By: Madison Bruner

The neurotechnology (neurotech) industry is experiencing remarkable expansion as venture capital (VC) interest floods the cutting-edge sector. Brain computer interfaces (BCIs) and nerve stimulator technologies frequently transition from research labs to commercial ventures. Investors are left to navigate a vibrant ecosystem of innovation. Investors, entrepreneurs, and lawyers are required to navigate a complex financing landscape, comprising unique development timelines, intellectual property complexities, and a plethora of FDA regulations. While this overview is not exhaustive, the principal issues facing neurotechnology financing will be discussed.

Money, Money, Money: Tracking Investment Momentum

Venture capital investment in neurotech has exploded recently, with total industry funding reaching $2.3 billion in 2024. This is greater than a three-fold increase from 2022 levels, despite broader market volatility. Recently, startups specializing in BCIs are dominating the field, although neuromodulation, neurostimulation, and neuro-AI diagnostics have attracted substantial venture capital interest as well. 

Among the highest-profile startups are:

1. Neuralink is a company founded by Elon Musk, developing implantable BCIs to restore autonomy to individuals with paralysis. Neuralink has received $680 million over six funding rounds and is reportedly valued at $8 billion. 
2. Synchron is a company developing a solution that avoids the need for open brain surgery by using a minimally invasive procedure. Syncrhon raised $145 million in venture capital funding and is reportedly valued at $385 million.
3. Neurable is a company developing non-invasive BCI headphones and pairing with Neurable AI to enhance focus and reduce burnout. Neurable has raised over $30 million in funding and is valued between $50 million and $100 million.
4. Paradromics is a company developing a high-data-rate, high-reliability BCI. Paradromics has raised $108 million in funding and is valued between $100M and $500M.
5. Blackrock Neurotech is a company developing BCIs to provide new hope for people with paralysis & other neurological disorders. Blackrock Neurotech has raised $49.7 million in funding and is currently valued at $350 million. Notably, Tether, a cryptocurrency company, invested $200 million in Blackrock Neurotech in 2024.

NeuroTech Futures’ 2024 Funding Snapshot. https://rb.gy/fic5so

Neurotech’s Real Assets: Intellectual Property and the People Behind It

Multi-Dimensional IP Portfolios

Neurotech startups present unique due diligence challenges as they have multi-dimensional intellectual property (IP) portfolios. Neurotech startups hold an intricate collage of intellectual property spanning disciplines such as neuroscience, engineering, materials science, and AI. As such, neurotech startups will likely touch every type of IP:

1. Patents: Protects hardware innovations like implantable electrodes, pharmaceuticals, and wearable brain activity monitors. Patents also apply to biological and methodological breakthroughs, including brain mapping techniques and neural stimulation methods.
2. Trade Secrets: Protects proprietary software algorithms, neural data sets, process know-hows, etc. Trade secret protection is also common for internal processes and other competitive techniques that are difficult to protect under other IP regimes.
3. Copyright: Applies to research papers, brain databases, and software code used in device interfaces.
4. Trademarks: Used to protect brand identity, company names, product lines, and logos in a growing and increasingly competitive neurotech market.

Academic Tech Transfer Challenges

IP complexities are compounded when the startup is a spin-out of university research. Founders are typically still affiliated with their research institutions, even after starting a startup. This means investors and their counsel must navigate Bayh-Dole compliance, university licensing agreements, material transfer restrictions, and other complexities. Expert legal counsel is required to maintain and implement proper protections for these dynamic IP portfolios and ensure these protections align with a startup’s business model.

Talent Retention in a Highly Specialized Field

Neurobiologists and neurotech engineers are a valuable but rare form of human capital. Thus, they are heavily recruited by competitors. VCs may demand aggressive IP assignment, non-compete enforcement (despite tumultuous waters), and robust retention incentives.

The FDA Regulatory Maze

Neurotech companies face shifting regulatory landscapes that carry huge investment risks. The evolving approach of the Food and Drug Administration (FDA) to neurotech plays a vital role in investment planning. Firstly, neurotech startups must determine whether their product falls under the FDA’s classification system (Class I, II, or III). All three classes mandate certain regulatory requirements. Most technologies will fall under Class II, which requires FDA clearance through the 510(k) process. More invasive devices, such as implantable BCIs used by Neuralink, fall under Class III, requiring Pre-market Approval (PMA). Clinical trials are required for PMAs, and an Investigational Device Exemption (IDE) can be granted to allow the technology to be tested in a clinical trial in order to collect safety and effectiveness data.

Technology for treating serious conditions (such as paralysis, epilepsy, or severe depression) may qualify for Breakthrough Device Designation. This Designation provides a faster and more interactive pathway through the regulatory system. Other technologies that target conditions affecting fewer than 8,000 individuals annually may fall under the Humanitarian Device Exemption, which is exempt from certain provisions of the Food, Drug, and Cosmetic Act but has certain profit and use restrictions. Where neurotech is paired with AI or other forms of software, the Software as a Medical Device (SaMD) framework is applicable and will require clinical evaluation by the FDA. These overlapping regulatory pathways require that startups have strong in-house compliance teams or hire external counsel.

Once FDA approval is granted, companies have to comply with Good Manufacturing Practices (GMP), which ensure that the device is produced under conditions that assure quality, consistency, and safety.

Deal Structure Innovation: Milestones

Given the highly innovative technology of the neurotech field, deal structures need to be flexible and tailored. These structures accommodate the specific challenges that come along with technological milestones, FDA approvals, and market uncertainty. One of the most common models is milestone-based financing, which links funding to specific, clearly defined milestones such as FDA approval. However, FDA milestones may be a moving target, thereby not offering a concrete baseline. Hybrid models that blend technical, clinical, regulatory, and sales milestones offer additional flexibility.

Privacy and Ethics of Neurotech

Beyond IP and FDA obstacles, there is an emerging debate regarding the ethics of neurotech. Neurotech startups are collecting, processing, and storing extremely sensitive data that is directly sourced from brain activity. This data is more personalized and uniquely intimate as compared to other forms of biometric data, such as fingerprints or facial recognition. Neural data consists of the brain’s electrical signals, thus offering a window into a person’s thoughts, intentions, emotions, and cognitive patterns.

Most existing privacy frameworks, such as the Health Insurance Portability and Accountability Act (HIPAA) and the EU’s General Data Protection Regulation (2018) (GDPR), do not explicitly address the protection of neural data. Therefore, there is an urgent need for new laws or amendments that recognize cognitive data as a special class meriting heightened protection. Some forward-thinking jurisdictions, such as California and Colorado, are already paving the way.

For investors and entrepreneurs alike, ethical frameworks are not only a commodity but a necessary prerequisite to risk mitigation. VC firms are now evaluating startups not just on the strength of their ethical governance as well as technological feasibility or commercial potential.

Conclusion: Implications for Startups and Investors

Neurotech is one of the most promising but legally intricate frontiers in venture capital today. Investors and founders alike must navigate complex challenges spanning regulatory compliance, intellectual property protection, team building, capital allocation, and data governance. With sophisticated legal counsel, investors, and entrepreneurs can navigate the complex neurotech landscape more effectively and capitalize on this new frontier. In a world where data is the new oil, investors are eager to find the next unicorn that leverages cutting-edge technology and neural data, effectively turning our wildest science fiction dreams into reality.

#Neurotech #VentureCapital #FDARegulations