Biotech is big and it is going to get bigger. Period. Just like with the boom of the tech industry, there is a blossoming startup culture right now in biotech, but most serious investors are reluctant to buy in right now without any knowledge of the industry, which is understandable. This post is the first in a short series that is meant to help individuals and investing groups make smart decisions about biotech startups, and ultimately provide simple keys to make getting into this explosive industry as easy as possible.
You don’t need to be a scientist to understand biotech.
One of the big misconceptions is that an investor must either intimately understand science (or have an adviser who does) to be comfortable in biotech. The truth is, just like with the technology industry, you don’t have to be an expert to understand the value of what the entrepreneur is doing. The burden of understanding the science behind the business likes squarely on the people running the show. There is a very quick and easy litmus test for this: if the CEO or lead scientists can’t explain everything they are doing in extremely simple terms (I mean high school graduate level terms), then they are either extremely bad at communications or they don’t know what they are doing. It is usually the latter.
Some people look very closely at the credentials of the team as well. This can be a decent indicator of the overall level of expertise of the team, but it can also be very misleading. Gone are the days of old when biotech was reserved for those carrying a PhD after their name. In fact, as long as someone has had some formal training in biology, biochemistry and biotechnology principles, they will likely know enough to be successful. What they lack in credentials, however, they will have to make up in drive and self-study. They have to keep up to date with current industry trends, and they will likely need to teach themselves a whole lot of new skills. If they can do this, then you should have very few doubts about their ability to execute for you.
Biotech startups are not like tech startups.
When an investor hears a story of a tech startup that is working out of a garage or an apartment, they usually see one big flashing sign that says “low overhead, low setup costs”. A little tech startup usually doesn’t need a dedicated office and work space, and some need little more than a computer and a smartphone to produce a proof-of-concept product. While biotech startups can still be scrappy, they require a higher initial investment for some basic equipment, supplies, consumables and lab space. Unfortunately it is very difficult to start a lab out of an apartment. Trust me, I tried.
On the whole, proof of concept work for a biotech company takes time. If a kid comes to you with an idea that he knows will work but hasn’t proven yet, chances are all they need is 6 months in a lab with $250k and you will see what they can do. If the team is serious about it and is really dedicated to working hard and putting in long hours then that $250k will be the difference between a big idea going to market and a big idea being left on the lab bench.
The End Game
Every millennial dreams of starting a tech company and getting bought out by Google, right? Well in biotech, we have one of two dreams depending on the type of organization. If the company will be a Contract Manufacturing Organization (CMO) then it is very likely that the big dream is to pick up some huge clients and start signing contracts with major companies. If the company is developing a specific product or suite of products, then the dream is to get bought out by the biotech equivalent of Google: one of the big 25 biopharmaceutical companies.
Either way, the payouts for these companies is usually huge. There was once a small algae nutriceutical company that had revenues of only $450,000 per year, and was purchased for $1.08 billion. That is, billion with a B. For algae, with an A. This isn’t an outlier example of what is possible when you create something revolutionary and someone with enough money sees it.
The Moral of the Story
Biotech is hot. It isn’t a sexy industry, and most of what it produces doesn’t get marketed directly to customers in the same way a new social media app would. The beauty of the industry is that it often operates in or around the 95% margin range, and after the initially high setup costs and the price of developing a scalable system there are a whole lot of profits to be made. The only drawback to the industry is that most biologists aren’t well-versed in investing principles, and most investors aren’t biologists by trade. There has to be a bit of a meeting in the middle if investors are going to get the most out of the biotechnology industry and scientists are going to find the funding they need to make their ideas reality.
A biotechnology entrepreneur is a new hybrid between scientist and businessperson. They see big problems in terms of scientific discoveries, and they are always trying to find out what they don’t know. If investors can tap into these young minds that have been educated in state-of-the-art biological techniques, they will definitely find the next big health breakthrough. It may not be their first idea, or their second or their third, but these “kids” will certainly get it right if given the chance.
