Why biotech startups need “smart capital”?

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By Min Hu, PhD

In many people’s eyes, biotech companies are money blackholes. A typical startup spends its first 5 or even 10 years of life consuming huge sums of cash, without churning out any revenue, let alone profit.

This doesn’t sound like an attractive proposition to either entrepreneurs or investors. After all, everyone wants a bit more transparency and a little certainty along the journey. Is this possible?

The answer is certainly yes. And to achieve this, entrepreneurs and investors need to work together.

In my last article, I said “patient capital” is not necessarily what biotech startups really need. Instead, they need “smart capital” – money + brain.

There are three crucial elements for a biotech startup’s success. Great science with strong IP is the first one – after all, that’s why a biotech company exists in the first place. Capital is also important – it’s the life blood for a biotech company. But there is another type of vital ingredient in the blood – commercial acumen. This is as important, if not more important, than the first two elements. It’s just like the immune cells we have in our blood – without them, we can’t battle against the adversaries from the complex and challenging environment we are in.

It’s the third element that we often underrate. Yes, we do great science that has the potential to save millions of lives. Yes, we raise tens of millions of dollars into the company to fund the amazing research. But all these efforts need to be rewarded, and the only way is through successful commercialisation. This is a lot harder than what most entrepreneurs have ever imagined, and they need a lot of help on it.

A great source of such help, is the company’s very own investors. Investors are by no means “know it all”, but experienced and smart investors would have “seen it all” or “thought about it all”. They also tend to have broad networks of other investors and experienced executives. These are great resources that entrepreneurs should not hesitate for a second to leverage, as much as they can.

So, what exactly can an investor offer along with capital?

First, smell where the money is. Well, that’s the investor’s job, isn’t it? A good investor’s ultimate goal with every investment is to realise a lavish exit, ideally within a 3-5 year time frame. However, the market is constantly changing, so the investor must be able to envision the best exit pathway in 5 years’ time, and head towards it right away. This doesn’t mean that the investor is shortsighted or doesn’t care about the company’s long-term value creation. Quite the contrary. By focusing on the medium-term value creation and commercial exit, the company is more likely to be laser-sharp focused and head towards maximised value creation. For many biotech companies, commercialisation doesn’t mean launching and selling a product in the market. It could mean selling its R&D pipeline to a big pharma, or licensing assets to multiple clients and co-develop products with them, or be acquired by a larger company where great synergies can be realised. Based on what the company’s core assets are and the market conditions, one pathway might be better than another. By planning early and understanding what they need to achieve to realise that value, the company is clear of distractions and can therefore stay focused.

Second, help the company set realistic milestones and be disciplined in achieving them. Creativity and innovation is at the core of any startup. But this would only yield great results if paired with utter discipline. There are tons of decisions to be made along the journey, many of which could mean life or death for the company. For the entrepreneur, it’s sometimes hard to be absolutely objective and keep the big picture and ultimate goal in mind when involved in the day-to-day operations in the business. That’s why they need some extra objectiveness from someone who knows the business well, has direct interest in the company but is not too intimate with it. Who are better suited than its investors for this role?

Third, attract and keep the right talent. One of the biggest challenges for any startup is forging and nurturing the right team, especially for biotech, as the process is highly complex and there is no “market feedback” until years later. Experienced investors are able to identify gaps in the core team’s capabilities, and leverage their network to look for the right people to fill the gap. The new addition does not only need to have the right skill set, but also must share the same vision and goals with the rest of the core team. Everyone in the team needs the appropriate and fair incentive. I strongly prefer the incentives to be heavily geared towards equity rather than cash – only this way, the team can be aligned to achieve the exit that will benefit everyone. To make this happen, investors and entrepreneurs will have to work together.

Investors and entrepreneurs are in the same game, and winning the game is their shared objective. There is so much more value that investors can add to startups than the money itself. This is especially valuable for a biotech company, compared to, say, an internet “tech” startup. The latter has their magic bullet – ultra-fast market testing and extremely short feedback loops, so they can just try it out “in the real world” again and again until they get it right. This luxury is non-existent for a biotech company, where the real market value of intense R&D and tens of millions spent can only be realised years later, and if anything is fundamentally wrong, it’s often too late to correct.

Of course, as an investor, we should always be sensitive about the fine balance between “hands-on” and “intruding”. After all, an investor’s job should not be to run the company for the entrepreneurs, but to be an extra brain for the company, and provide resources when needed.

That’s what “smart capital” is all about. It might sound simple, but in practice, there is never short of challenges. In my later articles, I will talk about the practicalities of each of the factors that make the “smart capital” strategy work.

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