Survival of the fittest: how your biotech startup will survive the upcoming recession
The increasing interest and inflation rates and pullback in public equities indicate that growth companies could be the most vulnerable in the upcoming recession.
In a game of natural selection, biotech startups will have to learn from companies–both of the same species (biotech) and others (software) — that have gone through similar situations.
Just like germline DNA, this article is the guide that previous companies have left on how to survive an economic recession. As compact as 3 chromosomes, the guide includes: 1) response mechanisms to financial stress; 2) finding homeostasis in your valuation; and 3) becoming the fittest.
Thanks to Nodes Advisors for supporting this post. If you’re building a life sciences startup, don’t hesitate to reach out to them. They have special partnerships with AWS and others to help early-stage founders in techbio get started.
Disclaimer: this article was originally written in May 2022 (some points are outdated) and it’s to serve only for perspective. Don’t take this as investment or startup advice.
Chromosome pair 1: analyze the extra-startup environment
An interesting observation made in LifeSci VC is how biotech companies outperform others in downturns, especially those like the COVID pandemic where healthcare was of course an essential sector of the economy.
This doesn’t seem to be the case this time. After analyzing how public biotechs are performing in terms of their valuation, we can get an estimate of how this will affect your biotech startup, to then plan for the base, best and worst case scenarios and finally take action to improve.
Locus 1: estimate how much your valuation could drop
Although some biotech companies have actually increased their valuation (by less than 20%) in the last six months, those are the exception rather than the rule.
In a sample of 14 publicly traded biotech companies, the drop average in valuation for the past 6 months has been 46%. As a smaller company or startup in the space, you should consider that as your base case scenario and a 73% decrease as your worst case scenario.
Behind the valuation itself, is the fact that raising capital will be far more challenging these days. An analysis of the most active biotech investors done by BayBridge Bio shows how Series B investors are the least likely to invest these days, compared to Series A investors.
Locus 2: understand how investors are behaving
According to Pitchbook data, the number of global private biotech financings has decreased 31.2% since the beginning of 2021. More concerning, Bay Bridge Bio has observed that monthly investments in startups fell 61% between March 2021 and March 2022.
Further, Christopher S. Miller (partner at Troutman Pepper) suggests that investors are using risk-mitigation strategies like tranched financings. Under this scheme, biotech startups will have to hit milestones to access portions of a round. Even if that’s not your case, Chromosome 3 will address the importance of continuing to develop your product.
Chromosome pair 2: develop response mechanisms to financial stress
Startups and cells are similar in that they both have (or should have) response mechanisms to external stress. While cells want enough ATP, cash remains king for startups. Thus, startups will have to minimize cash burnout to have a runway for the next 18–24 months.
Locus 1: manage your burn
It’s time to slow down that ATP hydrolysis! In other words, let go of secondary expenses. As a startup, you may not have to worry too much about this. Still, let the following list be a reminder of things you should cut on:
Unnecessary marketing campaigns and PR
Software infrastructure like unnecessary email accounts
Secondary customer segments
Locus 2: managing layoffs
Even before layoffs per se, another strategy is turning fixed costs (such as salaries) into variable costs. Essentially, this means changing the compensation scheme. Instead of a fixed salary, you could implement hourly wages, commissions, bonuses, or even shares of the company, in such a way that you’re paying in relation to the output produced by the employee.
Now, layoffs will be inevitable in many cases. As a startup, you want to focus your efforts (even more) into the product. Thus, it follows that scientists, engineers and any core person building your product are the last group you want to consider for redundancy. The question you should ask yourself is: what “stay team” will be able to turn things around?
Undergo a single round of layoffs. That way, you will avoid a culture of fear and instead create one of confidence in those who stayed.
Just to be a good person, you could help those who leave the company by connecting them to companies recruiting — yes, they will also exist even in this situation and we will touch on that in the next chromosome.
For the stay team, motivation will be especially important. Remember you not only want to survive, you want to come out stronger, as will be discussed in chromosome 3.
Daniel Pink’s theory of motivation states that autonomy, purpose and mastery are the key intrinsic motivators of every human being. The good news is that all these three should be a piece of cake being a biotech startup.
Your job as the CEO is to make sure each of these components are always present. To provide a sense of purpose, constantly remind your team of your mission. For autonomy, give each member a sense of confidence and freedom to achieve their tasks. As long as your milestones are not impossible and you have a great team, the difficulty level will be in place and a sense of mastery will come automatically.
Chromosome pair 3: grow faster
As a startup, you have every reason to move faster than larger competitors; to not only survive but to come out stronger. That can only mean one thing: it’s time to build! Or the biology equivalent… it’s time to grow!
Now, here, you see, it takes all the running you can do, to keep in the same place.
If you want to get somewhere else, you must run at least twice as fast as that!’
Locus 1: establish great partnerships
As mentioned in chromosome 1, investors will be more results-oriented than ever before. To get a proof of concept faster, ally with organizations such as CROs.
In fact, McKinsey suggests that any partnership that expands capabilities, accelerates development timelines, or de-risks assets can create value. In that sense, partnering with a larger company would also be interpreted as good validation.
If this applies to you, find a way to negotiate better deals with your suppliers; establish long term deals for this is the perfect time for both parts to do so.
Locus 2: keep and attract talent
If you remember that within crises are the seeds of opportunity, you will see that two things will hold true in this recession: lower valuations and increasing layoffs.
As some talented individuals leave even bigger companies, use stocks as an incentive for them to join you. The expectation is that you will be able to hire them more cheaply than usually and they will help you hit milestones faster. This in turn, will attract investors, who will see the progress and the right team to fund. As the startup grows and the recession comes to an end, their stocks will have increased.
All in all, the strategies described above are about focusing on building, becoming more lean by reducing unnecessary expenses, understanding the landscape and leveraging potential partnerships to build even faster.
We hope you have found the structure of this article at least a base pair interesting 😉. It was definitely intriguing to see how we can borrow mental models from biology itself in order to understand the economics of biotech startups.
“It is not the strongest of the species that survives,
nor the most intelligent,
but the one most responsive to change.” — Charles Darwin
Thanks for reading S🧠FIA! Subscribe for free to receive more posts on bioinnovation!