The Startup Genome project recently released a report on the DNA of internet start-ups, essentially trying to identify attributes that lead to success or failure. One of the things they found was that 74% of start-ups failed because of "premature scaling." Sounds like an unfortunate medical condition, but it's Internet companies spend too much money before they really know what they have – their product, customer, market, etc…
While reading it, and my tech partner Fred Destin's post on it, I couldn't help but think about the issue of premature scaling in life science start-ups. Spending too much, growing too fast – not an uncommon characteristic in biotech. It almost always leads to shareholder pain and a loss of invested capital.
Here are four types of premature scaling (or inappropriate scaling) I can think of in biotech, and we try to avoid them all:
1. Building a Big Science story too fast. This is the "Go big or go bust" strategy with a group of Nobel laureates: Raise enormous amounts of capital to fund a novel discovery or research platform without enough evidence of target validation in a disease setting, confidence in chemical (or biological) tractability, progress on a lead program, etc. This generates big teams, big footprints, big stories – and massive burns. If the substance and, in particular, the rapid progress on product development, doesn't get in line quickly, a big gap in valuation emerges that can crush these investments.
The right way to build a Big Science story today involves scaling consistent with a science-led, capital efficient approach: Build a sound platform with 15-20 FTEs on modest equity raises, find partners to help offset the growth and validation of that platform and then grow into the Big Science story as R&D evolves. The wrong way to build these is through rapid scaling around a hype-led fundraising machine. More often than not, investors get burnt with these.
Synta is a good rapid-scaling example. They have raised and spent $350 million, had at one time a team of 150+ FTEs or more and built a big broad portfolio -- but their investors have suffered considerably. Story is far from over, but at the 10-year point its looking tough for the early investors.
Sometimes this model works, at least for investors. If the company can achieve escape velocity with enough hype and buzz in the market, they can get public or acquired early. Sirtris is a good example of a high escape velocity 'big science' deal that made it pubic and was acquired; its fair to say that many spectators wonder if GSK is regretting its $720 million acquisition, but at the time the story had a ton of public relations momentum.
2. Building a big company when it's really a project. Lots of venture money is wasted building "companies" when they are really just product development vehicles. I covered this theme under a prior blog around new liquidity theses. By stapling multiple programs together, building a big team especially on G&A and running multiple studies at once, investors often think they've diversified their risk. Most of the time they've just raised the capital intensity of their deal such that one product bump and the whole thing gets revalued enormously.
Big Pharma buys these plays for single programs typically and so if a company is lucky enough to have two winners, say a Phase 2 and pre-clinical program, they leave real value on the table. If you've got an interesting asset, then develop it. But there's little reason to put the expensive trappings of a bigger company around it. Leverage a part-time group where possible; you probably don't need a CFO or, God forbid, an HR person. Focus on lean product development. Stromedix and Zafgen are great examples in our portfolio.
