Legend has it that every self-respecting high-tech company was founded in a garage with its initial business plan written on the back on a napkin. But how do biotech companies do it, given the lack of six digit lab equipment and appropriate biosafety levels in your average garage?
The path to a biotech start-up company generally begins with inventions conceived and refined over many years in an academic institution in a range of different disciplines. Biotech companies, therefore, often start their path to hopeful success with a technical solution that finds a worthy application rather than a vision, such as “creating a platform to share images”, that gets realized by writing code or building a webpage.
It was the 1980 Bayh-Dole Act that made this mode of business creation possible and arguably played a critical role in creating the biotech industry as we know it. Bayh-Dole permits US universities, not-for-profits and small companies to retain the title to inventions made in their laboratories with government funds, i.e. grants. Before this landmark law the government owned all inventions made with grant money – and few of them ever saw the light of day in the form of commercial utilization.
Bayh-Dole went one step further: it encourages universities to collaborate with companies, promote the utilization of their inventions and give licensing preference to small business, effectively transferring technologies to start-ups while gaining funding for themselves from the licensing fees. By all standards Bayh-Dole is one spectacularly successful piece of legislation and – almost 40 years on – can be credited for a large number of biotech start-ups.
Hard and current data on the number of such technology transfer transactions and their economic impact are difficult to come by, especially data pertaining to specific industries. The Association of University Technology Managers (AUTM) reported in its 2015 U.S. Licensing Activity Survey that over the last 25 years 380,000 innovations were reported to Technology Transfer Offices, 206,000 new patent applications were filed, more than 84,000 US patents were issued and a stunning 11,000 start-ups were formed based on those innovations.
The newest data from 2016 confirm that picture: 70% of licenses from academic institutions went to small and start-up companies.
The licensees are often the people who know the technology best: the inventors. Professors and/or graduate students, who spent all or a significant part of their careers developing and refining a technology or researching a promising drug lead, become the scientific founders of fledgling biopharma or biotech company.
Once the new entrepreneurs have secured their licenses they generally don’t go very far: 70% of start-ups end up near “their” university.
Biotech Hubs: Money, Space, People, Mindset
Staying close to home offers advantages, especially when home is a large well-funded university with other large and well-funded universities close by. A vibrant entrepreneurial scene attracts investors, former (fellow) students are natural early hires and universities, interested in maximizing their own return from successful licensing, might even provide space and support in a business incubator. More mature companies in the area are potential partners and have seasoned senior executives interested in sharing their experience with fledgling companies.
Availability of money, space, people and entrepreneurial spirit to boot is what makes biotech hubs such as New England and the San Francisco bay Area so successful.
The Long Road Ahead
Securing intellectual property and maybe even a space in an incubator are the critical first steps. A long road awaits the biotech entrepreneur who hopes to one day take their NewBioCo public or sell it at – if not a spectacular at least a decent – valuation.
Multiple challenges face a biotech start-up:
- Funding is the obvious big hurdle for almost every start-up in any industry. What makes biotech and especially biopharma a particularly tough sell is the very long time to market or exit. Between a promising compound in pre-clinical and a drug candidate in successful Phase II clinical trials lie many years and many millions of dollars. Biopharma is a high stakes, high risk, high return long game and fewer investors are up for it than are willing to fund the development of the next must-have app.
The – somewhat reasonable – advice to high-tech entrepreneurs to use their own money, their parents’ retirement funds plus anything else they can beg, borrow and crowdfund won’t get the typical biotech entrepreneur very far. Many biotech companies continue to rely on government grants, specifically Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) grants to get to a point were an Angel investor or a VC focussing on early stage investing might take an interest.
Raising money is not for the faint of heart but even with Angel money or an A round in the pocket the entrepreneur is not out of the woods yet. That money burns quickly and the new investors are reluctant to invest until there is an opportunity for significant value creation in the near term.
- Building the team – having the right people in the right position is incredibly important for any company. A great team is well-rounded comprising of people with complementary skills and a common vision. Deep domain expertise and understanding of the market the product targets are crucial. The importance of the team for fundraising can hardly be overstated, investors are said to fund teams, not products or technologies. The catch-22 is people are not going to leave their jobs until you have raised some money.
- Creating the right company and incentive structure – this sounds like a boring task that can be postponed until some later point – but isn’t. To hire and retain the best people the right incentives need to be in place. Sooner or later that large biotech company across the parking lot will try to poach the top talent. Enthusiasm for the technology can go a long way; the rest is making sure that key people have enough upside to refuse even the proverbial “offer that can’t be refused”.
- Securing the intellectual property (IP) position – not only is it crucial to get the license for the foundational technology right before you could do any fundraising (issues like exclusivity, geography, termination and, of course, fees) but also to build onto that IP position, expand it and secure it against competitors. There are no shortcuts with IP and securing it will mean spending precious cash on highly paid patent attorneys and obsessing many hours over the best way to formulate the claims.
Starting a biotech/biopharma company is a daunting task, with many challenges and a very long commitment: Humira, the first antibody drug prescribed for the treatment rheumatoid arthritis, was discovered right around the time the Pentium processor was developed. 10 years later the tech industry had given us Yahoo (1994), Java (1995), Nintendo 64 (1997), computer animation (1998), the first hybrid car (2000) and the Apple iPod (2001) among many others – all in the time it took Humira to be developed, tested in the clinic and approved by the FDA. The upside: sales of Humira in 2015 alone amounted to $14B.
Founding a biotech company is a wild ride but it is worth it!
List of 65 biotech incubators
List of 15 best biotech incubators in Europe