Most biotech startups are default dead. In fact, most of them earn zero revenue throughout their entire existence, regardless of how many millions of dollars they raise. This is usually true even after they IPO – most are still many years from being able to sell their therapeutics on the market.
For software companies, being default alive vs default dead has a simple definition as articulated by Paul Graham: assuming fixed expenses and current revenue growth rate, do you reach profitability before you run out of cash? I.e. is the area-under-curve of your burn rate greater than your cash balance? The argument goes that a default-alive company is harder to kill and has considerable optionality on the actions it can take.
Applying this framing to biotech companies is challenging. Since almost all biotech companies with drug pipelines produce no revenue until their drugs complete clinical trials, this means almost all are default dead. Most “successes” are single asset companies that get acquired by pharma while running trials, and so this means that even the wins are default dead for their entire life. Also, unlike software companies, assuming “fixed expenses” is not realistic in progressing drugs. There are considerable step-function increases in costs as biotechs advance their internal pipelines into the clinic.
On first thought, it may appear that the same dynamics exist in nearly all hard-tech companies. Many businesses – in defense, satellites, aerospace, chemicals, and others – involve spending large sums of money prior to making a considerable return.
But in most hard tech companies, the amount of technical risk (i.e. can I make my product) far exceeds the market risk (i.e. does anyone want this product). For example, Boom Supersonic is mostly a bet on whether it’s possible to fly supersonic from London to NYC for the price of a business class ticket, not whether anyone wants that. Solugen is mostly a bet on whether it’s possible to make chemicals like hydrogen peroxide much more cheaply and safely, not whether people want those.
And even so, both of those businesses established market demand that was credible and enduring. Boom built relationships with airlines during YC and Solugen found customers for their smaller deployments prior to scaling.
Unfortunately, biotech companies have considerable technical risk and considerable market risk. Developing a drug is more like making a supersonic jet than building a b2b app in terms of technical risk. Getting that drug to people, though, requires nimbleness in navigating changing market factors. If a drug is late to market vs unknown competitors, or if there are tox-related failures in related drugs, or insurance companies refuse to cover it, or regulators are slow to approve it, or performance is slightly worse than expected, or political conditions change, or interest rates move, its market value can quickly go to zero even if it “worked” in a preclinical or clinical study.
The solution: before going all in on making your own drugs, become default alive. For techbio companies, I’ll propose a specific definition of default alive: generate enough profits to fund at least 1 molecule into Phase 1 without additional VC money. It is possible for a large subset of techbio companies to produce medium amounts of revenue, say on the order of $10-100 million over 2-5 years, at the expense of advancing a wholly-owned pipeline. This may look like selling software or doing revenue-generating partnerships with big pharma. As a few examples, Cartography Bio had a $20M up front payment from Gilead doing target discovery with their platform, PostEra has earned over $50M in revenue from partnerships and grants, and Genesis Therapeutics has earned at least $85M in upfront revenue via partnerships with Gilead, Incyte, and Eli Lilly. These deals can produce tens of millions in revenue for a relatively small team, and create a considerable cash cushion via profits before taking on more risk with internal programs.
I’ve written previously about why these deals can be painful and are unlikely to become billion dollar businesses in themselves. It’s also true that the time scale associated with these deals may slow the company’s growth relative to going all in on a single asset. Venture investors often don’t like this because it’s harder to produce a return on a 10 year fund life if all the investments first take several years to become profitable. But that’s the investor’s problem, not the founder’s problem. Investors are protected by the portfolio effect – they only need a few wins across all of their companies. They’d rather get their wins as soon as possible. Founders live or die with their company.
The benefit of becoming default alive is it liberates the founders. If you run a startup that is default alive, you fundamentally do not need further capital. You probably want it at some point in order to enable a new level of risk taking, but you don’t need it. And it’s much easier to raise large amounts of money if you’ve demonstrated you can do a lot with very little. It also means that you can remain alive long enough to get lucky and catch a tailwind, either due to a new technology moment arriving (like better protein design for an antibody company) or new market factors (like COVID occurring for Moderna). At YC we give a talk at the end of each batch called “Don’t Die” discussing exactly this – and this advice applies to biotech companies too.
So this is my challenge for the newest generation of first-time biotech founders, especially ones with a strong technology or techbio platform. Use your seed capital to find creative ways to become default alive. Reinvest your profits alongside modest capital raises to expand these businesses until they start to plateau. Use your now-proven execution skills to raise the capital needed to then take multiple shots on goal in the clinic. If those shots miss, go back to your profitable base and retool to try again. Put yourself in positions to catch tailwinds. And don’t die.
Thanks to Jared Friedman, Rahul Gupta, and Suhas Gondi for feedback on earlier drafts of this.