Drug Baron

Lessons Learned in the Playground: Why the UK lags behind the US when it comes to biotech entrepreneurs

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Some of the most important lessons in life are learned in the playground.  And so it proved this week, when more than 100 wannabe biotech entrepreneurs gathered in London for the Playground event organized by Index Ventures and Nature Biotechnology.

The goal was to inspire the next generation of entrepreneurs to take the plunge in biotech.  To do that, Kevin Johnson pulled together some of the most successful biotech pioneers, led by the entertaining, thought-provoking and charismatic Stelios Papadopoulos.   But the most striking thing? That almost all these inspirational leaders were from the US.

While its undoubtedly true that the UK has hosted some truly entrepreneurial biotech talent (look no further than Kevin Johnson himself), the US domination on the stage at Playground was representative of the start-up world.

Why is that? Are Americans simply a more entrepreneurial bunch?

Could it be that the young entrepreneurs were simply afraid of failure? Yes. And with good reason 

Spending some time in the Playground didn’t just pose the question – it also provided some clear answers.  For a start, there was no shortage of entrepreneurial spirit (or for that matter ability, energy or commitment) among the young audience.  But one thing came up over and over again: what a big deal it was to start a business.

It really shouldn’t be – starting a business is just like starting a scientific experiment.  So it got DrugBaron wondering whether the key difference between the UK and the US environment was the activation energy around those first start-up steps, and what the UK establishment could do to remedy it.

First the facts: the Boston biotech cluster alone is bigger than the entire UK biotech industry.  By every metric, from number of start-ups, to capital deployed through exits achieved and dollars returned to investors the US biotech industry outstrips the UK by almost an order of magnitude.

Difference in population is nowhere near sufficient to explain the difference.  So other factors must be in play.

Perhaps the favorite explanation, though, seems to be a cultural difference.  Napoleon supposedly called the Brits “a nation of shopkeepers”, suggesting a conservative, rigid approach to business – and to life.  And, given the relative paucity of biotech start-ups this side of the Atlantic its tempting to assume this assessment is as true today as it was in at the start of the 19th Century.

If indeed it was ever true.  One’s enemies are not renowned for accurate character assessments, and Napoleon was not exactly a friend of the British.  Clearly, the remark stung, maybe even resonated, for it to have survived in the popular mentality to this day.  Its quite possible the nation is secretly proud to be seen in such light, if the antithesis to which they were being contrasted was the Mediterranean “laissez faire” that comes suspiciously close to laziness masquerading as flair.

Young entrepreuers at UK University are often seen as cuckoos – feathering their own nest at the expense of the public purse that pays them, and provides the necessary infrastructure

Certainly the evidence from the Playground suggests the entrepreneurial spirit burns strongly in the UK today.  Organized by Index Ventures, together with Nature Biotechnology, the Playground event in London on 18th October was a shameless attempt to put the ‘cool’ into biotech.  Loosely modeled on the successful formula of Seed Camp, which brings young wannabe tech and IT entrepreneurs into close proximity with seasoned industry veterans, VCs and serial entrepreneurs, the objective of Playground was to make starting a biotech company seem as cool as starting the next Facebook.  With all the glitz of an awards ceremony in the chic modern Brewery venue in the City of London, it was perfectly clear that the audience of a little over a hundred young people, mostly from an academic background, were anything but Napoleon’s shopkeepers.

Many came because they were seriously debating whether to start a healthcare business.  Good ideas, abundant energy, passion and determination were all in evidence.  Indeed, with such enthusiasm it was hard to see why more great biotech start-ups don’t emerge in the UK.  For certain, it is not for the lack of entrepreneurial spirit among the next generation.

Nor, contrary to popular legend, is it due to lack of capital.

Since closing their new dedicated life-sciences fund in March this year, Index have been inundated with start-up opportunities – but only a relatively small fraction of those originated in the UK.  Despite a strong geographical bias towards Europe, at least historically, they still evaluate a large number of opportunities from the US.  Other European funds report similar experiences.

So the capital is there, but the UK start-ups to compete for it are conspicuously sparse.

Paradoxically then, we have a ready supply of keen young entrepreneurs, we have access to capital, we even have (at least in Cambridge, Oxford and London) the infrastructure to support very young drug development companies.  Yet from those ingredients, too few start-up biotechs actually emerge.

Ingredients alone don’t make a cake.   Someone has to actually break open the eggs

So what is the bottleneck?

Talking to the students, the most obvious common factor was the perception that starting a biotech business was a big deal.  There was much soul-searching going on: did they have the right business idea? Were they really good enough to “make it”? Some had clearly been deliberating these points for years.

Yet there is no way to know the answers to either of those questions without giving it a go.  Starting a new biotech business is like a scientific experiment – the jury is out until the data comes in.

Indeed, more than likely the first endeavor will fail – most new healthcare technologies do.  More often than not, it’s not the fault of the entrepreneur: they didn’t pick the wrong technology (well, they did – but no-one could have known better) and they didn’t do anything wrong in developing it.  But once the data was in, it turned out to be a loser.

