Investing in the biotech space before it had a name, I’ve seen life sciences investors steer founders toward the therapeutic pipeline in hopes of securing the payout of a winning drug or medical device.
But high reward comes with even greater risk: The 90% the failure rate in clinical development implies that a single, highly probable failure could destroy the entire value of the company. Given that the global pharmaceutical industry is value $1.6 trillioneven a small improvement in the failure rate would result in a huge increase in economic productivity and patient impact.
There is no denying that therapy offers a desirable path with high returns and enormous human impact, but we cannot afford to proceed to disregard the alternative. The most reliable yet untapped business models are the tools and services that power the field.
Eric Schmidtlong-term Google/Alphabet CEO and co-founder of my previous company, Innovation effortsfamous remark: “Revenue solves all known problems.”
Recurring revenues with high gross margins allow firms to find out their fate, corresponding to when and whether to create riskier product lines corresponding to pharmaceuticals. It also enables a unit economy that has high multiples, resulting in less dilution of founding teams. And while a preclinical therapy company must persuade specialty investors that their hypothesis will work, platforms can quickly modify their product to exhibit true product-market fit.
Here is a framework that biotech developers can use to find out whether or not they should sell their platform to others or use it to develop their very own therapeutic assets:
Does the platform provide unique capabilities or is it broadly usable?
Just as SpaceXLaunch capabilities enable the entire space technology industry when Illumina began offering sequencing technology, there was a belief in the industry that inexpensive and accurate sequencing could support just about all biology research and development efforts. If Illumina used it solely for internal GWAS research and drug development, it is unlikely it will reach a market capitalization of $80 billion.
Does the market today see value in the tool or does it need education?
Without ubiquitous adoption, complex platforms are higher suited for in-house drug discovery. Eikon Therapyunicorn, whom I previously supported in the seed department, matches this bill – single-molecule tracking technology is extremely useful for understanding protein kinetics, but very difficult to interpret. Spatial biology is one other emerging tool where the sheer volume of knowledge and novelty of the field require specialized teams, making it higher to build at the top slightly than sell.
Is there a business model to support this technology?
Investors are concerned about the accumulation of technical and market entry risks. Pharma is not accustomed to large spends on SaaS and contracts, but expects services and spends on partnerships – winning firms will understand how one can use these purchasing behaviors to their advantage. Recent success in building a derivative business model is Foot therapythat gives non-exclusive biologics discovery services, obtaining significant payments and margins without engaging in slow licensing fees and negotiations on key elements.
What’s your superpower?
Just as product-market fit is vital, so is founder and business model fit. It’s as unfair to ask a consumer app developer to achieve success in an enterprise SaaS model because it is to ask a technology developer to be good at drug discovery overnight. Founding teams should build on their superpowers, and if it’s building technology, it’s probably also selling technology.
While the life sciences industry has long favored high-stakes therapeutic endeavors, now is the time to embrace resilient, revenue-generating models that improve therapeutic success rates.