What is a Biotech Start-up?by Christopher_NW // September 17, 2017
During the final year of my Ph.D I worked part-time in venture capitalism, which is an industry focused on funding start-ups. Some firms specialize in a couple of areas whilst others go for anything that can make prospective profit. I worked at a more specialized firm that focused on green-tech and biotech. During this experience (on top of the prior internship I id in technology transfer/business development with Edinburgh Innovations, where I focused on University-based medical and biotech innovations) I got to learn a to more about the types and styles of start-ups. To note, I differentiate a start-up from a spin-out, with the latter being a startup that emerged from a university and remains associated with said university. This article aims at briefly looking into the different types of start-ups one finds in the biotech industry.
My experience working in venture capital and tech transfer with different types of investors and stakeholders has highlighted that different people have different ideas about what constitutes a start-up exactly. For example, my Chinese investors would expect a start-up to have a product, sales and a team; whereas more generally, here in the UK (and other parts of the world) none of these are required; for example, the senior postdoc in the lab I did my Ph.D in has a startup that didn’t until recently have a defined product; this can be the norm in biotech. Personally I would disagree with the Chinese definition, though would be happy to call that a mid to late stage start-up. I would roughly use the following definitions:
1. Early stage biotech start-up: no customers, employees or actual product needed; however there must be legitimate ideas for a tangible product of products based on a well-defined ‘pre-product’ and its associated IP. Here the pre-product could be a well studied and understood biomacromolecule of clinical relevance and the IP can include (but not limited to) industrial secrets, patents and expertise of key team members. Importantly, one must be able to at least theoretically bridge the pre-product with a product and its associated market. Further, an early stage startup is likely to have been in some form of existence for within ~3 years and has developed from a combination of government grants, funds from winning competitions (i.e. pitching comps), crowdfunding, potentially angel investors, and possibly small venture capital funding (if very lucky; this is quite rare and the investment is usually going to be around $500 000). Some may also call this the ‘seed’ stage which occurs before the early stage technically, and I would put the demarcation at if you have significant funding yet or not. Finally, it is quite normal for this stage to be cash-flow negative.
2. Mid-stage biotech startup: this is the growth phase of the company, where a well-defined market/s has been identified and one has moved past an initial prototype for the product. This is the stage where there will be employees (often on short-term contracts based on what you can afford), but not necessarily end-user customers (i.e. a patient). Here the customer focus is on larger, more well-established companies you would be looking to either partner with, sell your IP to or licensing your product to. Funding at this point will usually be from angel investors, venture capitalists (with the funds here increasing into the millions of dollars), and sometimes industry funding. The cash flow at this point would ideally be positive or neutral, though it may still be negative depending on the additional R&D expenditures required or investment in materials etc. This is the point of a company where equity will be given serious consideration.
3. Late stage biotech startup: a level of viability can be attributed to the company, and cash flows should be positive (though there can be rare exceptions to this). The product should now achieve a level of market penetration, and may indeed see end user sales occurring. This is the stage of a start-up where consideration to IPO’s and other investment instruments are imperative. Funding here may come from the sales of the product in addition to venture capital funding, leverage of IP (i.e. licensing contracts). In order to increase liquidity (for investor attractiveness), a company may stay at this stage for some time in order to strengthen their position (i.e. pay down certain debts, or expand a product range or the level of market penetration of the original product).
These are how I would roughly define the stages of biotech startups, but they can be relatively different depending on the type of product. For example, a potential drug for human use will have a lot more regulatory and investment requirements than say, a veterinary diagnostic. There may be significantly varied types of IP involved, and there will be a lot of grey overlapping areas between each stage. This to me, merely reflects the exciting, dynamic, and highly risky (but highly rewarding…potentially) field that is biotechnology. These were my thoughts, I would love to hear others.
In a future article I will examine what makes a startup biotech company attractive to venture capital investors, and what they want to avoid.