Learning to lose was an important lesson – one DrugBaron learned on the tennis court.  Andy Murray beat Novak Djokovic in the 2012 US Open final by winning 50.79% of the points, a very slim majority.  You can win a tennis match despite losing more points than your opponent.  And losing points is an essential component of the game: if you play to get every shot in the court you will play too conservatively and your opponent will find you easy pickings.  Accepting just the right level of failure to produce an overall victory is the key challenge for professional tennis players – and biotech entrepreneurs (and, indeed, as DrugBaron noted recently, senior managers in large pharma companies).

The simple answer then is that the wannabe bio-entrepreneurs were afraid of failure.  Does that explain the lack of start-ups in the UK?  Are UK-based bio-entrepreneurs more afraid than their US counterparts?

Yes. And, as it turns out, with good reason.

The nub of the problem comes down to how to support yourself in the early days of your start-up, and how to support yourself (and your family) when the all-too-likely failure shows up.  It’s not a cultural problem – it’s a deeply practical one.

And its much more significant for bio-entrepreneurs than in other spaces.  Here’s why: most businesses get started while their founder is earning a living doing something else.  That might be waiting tables, driving a taxi or pretty much anything else that earns a few dollars but leaves you with enough energy to start an enterprise.  It also helps if the business can be started with very little capital (like writing a an iPhone app or starting an internet retail business).  Moreover, you can get a quick and dirty read-out of the likely success of your venture pretty early – how was the first version of the app received by your friends? Did anyone show up at your internet store?

But biotech is different. Big time.  Quite obviously its neither low capital intensity nor quick to give an early read out of future potential.  However, there is another more insidious issue at play.  If you are young and yet still know enough about biotech to have a reasonable chance at starting a successful business, there is almost a certainty that you are working in the field for your day job.  And you are very probably working in an academic lab (or in a large company) on exactly the topic of your expertise – and exactly the topic where you could best start a business.

That’s a big hurdle.  Your intellectual property in the area is almost certainly owned by your employer.  That’s very different from waiting tables aspiring to be an actor, or driving a taxi while founding the next Facebook.

The most important lesson learned in the Playground was not for the people in the room.  It was for the establishment – the government and senior academics: young academics should be encouraged to start a company while still employed full-time by the University

And this is the big difference between the US and the UK: over the pond, many though not all, leading academic institutions not only embrace start-ups emerging from their faculty, they view it as a badge of honour.  In some places it is almost de rigeur.

In the UK, by contrast, it is still frowned upon.  Senior academics in their fifties sometimes do it, usually as a side-line, but anyone under the age of 40 is discouraged or even actively prevented from doing so.  Students and post-docs work for a lab head, who increasingly struggles to raise the grant funding to pay their salary – so the boss wants to see their charges work night and day to deliver the currency of academic progress: peer-reviewed publications.  Hardly any sanction the diversion of a parallel career as an entrepreneur.

There is also a pervasive view in the UK that academics starting a business are unfairly exploiting the infrastructure of the university – funded from the public purse.   Worse, by doing so they may earn more (and drive a better car) that the senior Professor who (in his own view) gallantly sacrificed his own earning power for the good of the academic ideal.

Facing such a headwind, is there any wonder that so few actually break cover and found a new biotech business in the UK?  Starting a new business, in any field, demands so much energy, enthusiasm and commitment that it is already a viable career path for only a chosen few.  Add in external forces holding them back, and the flow will fall to a trickle.

Interestingly, DrugBaron (who was 34 and a full-time academic when he founded his first biotech company) mostly avoided these pitfalls: becoming a lab head at the age of 28 gave him the necessary control over his own activities that is denied to most post-docs, but perhaps even more importantly, his first “business idea”, for multiplexed diagnostic tests, fell entirely outside the academic field of his laboratory – allowing a complete separation of commercial and academic activities and intellectual property.

But we cannot restrict start-up activity to the tiny minority who achieve lab head status at such a young age, nor those whose entrepreneurial agenda lies entirely outside the interest of their employer.

Talking to the students, the most obvious common factor was the perception that starting a biotech business was a big deal

The most important lesson learned in the Playground, then, is not for the people in the room.  It is for the establishment – the government and senior academics.  If the UK as a nation is to properly exploit the entrepreneurial talent that is so clearly out there in abundance, and close the yawning chasm across the Atlantic, then they have to encourage young academics to try a different kind of experiment: starting a company while still employed full-time by the University.

Simple agreements to license the intellectual property from the University to the new company ensure that the publically funded infrastructure is paid for in the event the venture is successful (through milestones and royalties).  These young entrepreneurs are not self-serving parasites exploiting public largess to feather their own nests – they are the engines of our economy and the best hope for genuine innovation in healthcare over the next decades.  They are champions, not cuckoos.

Most will fail of course, but by dramatically increasing the number who try, the number that grow and flower and bear fruit will also jump.  And the supply of first-time entrepreneurs is the pool from which will come the serial entrepreneurs that populate the US start-up space.  Next time, it will not just be the audience in the Playground who are predominantly UK based – it will be the panel of speakers too.

