When venture capitalist Robert Swanson, and biochemist Dr. Herb Boyer each put in $500 to start Genentech in 1976, it could hardly be said that they knew what they were getting into, or how they were going to make their company successful. Few biotechnology companies existed before, and there were no successful “biotechnology business models” to follow.  However, these founders had a clear vision and a burning passion to use this newly discovered recombinant DNA technology to create disease treatments that were previously deemed “impossible”. This tool became known as “Genetic Engineering Technology”, hence the name Gen-en-tech. 

Since its founding, Genentech scientists have developed some of the world’s first recombinant human therapeutics such as Recombinant Human Insulin, Recombinant Human Growth Hormone, Recombinant Human Tissue Plasminogen Activator (tPA) and many others. Then in March 2009, Roche and Genentech agreed to a complete buyout of the company for $46.8 billion dollars, for 56% of Genentech’s remaining outstanding shares that Roche did not already own.  Not a bad return for a $500 investment in 1976.

Since its founding, Genentech scientists have developed some of the world’s first recombinant human therapeutics such as Recombinant Human Insulin, Recombinant Human Growth Hormone, Recombinant Human Tissue Plasminogen Activator (tPA) and many others. Then in March 2009, Roche and Genentech agreed to a complete buyout of the company for $46.8 billion dollars, for 56% of Genentech’s remaining outstanding shares that Roche did not already own.  Not a bad return for a $500 investment in 1976!

There was no doubt that between 1976 and 2009, Genentech experienced numerous, and sometimes disastrous, trials and errors in their product development, regulatory approvals, marketing and corporate development.  Since no best practices were available to follow in this fledgling industry, and there were few experiences to draw from, and no serial biotechnology entrepreneurs to listen to, the company founders forged ahead by sheer instinct, and created their own best practices as their company grew. 

Today, the biotechnology industry is over 35 years old with thousands of biotechnology companies worldwide, and many of these companies have been started by serial biotechnology entrepreneurs.  Sound business models are now available and there is plenty of experience to draw from for those contemplating starting and growing a biotechnology company. However, the challenge is often finding these resources and getting serial entrepreneurs to share their candid insights and experiences. All biotech entrepreneurs can save time and avoid costly mistakes if they avail themselves to as much practical experience as possible.  This old saying does have an element of truth, “learn from the mistakes of others because you will never live long enough to make them all yourself!”

Beginning May 15 through June 12, 2012, a 5-week, webinar series titled “The Business of Bioscience: What Goes Into Making a Biotechnology Product” will be presented by Dr. Craig Shimasaki, and sponsored by the National Council of Entrepreneurial Tech Transfer (NCET2).  This 5-series web-based presentation will cover the author’s 28 years of experience as a serial entrepreneur of three biotechnology companies.  He will share insights that will help those wanting to take their product idea through to commercial development, and the author will describe how to navigate the challenges of building a successful biotechnology company. 

The series covers five, 90-minute class sessions walking participants through the steps biotechnology entrepreneurs take when developling a product and building a company.  At the end of each session the participants can submit questions to the presenter.  This webinar covers insights from the author’s book “The Business of Bioscience: What Goes Into Making a Biotechnology Product” which will serve as an in-depth reference and resource.  

To register for this series click on the Research Commercialization Online Courses and Webinars

To purchase a copy of the reference book click on this link “The Business of Bioscience: What Goes Into Making a Biotechnology Product”

Don’t worry! You don’t have to be CEO in order to start your own biotech company.  In fact, it may not be the best advice to become CEO if you have no previous business experience.  An academic scientist CEO without prior business experience can sometimes be an impediment to raising money because investors bet on experienced people – not just in technologies alone.  Although there are examples of scientists leading successful biotech companies, unfortunately, stereotyping of scientists does occur. As a general rule, the more practical business experience you possess, the more confidence investors will have in your ability to successfully lead a company.

As a professor, you can assist in starting and forming your new company, help develop the technology and participate in its value creation without having to leave your academic position.  But even if you are interested in leaving your academic position, you still don’t have to run the entire organization unless that is your desire.  There are several ways to participate in the entrepreneurial process without shouldering the responsibility for the entire organization.  However, just because you are not leading the organization, it does not mean you cannot participate in shaping its future. There are several alternative roles you can assume that still provide valuable experience for participating in the entrepreneurial process and better equipping you for a subsequent entrepreneurial opportunity.

