Free Cash Flow: What It Is and Why It Matters for Biotech and Other Startups

Authors: Gerald L. Klein, MD1 and Alex Walden, MBA1; Larry Florin, MBA2; Rob Walsh, MD1

Affiliations: MedSurgPI, LLC1; LBF BioPharma Consulting2

For early-stage companies, cash is not just a balance sheet line. It is time, leverage, and strategic optionality. It pays clinical trial invoices, keeps the team moving, and gives leadership room to make decisions before the market makes them instead. Profit on paper does not pay salaries, CRO invoices, regulatory consultants, server bills, or vendors. Free cash flow does.

Free cash flow, often abbreviated FCF, is one of the clearest measures of whether a business is generating more cash than it consumes. It cuts through accounting noise and focuses on the practical question every founder, board member, investor, and operating team eventually has to answer: after running the business and funding required investment, how much cash is actually left?

The standard formula is simple:

FCF = Cash Flow from Operations - Capital Expenditures

Cash flow from operations starts with net income and adjusts for non-cash items and working-capital changes. Capital expenditures (CapEx) include spending on equipment, facilities, laboratory infrastructure, manufacturing assets, technology systems, and capitalized software. Subtracting CapEx gives leadership a more realistic picture of available cash.

Many startups report negative FCF for years. That is not automatically bad. A biotech company advancing a promising therapeutic, device, diagnostic, or platform may appropriately consume cash before revenue begins. The real issue is whether negative FCF is intentional, milestone-driven, and adequately funded.

Why FCF matters more than “profit on paper”

Traditional profitability metrics can be useful, but they often miss what matters most in early-stage companies. Net income may include accounting treatments that do not reflect immediate cash movement. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) can make a company look stronger by excluding items that still affect cash needs. Revenue growth can look impressive while the underlying business still consumes cash.

FCF brings the conversation back to operating reality. It asks whether the company has enough cash to execute the plan, reach the next milestone, and preserve negotiating power.

1. FCF defines runway

Runway is one of the most important numbers in any startup boardroom. A company with $36 million in cash and a monthly cash burn of $3 million has approximately 12 months of runway. That number drives hiring plans, trial design, vendor negotiations, fundraising timing, partnership outreach, and whether a company can wait for stronger data before raising capital.

In biotech and medtech, runway should not be modeled as one flat average. Cash burn changes by development stage. Preclinical work may be modest. Phase 1 and phase 2 trials increase costs through sites, monitoring, data management, safety oversight, and Clinical Research Organization (CRO) support. Phase 3 trials, manufacturing scale-up, regulatory filings, and launch preparation can change the cash profile dramatically. The organization’s Financial Planning and Analysis (FP&A) function needs to consider the timing of the future cash outflows and inflows (milestone payments). To the above example, that might mean a company with $36 million in cash may only have 9 months left because of known payments.  Conversely, said company may hit a milestone in seven months and end up with an additional 18 months of cash. 

2. FCF exposes the real cost of growth

Growth is attractive only when it is financially sustainable. A Software as a Service (SaaS) company can grow revenue while spending aggressively on customer acquisition. A medtech company can expand evidence generation while absorbing device manufacturing, quality-systems, and regulatory costs. A biotech company can advance a pipeline while committing to expensive clinical, chemical, manufacturing, and controls (CMC), pharmacovigilance, and medical affairs work.

FCF forces leadership to connect scientific and commercial progress with financial reality. A milestone is not only a scientific event. It is also a cash event. The question is not just, “Can we get to the readout?” It is, “Can we get to the readout with enough cash and credibility to act on the result?”

3. FCF is the language of capital

Investors do not fund narratives alone. They fund risk reduction, value creation, and credible use of proceeds. Venture investors, crossover funds, strategic partners, lenders, and acquirers all want to understand how cash will be deployed and what milestone changes the company’s financing profile.

For biotech companies, this often means modeling cash burn through commercialization.  While accomplishing the next milestone will be the priority of the organization, losing track of the long FCF projection can become detrimental.  Not properly forecasting FCF is inefficient in the best of cases. Biotech history is filled with companies that advanced promising science but exhausted available capital before development milestones could create financing leverage. In many cases, the constraint to success was not scientific viability alone, but the inability to sustain free cash flow through increasingly expensive stages of development. 

A management team that understands FCF can explain which expenditures are milestone-critical, which are discretionary, which can be delayed, and which create leverage in financing or partnering discussions. That clarity can improve fundraising conversations and reduce surprises.

4. FCF signals operating discipline

In strong capital markets, inefficient spending can hide behind optimism. In tighter markets, it becomes visible quickly. Boards and investors scrutinize burn, hiring, vendor commitments, consulting spend, and capital expenditures. Managing FCF well means aligning spend with value creation.  Periodically reviewing the assumptions surrounding the FCF projection is prudent. This process may highlight changes in the assumptions or the market or both.  In that case, the company will have plenty of time to take corrective actions. Those actions may include finding a development partner at favorable terms. 

That may include negotiating better supplier terms, sequencing trials intelligently, avoiding premature fixed costs, using fractional leadership, reassessing non-core programs, and timing CapEx around milestones.

The MedSurgPI Business & Financial Insights Lens

Biotech FCF requires a specialized view. R&D is often the dominant cash outflow. Clinical trials, CRO contracts, medical monitoring, safety oversight, manufacturing, regulatory preparation, scientific communications, and medical affairs support may appear as operating expenses, but they behave like strategic investments.

One-time inflows can also distort the picture. Licensing fees, grants, partnership payments, and milestone receipts may create a positive FCF quarter while the underlying business still burns cash. That is why leadership should separate recurring operating cash flow from one-time inflows and maintain a clear “core burn” view.

A practical approach is to forecast FCF by milestone: preclinical package, IND submission, phase 1 completion, proof-of-concept readout, pivotal planning, approval, and launch preparation. Each stage should have its own assumptions, risk points, financing requirements, and decision gates. A seasoned CFO will consider all the events and their likelihood and develop a cash projection. 

The bottom line

Free cash flow is not a finance-department exercise or a year-end cleanup metric. It is the operational heartbeat of a startup. For biotech, medtech, and other innovation-driven companies, it determines how long the company can pursue its mission, how much flexibility management has, and whether the next strategic decision is made by the company or imposed by the market.

Companies that master FCF can choose when to raise, when to partner, when to expand, and when to conserve. Companies that do not often discover too late that progress without cash discipline is not enough and potentially fatal to the organization.  A start-up biotech CFO will have a good handle on the assumptions surrounding the FCF and most importantly, will track changes to those assumptions. 

MedSurgPI Business & Financial Insights will continue to explore practical financial, operational, and development topics that help founders, boards, investors, and clinical leaders make better decisions in capital-constrained environments.

Disclaimer: This article is for educational and informational purposes only and does not constitute financial, investment, accounting, tax, legal, regulatory, or medical advice. Readers should consult appropriate professional advisors before making business, financial, investment, or regulatory decisions.