The curse of having too much money in biotech
Or how to accidentally start a research project instead of a company
We live in a unique time of abundance and incredibly mobile capital. The incredible wealth extracted from long-extinct flora buried beneath the sands of Saudi Arabia pays for highly trained scientists in Boston to perform open heart surgery on mice, and nobody thinks this is strange. John D. Rockefeller had to drive from regional bank to regional bank with a briefcase, physically porting cash away, while I can get funding without ever physically visiting my own bank.
Because we live in such a unique time, we also face unique challenges. One of those challenges is that it’s now possible for a founder to get too much money. Companies can launch with $50 or $60 million before the founder has a solid idea of what exactly they’re doing.
This is problematic because once you get a lot of money, you’ll be expected to spend it1. This is especially true if you reach some sort of impasse in your work. Your funders will wonder what the point of all that money was if you’re just going to progress at the same speed as someone with a tenth of the funding. They’ll think you should just hire more people, do more experiments, spend more money! But, as the wealthy man who hired two orchestras to listen to symphonies twice as fast found out, sometimes more activity just means more cacophony.
While “cash burning a hole in your pocket” is a universal problem across well-funded startups, it takes on a different character in biotech. This is because biotech, unlike, say, tech startups, has a couple characteristics that can make having a lot of money particularly challenging:
a) Biotech progresses in predictable stages, and the final stages are almost always orders of magnitude more expensive than the initial stages
b) It’s generally pretty easy to make a lot of money if you make it past the final stage, while it’s impossible to make any revenue if your asset doesn’t
c) There’s a somewhat unpredictable regulatory component, and that’s the single most common reason for company failure
Because of these characteristics, biotech has a couple recognizable failure modes when it comes to having too much money. One of these is the zombie company, where a company, having failed a late-stage trial, keeps running additional, expensive trials in new indications with their existing asset. They don’t want to start over again at the initial stage and they have the money, so they just keep running stupid trial after stupid trial, hoping to randomly make it past the regulators and into an approved drug.
This is bad. It’s a waste of time and resources. And, even if these companies do manage to have a successful Phase 3/pivotal trial and get their drug approved, there’s the moral issue that the drug might actually not work, and the success was due to rolling the dice enough times. Getting ineffective drugs approved and prescribed to patients is morally worse than wasting money.
But, I don’t think there’s any need for me to elaborate further why this is bad. After all, I’m pretty sure these people have already heard the criticisms I’m making and more importantly, are unlikely to listen. To paraphrase Charlie Munger, it is difficult to get someone to understand something when billions of dollars rides on them not understanding it.
Instead, I want to address a different big money failure mode, one that occurs to honest people at the other end of the biotech pipeline. This failure mode is when you try to start a company, but accidentally start a research project.
The way people get into this failure mode is very understandable. First you start off with a noble purpose like, say, solving inflammatory bowel disease (IBD), and then also a unique technology that makes people want to give you money, like, say, a delivery mechanism that can shield RNA therapeutics from the immune system.
But, like most things that are spun directly out of academia, your unique technology isn’t quite ready for prime time yet. Let’s say that, so far, you’ve only been able to deliver drugs to the liver, as happens to many delivery mechanisms2. But, if you could deliver drugs to the intestines, this would be huge for IBD. Your investors agree, too. In fact, they invested in this company because they really want to invest in some early stage IBD companies, and yours seems particularly promising. So what do you do?
Well, if you have a ton of money, you can start with a long, complicated series of experiments to prove that you can deliver drugs to the intestines. Maybe you’ll start with mice first, then dogs, then eventually humans. This will take up to 10 years, millions of dollars, a dedicated manufacturing facility, your own labs, and many PhDs. And, at the end of it, you will have probably published some cool papers.
But you still won’t have a product, and you’ll still need to figure out what exactly you’re delivering to the intestines in order to actually cure IBD. Somehow, you thought you were going to end up with a saleable product at the end of this, but now you’re 10 years in and you still only have papers. Or, in other words, you thought you were starting a company, but you were really just starting a research project.
If you don’t have a ton of money, though, instead, you can just paint the bullseye around your shot3. Your delivery method only delivers drugs to the liver? If it seems too hard to target the intestines, just pivot to becoming a company that targets liver diseases. You’re still going to have to pick a receptor and figure out a drug, but that’s not going to take 10 years or cost nearly as much. After all, you can always repurpose a drug or just buy one off of big pharma’s shelf.
Now, it seems really obvious when I put it like that, but it actually takes a lot of courage. You have to go back to investors and say, “Listen, I know I raised from you saying that we were going to target IBD. I had all our cool revenue models and you had to consult IBD specialists for your due diligence. But, we’ve been doing some more thinking, and we actually don’t think IBD is going to be feasible, so we’re switching to the liver.”
The investors are probably going to be annoyed. There are a lot of startups targeting the liver due to the issues mentioned before. They were excited by someone who was targeting the intestines, especially such a big, lucrative disease. They went through all this due diligence to confirm that your approach was valid. And now you’re saying that you’re doing something different?
That’s precisely when not having as much money works in your favor. If you can convince them that your options are pivot or the company runs out of money and dies, investors will accept the pivot. But, if your options are pivot or you just spend 10 years of your life doing stuff that’s not getting the drug into patients, the investors will try to make you waste 10 years of your life every time. They know how to play this game, and they’re hoping that you or they can leverage the uncertainty of your 10 years in order to make their money back and then some.
And, even worse, they might have planned all this from the start. Many more people have gotten rich in biotech from cool, promising therapeutics in early stages than successful therapeutics that have made it all the way. There are a lot of investors who prefer to invest money in companies that can keep doing experiment after experiment, releasing press release after press release, and never fail and always have hopes of riches on the horizon. Which, maybe some biotech founders are cool with, too.
But I’m not, and I hope you’re not, either. Start a biotech company if you want to start a company. Stay in academia if you want to do a research project. Don’t mix up the two.
Too much money is also a problem because you risk diluting yourself out of ownership and, to a lesser extent, because you risk a down-round. A down round does not spell the end of a company, but diluting yourself out of ownership and then getting fired by shortsighted investors spells the end of your time at the company (unless you’re Steve Jobs).
The liver processes almost all xenobiotics, if they don’t get destroyed by the immune system first. So, if you’re introducing something foreign to the body, easy places to go are either places that the drug will go anyways, like the liver, or places where the immune system doesn’t look so closely, like the eyes. Or, on the other hand, you can just provoke the immune system directly, if you’re doing vaccines. This is exactly the dilemma that Moderna faced and solved-ish, which I’ve discussed before.
There’s an old joke that I’m referencing here. A man goes to visit a small, rural town. He’s walking along the side of the road, and he’s amazed to see an old, wooden billboard with a bunch of bullseyes painted on it, each one with a dart at the center. He sees a young boy standing about 15 feet back from the billboard with a handful of darts.
The man’s excited to see a true dart throwing prodigy at work. As he watches, the boy cocks back his arm, throws the dart, and it lands - thunk! - right in the billboard. But, it’s landed way far away from any of the bullseyes.
The boy doesn’t look perturbed. He walks up to the billboard, looks at the dart, and bends down. When he comes back up, he has a paintbrush and a can of paint, and he carefully paints a new bullseye, right around the dart.
As someone with zero grounding in this world (despite writing ads for it for four years, which shows you what kind of employee I am), these are consistently fun reads. Good job.