In view of the return of the public markets for biotech stocks over the past few months, the year 2000 should be off to a good start. Here are 10 pieces of advice for prospective biotech entrepreneurs as we step into the new millennium:
- Think twice before starting a company. With so many venture capitalists using their funds to support existing portfolio companies, and with so many undervalued public biotech companies, most new biomedical technologies should be able to find a home in an existing biotech company.
The entrepreneurial dream of commercializing a new biomedical technology can still be realized within a well-managed, well-financed existing biotech company.
- Don't bootstrap it. Building a successful biotech company necessitates raising large amounts of capital from long-term, sophisticated investors. Dilution is a reasonable price to pay for building value.
Specialty life sciences venture funds and strategic pharmaceutical company partners can provide the funding necessary to build value quickly and to realize your dream. The alternative is to avoid dilution and to maintain control over what will be an expensive hobby.
- Hire management before scientists. As the biotech industry enters its third decade, there is a pool of excellent and proven business talent available to run new companies.
Instead of investing effort in festooning a scientific advisory board as long as one's arm with many famous names who will contribute a minimal amount of their time to the growth of the company, hire one experienced business manager to refine the scientific vision and to execute.
- Write a business plan that shows how you will make money. Significantly advancing the state of technology is not adequate justification for starting a company. Biotech is a business, and companies need to be constructed in accordance with a sensible business model.
Short-term guaranteed cash is more important than long-term, hoped-for royalties. As John Maynard Keynes remarked, "In the long-run, we are all dead."
- Under-promise and plan for delay. In view of the many mergers and merger discussions among pharmaceutical companies, deals often get put on hold and generally take longer than expected. Clinical testing of a new drug usually moves more slowly than planned, and the response by the FDA is unpredictable.
- Under-promote and allow investors to be pleasantly surprised. Don't issue press releases heralding a cure for cancer in mice. The applicability of small animals as models for the human system is largely over-rated. The media is always available to exaggerate a modest success as well as to overreact to a modest setback.
As H.L. Mencken noted cynically, "No one ever failed to make money by overestimating the ignorance of the American public," or their ability to be misled by spurious press accounts of scientific advances. Try to keep a low profile until you really have something to say.
- Sell to the other thousand-plus biotechs instead of competing with them. The current flurry of recent biotech IPOs includes several companies which will never manufacture, market or sell a drug. Instead, they will accelerate the process of drug discovery by a variety of ingenious methods.
For example, last week a new Massachusetts biotechnology company, Cellstore, raised just under $10 million from a group of venture capitalists in order to fund its business plan of providing biological tissues and information to the thousands of biotech and pharmaceutical companies undertaking biomedical research. This round of venture funding is expected to be all that the company will need in order to turn a profit.
- Be skeptical about "innovative" financing strategies. An industry in temporary distress attracts all manner of financial con artists.
Numerous financing schemes are now available to biotechs, which offer avoidance of current dilution in exchange for downstream price protection mechanisms that can result in massive financial pressure and the inability to raise further funds. Such instruments are aptly referred to as "toxic" or "death spiral" preferred stock.
Avoid the fate of seeing your biotech company merged into a funeral services company (the Procept/Heaven's Gate transaction).
- A sale is at least as good as an IPO. In Massachusetts this year, at least two 18-month-old companies, Advanced Inhalation Research and Genetic Microsystems, were sold to strategic buyers for prices in excess of $100 million.
There is nothing ignoble about selling your company to an excellent strategic partner and continuing to execute on the entrepreneurial dream within a larger, well financed company.
- Don't let the Internet get you down. The stratospheric valuations accorded Internet companies today are deja vu all over again. This was the biotech industry in the early 1990s.
Companies can chase ideas rather than profit for only so long. For those with a bit of patience, staying with the biotech industry will offer numerous advantages over a short-term, Internet play. Only the biotech industry can offer true barriers to entry through long patent lives and the FDA regulatory process.
Aside from certain infectious diseases and vaccines, the most important medical discoveries are yet to come, and will be rapidly accelerated by the current explosion of information about the human genome. Several hundred drugs developed through the use of biotechnology are advancing steadily through various stages of the regulatory process, with many expected to be approved this year.
Participating in an era of scientific advance which has not yet been seen in the history of mankind is an exciting and personally rewarding prospect - at least as gratifying as ordering groceries online.
Reprinted with permission. All rights reserved. Mass High Tech 2000.