Alternatives to Taking the Leadership Role

It is important to first decide your time commitment to the new entity.  Are you interested in full-time participation or only part-time?  Do you only want to participate in this new venture as a consultant on an “as needed basis”?  Would you like to start on an “as needed basis” yet have the opportunity to later participate full-time?  If you first identify your time commitment interest, it will help in selecting your entrepreneurial options.  If you are contemplating starting a biotechnology but are not interested in leading the organization, here are some ways you can participate: 

1. Take a position as Chief Scientific Officer or Vice President of R&D.  Participate by leading the technology development but have someone else shoulder the business and financing responsibilities of the organization.

2. Participate as a Scientific Advisory Board Member and assist in the overall direction and in solving problems during the technology development

3. Participate as Scientific Consultant and assist on an “as needed basis”

In the beginning, you will be heavily involved in establishing the company, and you must be willing to commit a large portion of your time during this phase.  Afterward, you can then return to academic research or medical practice, while contributing an alternate role as described above.  As a founder of the company you will most likely be involved in securing seed funding for your new venture, which may come in the form of grants and/or seed capital funding from angel investors.  During this time you must identify and recruit an experienced CEO or a former entrepreneur who can give you guidance on how to move the technology forward. Initially, you must be the sole driving force behind the company, understanding that your work will have benefit later when you reap the rewards of your efforts.  By participating in these  alternate roles it will better prepare you for subsequent start-up options where you may want to assume the leadership role. 

The Takeaway Tidbit

Professors with minimal business experience may want to consider supportive roles in their new venture rather than taking responsibility for the entire organization.  In this way, you can learn by participating as a member of the team, rather than being solely responsible for the outcome of the company.  By doing this, you will gain valuable experience and can be applied to your next opportunity.  You can then lead with more confidence because you will then understand the start-up process and the issues you may face.  It is essential to work with other experienced people because a good team is vital to business success.  For those who are interested, more information about these alternative roles can be found in the chapter titled “What Makes a Biotech Entrepreneur”, in the book “The Business of Bioscience: What Goes Into Making a Biotechnology Product”.

One of the first things is to talk with an experienced attorney who has worked with start-up biotechnology companies.  Too many entrepreneurs say they can’t afford an attorney, but in reality you cannot afford NOT have one for your business.

This article in the October 2010 issue of Nature Biotechnology “Why You Need a Lawyer?” discusses things an attorney will give you advice on, such as: issuing stock, constructing employee agreements, selection of a board of directors and advisors, and other things you will want to know.

All biotech entrepreneurs at some point must address the question “how much is your company worth?” The answer determines the slice of equity for yourself, employees, and current and future shareholders.  As a result, most BioEntrepreneurs tend to overvalue their company at the start-up and early development stages.  However, overvaluing your company is counterproductive and detrimental to attracting institutional and venture capital during these critical stages.  Although there are standard valuation methods for determining the value of growing companies with product revenue, how do start-up and preclinical stage biotechnology companies without product revenue value their organization?

For valuation purposes, biotechnology companies should be divided into two groups: Early Development and Latter Development Stage Companies.  Early Development Stage companies are Seed, Start-up, and Preclinical Stage organizations.  Latter Development Stage companies are those with an FDA approved IND (Investigational New Drug application) and companies with a product in human clinical trials.  For diagnostic and medical device companies, Latter Development Stage refers to companies with products ready for human testing prior to a 510(k) or Pre Market Approval (PMA) application.

When assessing the valuation of Latter Development Stage Companies the following methods are best utilized.  Each of these methods can provide differing valuations but the best valuation is an estimate determined by utilizing all three methods.

1.  Valuation by Comparables: Identify similar organizations in similar sectors at similar development stages that have been recently valued by a financing round.  Although this is generally not public information, there are available venture capital resources (for fees) you can utilize to obtain this information.  Also, if you know or have worked with Venture or Institutional Capital, they can help you obtain this type of information.

