Biotech financing, both public and private, has been choppy since September 2015. Yet some companies haven’t missed a beat. These “haves” continue to command high valuations and didn’t need to moderate their lofty aspirations. Not so for the “have nots.”
We have the privilege of working at Venrock, a firm that has funded, and continues to fund, highly successful companies such as Gilead, Juno, Illumina, and Intarcia. We’ve also seen our fair share of have-nots. Here are 10 of the key lessons we’ve learned about how to build game-changers in biotech.
1. Be uncompromisingly choosy. The road to success often takes 10 years or more and is sure to be bumpy. Be relentlessly discerning when it comes to choosing your investors and team. You are likely to see and speak with these people more than your closest friends for the next significant chunk of your waking hours. Pick your team and your investors based on trust, their embrace of truth-seeking, and perseverance. Beware of fair-weather investors, and those who are likable but ineffective.
2. Platforms are good but killer applications are paramount. Foundational technology platforms (like genomics, antibodies, and CRISPR) have led to some major biotech successes. Yet their ultimate valuation typically comes not just from the founding technology, but also from the drugs uniquely enabled by that technology. Selection of the platform’s killer apps — the clinical indications to which the platform will be applied — will make or break your company. We have seen many companies betting the farm on a highly risky first app, and when that first drug fails, the entire technology platform loses its day in the sun. Other companies pick apps where their technology doesn’t have a competitive advantage, simply because that clinical application is “hot” with investors and strategics. Good venture capitalists can be extremely helpful when picking optimal apps.
3. Fail fast. A quick, capital-efficient “no” is better than a long maybe. Identify the biggest risks and find a way to address them early. You will be tempted to delay a failure, but do so at your company’s peril.
4. Goldilocks had it right. Get your funding “just right.” Raise too little capital and you won’t make it to your milestones; raise too much and you will dilute yourself. Be thoughtful and realistic about designing your value-creating milestones and capital needs. Milestones are a commitment to your team and your investors — an implicit agreement about what will be achieved given a certain amount of time and money.
5. Zig when others zag and, when you do, swing for the fences. Venrock is anti-herd and pro-big ideas. Like you, we seek drugs and technologies that change the practice of medicine. Being first to a category can be revolutionary. So can being the best: a great strategy can be to dive deeply into a category just as others are getting discouraged by it. Learn from Version 1.0 and be best with Version 2.0 (or 3.0).
6. Know your customer. On the long and risky road to getting a product on the market, biotech CEOs and many of their investors forget who their true customers are: patients, physicians, and payers. Investors are not your customer, so don’t whipsaw your company in response to every investor idea or pushback. If your north star is solving unmet needs for patients, investors will ultimately line up.
7. Don’t bother sharing a cupcake. There are lots of cupcake biotech businesses — delicious opportunities in smaller markets — but not everyone wants to share something small. These opportunities can yield wonderful returns for founders, but shouldn’t take on the dilution of venture capital. If your market size is less than $500 million or your business needs only $10 million to break even, angels are a better funding source.
8. Scrappy is best. Using other people’s money is good too. The capital intensity of the biotech industry is one of the major reasons that its returns for founders and investors can sometimes be modest. Ideally, you will knock down major risks with small amounts of capital and then press the accelerator on growth once you know your path. Unity, which Venrock seeded, is an example of a company that executed on this strategy. Alternatively, if you must grow infrastructure early, supplement expensive equity capital with creative sources of “non-dilutive” capital like other people’s money (OPM). Possible sources of OPM include strategics, cash flow from adjacent businesses, government monies, and debt.
9. Be a master storyteller. The very best biotech founders and CEOs not only execute carefully but also weave compelling stories. The best employees, investors, and partners join a mission, not an asset. Masterful story telling helps you avoid “drip-feed” financing and B-player teams.
10. Work backward from your target company profile and your target product profile. Is your vision to create a single-product company or one with a rich pipeline of drugs? Do you want to hold on for the long run or sell early? Your answer to what kind of company you want to build has dozens of strategic implications. When you finally have a product in the clinic, ask what target product profile will actually compel a clinician to prescribe? Far too often we see companies focus on what is merely approvable (versus clinically useful) or what gets them through the next study — disastrous short-term decisions that fail to build long term value.
We believe that we are in a golden age of biotech. Making great foundational choices and partnering with a hardworking, experienced investor can help ensure that your company gets that gold.
Racquel Bracken and Camille Samuels invest in private health care companies at Venrock, a venture capital firm devoted to helping entrepreneurs build important and enduring companies. (Samuels holds personal shares in Unity, a company mentioned in this article.)