both unreasonable and irresponsible to claim that there is a perfect capital allocation ratio applicable to all startups.

Most companies with strong technological attributes allocate the majority of their funds to R&D, business development (BD), and human resources, though their specific priorities vary.

When founders are considering allocating capital to different segments of their company, they can start by asking themselves four questions:

1. Why Did I Found This Company?

2. What major problem am I passionate about solving?

3. To achieve this goal, what major risks (market, team, technology, or regulatory) do I need to eliminate?

4. Can I significantly mitigate at least one major risk during this funding round (from an investor’s perspective, this can greatly enhance the company’s valuation in the next round)?

By answering these questions, one can reverse-engineer the strategy to determine which sectors should receive a greater share of the already limited resources to achieve the desired goals.

Approach hiring as a form of value investment. Just as you would not invest in an asset only to sell it at a discount in the short term, do not hire an employee only to dismiss them within a few months. A poor hiring decision incurs costs far exceeding the actual wages paid.

In terms of marketing, please also avoid premature or disproportionate publicity that does not align with the company’s actual development status. This not only wastes limited resources but also erodes future credibility.

In addition to planning how to allocate funds based on business needs, it is equally important to plan in advance how long the seed round will last and when to initiate the next round of fundraising.

It is generally recommended that companies maintain an operational runway of 18–24 months after a successful financing round. This relatively flexible timeframe provides sufficient buffer to achieve the next product development milestone and to secure more favorable market conditions for the subsequent funding round amidst a volatile market environment.

While such advice might have seemed clichéd a decade ago, the macroeconomic landscape of the past two years and rising uncertainty have driven capital and markets toward more conservative strategies, thereby validating this approach.

As the 18-month mark approaches, the company should ideally have achieved key phased milestones—such as technological R&D breakthroughs, large-scale clinical data, and validation by users or customers—and begin initiating its next round of financing.

Building on the content from the previous section, let us envision an internal meeting held by a startup team after securing financing:

The founders and key team members listed on the conference room whiteboard the primary objectives or milestones to be achieved during the operational phase (18–24 months), as well as the goals that must be met by the end of this period to facilitate raising the next round of funding. Subsequently, the team broke down these objectives into a series of key results. Based on these key results, the team assessed the skills of existing personnel and analyzed what new hires (full-time or part-time) were needed to fill the gaps. Additionally, the team accounted for uncertainties in R&D and marketing, building in a buffer period of several months.

R&D expenses, which account for a significant proportion of the costs for technology-driven companies, cannot be ignored by either professional managers or scientific founders.

So, before a company scales up to the point of needing to establish GMP-compliant manufacturing facilities, what are the typical components of R&D expenses at the seed funding stage?

High-quality laboratories are difficult to find and expensive to build, yet they are particularly crucial for research and development. While we recommend making efficient use of laboratory facilities at universities or research institutes whenever possible, if this is not feasible, founders should ensure that the tools within the experimental space meet operational needs, that there is sufficient room for expansion, and that everything remains within budget. Of course, employee commute times resulting from geographic location are also an important consideration.

When a team prepares to relocate from an incubator or shared laboratory space to an independent facility, it should also make advance preparations to ensure the move is conducted safely and in compliance with applicable regulations.

Most off-the-shelf laboratory spaces, such as incubators and shared labs, do not come equipped with the specific instruments required for a project; therefore, it is advisable to seek out sources for equipment that can be shared.

If procurement is absolutely necessary, reputable sources of pre-owned equipment can be a viable option; however, it is imperative to ensure that the equipment is traceable and backed by after-sales service support. This point was discussed in our previous article“Second-Hand Equipment for Scientist Entrepreneurs: The Unwilling Tears of Bankrupt Biotech Companies”There is discussion.

For the procurement of laboratory consumables, given that large-scale research following company establishment differs in volume from academic scientific research, it is advisable to re-evaluate and select suppliers, estimate future consumable usage based on upcoming research plans, and leverage bulk purchasing to secure discounted pricing.

Although some paid software may consume a portion of the budget, it also makes process management more effective:

• Laboratory Inventory Management Software

• Laboratory Supplies Mall and Channels

• LIMS

• Experiment Tracking and Project Management Tools

• Video Conferencing and Other Team Collaboration Tools

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Regarding the last point, I have heard of startup teams that, in an effort to save on costs for a certain video conferencing software, would disconnect and end their multi-person online meetings every hour, only to re-establish a new meeting link. This practice is both lamentable and admirable, reflecting the team’s resilience and determination.

Reserve a portion of the budget for contingencies. Employees may resign unexpectedly, and equipment may suffer accidental damage; it is advisable to maintain a separate contingency fund to address such unforeseen circumstances.

Although the company is at a very early stage, having only secured seed funding, its approach to R&D should shift from scientific research to commercialization-oriented research. Founders should begin to consider establishing efficient laboratory workflows, exploring the use of automation and integrated software with laboratory managers and researchers, creating reporting and analytics dashboards to monitor laboratory expenditures, and conducting regular audits of laboratory budgets to track cost flows.

Those who frequently shop online are well aware that the price of the same item can vary significantly across physical stores, Taobao, Pinduoduo, and Alibaba.

By the same token, when procuring for your own company, it makes no sense to simply accept the first quote received. Have you conducted a three-party price comparison? Can you secure small-batch orders from upstream suppliers? How much room is there for further discounts on the quotes provided by suppliers?

In previous procurement environments, these costs might have been approached differently; however, within a self-established company, ignoring cost savings equates to eroding one’s runway.

Researchers who frequently conduct experiments have, to varying degrees, experienced delays in their work due to late deliveries of primers. In academia, this may be somewhat acceptable. However, in startups, every day of delay brings the company one step closer to running out of cash. Late or incorrect orders can mean the difference between creating value and wasting an entire day’s work.

Before placing an order, it is essential to obtain detailed background information on the items: Are they already in stock at the warehouse? Or will they be shipped directly from the manufacturer? Confirm by phone whether the items are ready for shipment.

Financial management is another aspect of startup management that scientists often struggle with. Given the limited budgets of startups, tracking expenses on a daily and monthly basis is crucial for estimating the company’s cash runway (time until funds are exhausted).

Spend a few hours each week coordinating invoices, organizing receipts, and processing expense reports. Continuous review helps founders identify erroneous charges and eliminate wasteful spending with ease.

One day, every company will need to navigate its first return process. The costs associated with returns can vary significantly. Some companies are only required to cover return shipping fees, while others may accept only partial refunds. These expenses are unavoidable and non-negotiable (or require substantial effort and time to negotiate), making it crucial to clarify the return policy before purchase.

In practice, every founder likely has a unique plan tailored to their specific project and team. The common trait among founders who can effectively utilize capital and drive their companies forward is the ability to rapidly adapt and transition from a “scientist” mindset to an “entrepreneurial” one, while planning and simulating future scenarios well in advance. Once a company achieves stage-specific milestones that align with its technological track, market conditions, and investor expectations, it can proceed to initiate the next round of financing.