2.  Valuation by Public and Private Exit Valuations:  Find the prices paid for mature organizations in your sector during an exit such as an acquisition or an Initial Public Offering (IPO).  An appropriate adjustment to this price is then made based upon the return multiples required by a typical institutional investor.  For instance, if an institutional investor today requires a potential 8-10x return on their investment in order to invest, then your organization could be valued at $25 to $31 million based upon an acquisition value of $250 million for a mature company in your sector.

3.  Valuation by Risk-Adjusted Discounted Cash Flow (rDCF):  This is determined by first estimating the company’s future revenues minus the costs associated with generating those revenues, then discounting these by an appropriate interest rate.  This is called a Discounted Cash Flow (DCF) or Net Present Value (NPV) of those future earnings.  Then, the value of those future earnings is discounted again by the risk of successfully completing Phase I, II, III and receiving FDA approval.  The final value is called a Risk-Adjusted DCF. Although this method sounds complicated, there are good mathematical programs for calculating these figures.  The uncertainty comes from the estimates made about the company’s future revenues and when determining the risk associated with clinical and regulatory success.

4.  Adjustments to Valuation: There are several value-adding or value-detracting factors.  Examples include the completeness and caliber of the management team, the acuteness of the medical need for their product (e.g.HIV, Alzheimer’s, Cystic Fibrosis), follow-on applications, and the strength of existing financial and development partners in supporting ongoing product development.  The Current Financing Window and the Need to Raise Capital: There are other adjustments to valuation.  When a biotech company urgently needs capital but doesn’t have readily available financing their valuation is somewhat reduced.  Conversely, an organization that is adequately funded with adequate resources to reach their next value enhancing milestone is valued differently.

For Early Development Stage Companies, you can use all the same methods except the Risk-Adjusted Discounted Cash Flow Method (rDCF).  Early Development Stage companies have many more financial and scientific uncertainties that weaken the ability to confidently utilize the rDCF method.  These companies lack certainty of successfully reaching the next stage of development and uncertainty in securing adequate funding to continue progress toward the clinical testing and regulatory phases.  Also, the cost, risk and time associated with the research and development phase of any one particular biotechnology product is uncertain.  More importantly, Venture Capital does not use rDCF for valuation of Early Development Stage companies, and they are the most common investor at this stage of development.  However, once a company receives FDA approval to begin human clinical testing (IND approval), there is a better understanding of the development path and the risks associated with these products reaching commercialization.

The Takeaway Tidbit

Accurately determining the valuation of a development-stage biotechnology company is important for attracting financing, issuing stock at “fair-market’ value and ensuring that future financing partners are not soured by an unrealistically valued company.  Many valuation methods are available for companies with product revenue but all methods do not work equally well for early and development-stage biotechnology companies.   The reason for this lies in that early-stage biotech investors are VCs who typically do not use rDCF when determining valuation of companies at these early stages.  The key to arriving at a fair valuation is using the appropriate methods for your company’s stage of development.  Having a realistic valuation for your company will increase the likelihood of financing your enterprise.  In reality, after utilizing all these valuation methods, never forget, valuation is ultimately determined by the investor who writes the check.

Without capital, the greatest of ideas get nowhere.  The biotech entrepreneur must successfully identify and access consistent sources of capital over the life of their organization in order to transform their ideas in to products.  During early development stages the entrepreneur should make use of Angel capital and Small Business Innovative Research (SBIR) and other federal (NIH) and state grants.  But at some point this budding company will need to secure venture capital or what is known as Institutional Funds.  How does one go about doing this?

Kleiner, Perkins, Caufield &  Byers (KPCB) is one of the stalwart biotech venture capital groups and one of the early backers of Genentech in 1977.  Since then, the firm and its Partners have backed entrepreneurs in over 100 life science companies working in every area of medicine, including cardiology, cancer, neurology, immune system diseases, ophthalmology, and molecular diagnostics.

Stanford University’s Entrepreneurship Corner interviewed Brook Byers, an early partner in the firm discusses the best way an entrepreneur should find and reach venture capitalists.

In this second video clip he shares his thoughts on selecting and working with venture capital firms.

The TakeAway Tidbit:

Entrepreneurs must anticipate the need to find venture capital early and begin communicating with these firms even if they don’t need their capital immediately.  Relationships take time to build. Finding the right financial partner will not only bring financial strength to your business but also the expertise in assisting you to strategically grow and build your business.

