This is the first article of a three-part series on the founder-led biotech movement. A few months ago, I heard this criticism of YC by a recent YC alumni. He made the point that YC throws money at just-out-of-school, clueless tech boys, and that after demo day, they are sent out to the real world to attract capital.
Whether you agree with this criticism or not, it is true that YC as well as many other accelerators and VCs are all about attracting and then training young technical founders to scale their bedroom project into a multi-billion dollar company. And so far, this model of investing has been doing very well. Sergey Brin and Larry Paige were no IT company executives but went on to build Google when they were just PhD students. The Doordash founders were also Stanford graduate school of business students that got started in their dormitory. The list goes on and on.
How is it possible for founders to build empires from their bedrooms? It wasn’t always like this, of course. Most of us would attribute the sea change to the dot-com boom in the late 1990s, which enabled multitudes of Internet-based companies to become tech giants. Software decentralized how value can be created and then scaled. Today, with just a CS degree or some self-taught web development skills, you could technically build an app, acquire new customers manually or through channels like Product Hunt. And this is why accelerators are on the search for at least one “self-sufficient” founder in a team, someone who can build the product without outside assistance.
In the same vein, Paul Graham’s famous words of advice,
“do things that don’t scale”
reveals another important fact about this paradigm of tech startups. There are definitely moments when founders have to do non-glorious things that don’t scale such as giving personalized care to its first users. But once some traction is there–once you solve people’s problems and acquire loyal first users–the scaling part is manageable. For a software company startup, the challenge of scaling boils down to the challenge of hiring–building a strong technical team. Thus, throwing money at a self-sufficient founder of a software company really does solve a lot of the problems associated with scaling, hence why YC’s model works.
Hardware and biotech startups, however, face a unique challenge that Paul Graham calls “Catch-22.” It is a chicken and egg problem where without a product you can’t generate the growth needed to raise the money, but you need the money to manufacture your product. For hardware this may be due to the fact that the minimum order for a factory production easily goes over 100K. There are still ways around this problem, however. A founder can try making the first hundred products themselves such as by building prototypes with a 3D printer. Meanwhile, even this solution is not adequate for early stage biotech founders. Producing a promising compound, let alone a single drug, can take millions of dollars.
In fact, for early stage biotech companies, it is hard to imagine how anyone can be a truly “self-sufficient” founder. This is because even if it’s just for generating proof of concept data, experiments will have to be run, and simply having an equipped lab is extremely expensive. A lot of biotech companies spin out of research done in academic institutions, which means that they’ll have to negotiate with the institutions for licensing. Founders that start companies based on their PhD or postdoc research often give away upfront fee and royalty to academic institutions like Stanford simply because they used these institutions’ lab space.
One biotech founder was a postdoc before his research spinned off into a company. The university where he did his postdoc demanded an upfront fee of 50K in addition to royalty. Mind you, these are not wealthy investors who have a lot of capital. These are recent postdocs and PhDs. This experience made him vow that for his second company, he will do all he can to avoid working with academic institutions. Similarly, a group of biotech researchers developed proprietary technology that led to the IPO of a biotech company. The academia institution was offered stocks of the company and the head of the lab received one million dollars; however, the group of scientists who worked on the invention got nothing.
How do biotech founders overcome these challenges? Sometimes I hear stories of biotech founders being extremely hacky and also extremely lucky while navigating these obstacles. Perhaps, they managed to occupy some unused lab space for a very cheap price. I’ve even seen founders buy lab equipment at an extremely cheap price from other companies closing down. A few biotechs may be able to enter biotech accelerators and incubator programs that offer dry labs and sometimes even wet labs.
Luckily, as we see the founder-led movement growing even in biotech, we see more routes that biotech founders can take to be “self-sufficient,” giving up less to outside parties while starting a company. In the second part of the series, we will explore new routes to starting biotech companies that allow the founder to retain capital and control.