In a post, William Crawford references Whitesides talk on “Challenges to Successful Innovation and Translation” of medical research where he outlined “Whitesides Rules for Biotech Entrepreneurs” or “Uncle George’s Homey Rules for Entrepreneurs”.  These 14 simple rules are, well… simple, but like viewing life in a rear-view mirror, some of these may be seem obvious as you read them but they were most likely borne through adversity.

For instance, rule #10 “Regulatory Agencies are Motivated to Avoid Risk.  Nobody ever lost their job for not approving a product”  For the biotech entrepreneur, the lesson is, when developing and testing your product, be sure to plan on examining every reasonable risk imaginable…and then find a few more”.  The FDA is a risk-averse agency by nature.  Help them do their job by appropriately removing the guesswork from as many product risks as reasonably possible.

The biotech industry is only about 35 years young.  However, in spite of reaching profitability, some still say the biotechnology business model is broken.  They cite inefficiencies in generating significant profits from the industry as a whole, absent a handful of successes. It is true that the path to biotech commercialization is littered with hundreds of companies we no longer know the names of—yet this can be said of many industries. The fact is that the vast majority of biotechnology companies are early-stage and they still consume—rather than produce—capital.

Criticism arises from comparing the biotechnology industry’s profitability timeframe to non-science based businesses, without respect to the length of the industry’s unique product development cycle. If the business of biotechnology is measured in the same timeframe as say the IT or computer industry, then the critics are correct. However, biotechnology products have a development timeframe that can extend 10 to 15 years. This is much different than a product which can be commercialized within 2 to 3 years. My hypothesis is, that if time-to-reach-profitability was measured in “multiples of product development cycles”, the biotech industry fairs just as well as other industries.

The biotechnology industry’s ability to quickly hone in on successful drug targets or molecular markers will no doubt improve, which will then increase the success rates and decrease the time to commercialization. The concept of young industries working to improve targeting efficiency is common. In the petroleum industry’s early days, oil companies simply dug holes in the ground in the most likely places—with few successes. Today, oil companies use sophisticated sonar and high technology geological devices to improve the likelihood of a drill hitting oil. The difference between the oil industry and the biotechnology industry is the length of time it takes to learn the well is “dry”. Biotech companies may not discover that the well is “dry” until their drug candidate completes phase III clinical trials—this may be 8 to 12 years from the beginning.  Unfortunately, biotechnology product development stages cannot run in parallel. Just as you cannot put two 4 ½ month pregnant women together to get a baby—some things just require time.

THE TAKEAWAY TIDBIT

In spite of this criticism, the biotechnology industry contributes a value that cannot be measured in near-term profits. Many biotechnology products have life-saving medical significance and these products were inconceivable decades ago.  Regardless of its business model, the biotech industry will continue to grow, as long its products and services attract willing financial markets that value their contribution enough to support them to maturity. As more biotechnology companies mature, no doubt this industry will improve in overall efficiency and profitability. But more importantly, its life-saving products will have already made a significant impact on the health and welfare of all society.

Step 1.  Make absolutely sure the idea has a true market need

Good ideas are just that…good ideas, however, not all good ideas produce needed products.  Recognize that there are many exciting technologies still in search of a market need.  Be absolutely sure that there is a real market need for your future product (see BioBlog “The Deception of Marketing a High Tech Product 9/30/09 post).  Also, be sure that the technology of interest is protected by intellectual property (IP).  Next, secure the assets, IP rights and commitments from the inventors and key personnel (if you are not one) who have the know-how required for making the technology successful.

Step 2.  Identify Founders and Key Personnel

Good people are critical to any company’s success.  Carefully identify these individuals and understand their interest and commitment to the future organization.  Not all individuals with interest at this stage should be founders of the company; nor should all founders be equally compensated with identical amounts of stock unless all intend to work full time in the organization once it is funded.  Determining percentage ownership is a difficult issue.  You do not want one founder receiving identical equity ownership who will not be working with the new organization yet keeps a secure position receiving a good paycheck and rides on the coat-tails of other founders.

Step 3.  Find a Good Attorney

This individual is a key partner.  Your attorney will be the individual you go to for advice, guidance, counsel, and of course, legal answers.  They will help you navigate through the corporate and business issues during all stages of establishing and growing your company.  Within the first week of starting your company, you will have this person’s phone number committed to memory.  Therefore, they need to be someone you trust and someone with whom you work well, and above all, a professional with many years of expertise in advising start-up biotechnology companies.

Step 4.  Incorporate your company as a C Corporation

Your next objective will be to raise money and/or secure federal SBIR (Small Business Innovative Research) grants.  Without an incorporated company you won’t be able to do either.  There are many reasons to incorporate early, one reason is that you can then issue founders stock without having to pay exorbitant sums of money for shares (or incur large tax consequences) since the valuation of the company at this stage is extremely low.  The majority of all biotech companies should be C Corporations rather than S Corporations or LLCs.  Serious investors know this and decline to invest because they do not want to go through the trouble of changing an inappropriate business structure.

Step 5.  Conceive a well-planned marketing and business strategy

It is impossible to raise money without a well-written business plan that clearly describes: the market problem and need, how your product will solve it, how much money your product will generate, what you intend to do with the cash, what the return and exit is for the investor, and who the key personnel are within the company.  Write your business plan with the guidance of your attorney.  They will help convert this into a fundraising document (private placement memorandum).  You will then seek an audience with the appropriate investor groups interested in your stage and sector of industry.

Step 6.  Operate as a virtual company

Keep your day job!  Build the company carefully while minimizing your risk.  At this early stage, brick and mortar are not necessary when you possess a computer, a cell phone and have an internet connection.  However, be sure to have access to a conference room or meeting room but don’t spend money on rent at this stage.  As you work on your new enterprise, be careful about performing any work for the new enterprise while employed at your current place of business.  There can be legal issues with ownership if you use company time and/or facilities while starting your new business venture.  Be sure to discuss these issues with your attorney.

Step 7.  After raising seed capital, advance the technology consistently through successive product development milestones

Be sure to outline the key value-increasing product development milestones throughout the entire product development pathway.  Then demonstrate consistent progress by meeting these projections for the first few of these milestones.  All investors like to hear about companies making steady progress along a planned development pathway.  By timely meeting key milestones, you will increase the value of your company and decrease the investment risk. Consistency in meeting planned milestones increases the likelihood of securing subsequent funding.

THE TAKEAWAY TIDBIT

These 7 steps are important basics for the biotech entrepreneur.  The amount of time it may take to complete these steps can be anywhere from two months to two years.  There are many additional steps to starting and building a biotechnology company than presented here, and this brevity is not meant to trivialize the process but rather to clarify what is involved in reaching this goal.  Sometimes the order of these steps may be different, but each of these are essential when starting a biotech company.

Biotechnology product development, at some point, is constrained by time and limited capital. In addition to time and resource constraints, there are “unknown-unknowns”. The unknown-unknowns are things that you did not know, that you did not know, that you did not know. Because biotechnology is the melding of science and business, it creates a business of uncertainty. Biotechnology research begins with promising yet unproven science, although this promise provides the phenomenal opportunity for life-changing medicines. However, because of this uncertainty, product development rarely proceeds in a straightforward manner. This brings us to the first tenet of biotechnology product development – Always make allowances for product development pathway detours.

Unplanned but Anticipated Detours

Product development pathway detours are scientific issues that must be overcome in order to return to the original product development pathway. These scientific detours may include, an unplanned development of a new cell line to express a product in cell culture without Fetal Calf Serum (FBS) because there is not enough FBS commercially available to meet scale-up requirements—such as what occurred with Tissue Plasminogen Activator in the mid-1980s. Other detours may include an unplanned need to resolve a false-positive problem in a biological assay that was used for selecting lead molecules, after learning these molecules did not work when moved into animal models. These detours arise from the unknown-unknowns. Things you did not know, that you did not know—until you got there. The remedy is to make allowances for them because it is certain that all companies will encounter this phenomenon.

Universally, proposed product development pathways presume everything will work smoothly as planned, rarely allotting any time for unanticipated work. Of course, who wants to show a potential investor that they are not aware of all the problems when developing a product! This type of poor planning is a grave mistake.

It is vital to make allowances for the unknown-unknowns, because at some point in development, cash and time become the two critical limitations of a biotechnology company. Companies that do not make allowances for detours along the development pathway, quickly run out of capital and become drained of the ability to reach the next significant product development milestone.

Company Valuation Spillover

This problem becomes compounded since company valuation (the monetary value ascribed to the company) is tied to product development milestones. For instance, a company with an IND (Initial New Drug) Application on Clinical Hold with the FDA has a different valuation than a similar company with an accepted IND that is beginning Phase I clinical trials. These two companies have different valuations and differing abilities to raise capital to further their development work.

That is not to say that INDs cannot be put on Clinical Hold and still be successful. It simply means that if you only allocate time and capital to reach the IND filing point without allowances for detours, you may be forced to raise capital at a time when the company’s valuation is not reasonable, and depending on the financial market, it may be difficult for the company to raise capital—period.

THE TAKEAWAY TIDBIT

So, be aware of, plan for, and make allowances for the unknown-unknowns during product development. In doing this, you will provide your organization with the best chance for success in reaching its product development goals.

WHAT IS IT

Defining Success and Failure

In order to talk about the traits of successful entrepreneurs, we must first start with a better understanding of “success” and “failure”. Success is often erroneously defined as—everything you do produces a favorable outcome.  If “success” is equated with never having an idea that did not work, never having a business shut-down, or never encountering insurmountable product development problems, then there are very few successful entrepreneurs in this world, and it is near certain that you too will not be “successful”.

True success is—ultimately accomplishing a desired purpose. True success is buried deep within the continuance of work, regardless of opposition, in spite of setback, in the face of roadblocks and folded companies. True success has more to do with where you draw the finish line, rather than solely the outcome of events.

The invention of the electric light bulb was met with extraordinary “failures”, but Thomas Edison the American inventor holding 1,093 patents, didn’t draw the finish line prematurely.  He continued his work amidst “failure” even when others gave up and concluded it could not work.  Later, when Edison was asked about his innumerable failures while working to discover the optimal light bulb filament, he said “I never failed once—it was just a 2,000 step process”.

There are many significant characteristics that accompany successful entrepreneurs, and a number of important ones are discussed in the book, “The Business of Bioscience”, however, two readily distinguishable traits worth noting are, that successful entrepreneurs all possess (1) passion for their work and (2) a vision for its future.

Passion for Your Work

Passion is what keeps the fire within blazing when others attempt to throw water on the flames.  Naysayers will inform an entrepreneur of the myriad of reasons why an idea, product or business cannot succeed. A wise entrepreneur will always heed advice about obstacles and be creative to overcome these, but successful entrepreneurs do not quit simply because others have explained why something cannot be done. Naysayers operate under Newton’s 1st Law of Motion, which says: an object at rest tends to stay at rest until acted upon by an outside force.  Naysayers rarely overcome the inertia of inactivity.  Although they can easily spot problems in a business plan or idea, they are hard-pressed to come up with solutions, simply because it takes too much creative energy for them to do so.

The successful entrepreneur however is self-motivated, and their momentum is internally generated by their passion.  They operate in the corollary to the 1st Law of Motion, which says: an object in motion tends to stay in motion until acted upon by an outside force. The successful entrepreneur is in perpetual motion, and they overcome outside forces through creative ideas and solutions.

Having Vision

Successful entrepreneurs are visionaries.  Vision is seeing with your internal eyes, and not just with the eyes in your head.  Anyone can “see” the circumstances, but only inspired entrepreneurs see what others do not see.  Sometimes this aspect of vision can be taken too far afoul and becomes “entrepreneurial myopia”, which is really ignoring realities (see 9/30/09 post).  Having true vision is seeing with both sets of eyes without losing sight of the internal vision.

Orville and Wilbur Wright had a vision of flying, as did many other entrepreneurs and inventors.  Before the 1900’s, the majority of the world said it could not be done.  Many concluded that, “if God meant us to fly he would have given us wings”.  The Wright brothers believed that they were indeed given wings, and they worked to perfect them.  They pursued their vision, and on December 17, 1903—they did fly.

THE TAKEAWAY TIDBIT

Successful entrepreneurs have diverse personalities yet all possess a core group of similar traits. Some are born with these core traits; for others, these traits are acquired during their career. However, passion and vision are two critical components that ALL successful entrepreneurs possess.