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  • Patrick Farrant

    David, spot on. Thank you.
    Patrick

  • Network Pharmacology Blog

    This is very good on the suppression by the establishment and is on the money. To say there is money is something that we are not sure rings true. The devil is often in the detail. Venture capital is frequently a poor fit with the timelines of biotech and they take a reactive rather than pro-active approach to dealflow. They are often taking a tick box exercise to assessment with such items as ‘tried and tested winning management team’; ‘clinical data’; patented compounds etc etc. This is very hard for start-up biotech to achieve.

    Moreover their scientific assessment is often orientated toward the mainstream of the day e.g. large molecules or genetics for cancer when clearly what is needed is radical new approaches and science. In this industry commerce can’t cheat the science in the long-term a lesson VC’s and pharma companies have had to learn the hard way recently.

    We would argue a whole new model is needed. With characteristics such as:

    1. A proper assessment of what the technical needs and risks are, how they are to achieved and mitigated and the evidence in support of this. e.g how are you going to gain efficacy other than trial and error based on pathway biology which has mostly failed in complex disease?

    2. A market place approach allowing investors to exit if they wish when a project moves to the next stage having achieved the higher risk success of the earlier stage.

    3. The ability for academics to stay in academia but to have fair input scientifically and strategically into the companies they form.

    4. Pro-active targeting of the scientific approaches needed for specific problems and then formation of investment and development solutions tailored to the opportunity. For instance project finance has now entered the realm in the US. This could be a good approach but requires a better more honest assessment of technical risks and how they are to be tackled.

    5. Recognising that companies are not what is ultimately valuable but drug compounds &/or platform technologies that support some aspect of their creation. Good management skill is needed to bring this value out but the value is the powder or the technology, that is what companies acquire. Unlike other industries a good management team cannot crack the problem by good commercial, operational and marketing skills, the science is there like a great elephant in the corner.

    Interestingly a license deal is not really an exit but arguably a problem. The milestones are swallowed whole by the company and the royalty is effectively an annuity that might never happen and is a long way off. Ask any oil company stock markets hate an annuity so why are they going to get excited by a potential annuity long in the future with high risks that it might never happen. Also why would a pharma co. wish to buy a potential royalty stream from a competitor. Congratulations your license deal has paid for some more research and secured the salary of your CEO but has just made an exit arguably much less likely. The gain for public institution and investor shareholder- zip.

    If the UK wants a better biotech community (and the politicians love to hold this as a great beacon of hope) then a better model is needed to do justice the some of great scientific research and talent in UK academia.

    • http://twitter.com/sciencescanner David Grainger

      Thanks for such a lengthy and thoughtful comment.

      I never meant to imply that the cultural suppression of entrepreneurship among young academics by the establishment was the ONLY factor differing between the US and UK. I believe it is one of the most important however, and one of the easiest and cheapest to remedy.

      But I don’t recognise the picture you paint of the venture capital model. It may have been largely true 10 or even 5 years ago, but there have been major changes.

      Indeed, you have already been proved right: the model you describe from a decade ago failed. Returns have been worse than almost any other sector. And market forces are driving the revolution. No-one would put capital behind a discredited model.

      Take ‘project financing’ that you recommend: Index Ventures – a European VC – have been at the forefront of the introduction of this model, and others have followed, so project-based capital is as available to UK entrepreneurs as those in the US.

      You ask for more pro-active VCs: since closing the Life-Science only fund in March 2012, all of the investments Index made have been in companies created around assets rather than simply financing established management teams around a pre-existing business plan.

      Bottom-line is that since joining Index as a Venture Partner, I can see from the inside just how much VC has changed in the life sciences. Much of what you ask for is reality already. Of course, its too soon to see the rewards for those changes mounting up but if you (and the top VC partners who already saw this years ago) are right, then those rewards will surely come – if, and only if, the huge base of entrepreneurial young scientists are mobilised into action!

  • euanramsay

    Great post David. As an ex-pat based in Vancouver, with an office in San Francisco, I often contemplate whether the mechanism my colleagues and I have used to start a biotech company would be possible in the UK. I believe our experience with Precision NanoSystems would support your assertions in the article. Essentially, we de-risked the technology, developed new IP and built the core team in the academic setting.

    For the University, these efforts brought in over $3.5M in competitive grant funding and ultimately a heathy equity stake in a company, which was launched with prototype instruments that immediately resulted in a partnership with a large biotech company. For the company, this strategy enabled access to infrastructure and expertise, which allows for a capital-efficient operating model.

    My colleague, James Taylor and I describe this method as the “leverage start-up model” and have described it in more detail here http://blogs.nature.com/tradesecrets/2011/06/09/the-leverage-start-up-model, and in further posts at biotechstart.org. The central tenet is our universities are at the epicenter of infrastructure and expertise and can be used as economic engines to generate both substantial health and economic gains to maximize the return on investment for the public purse. It is no coincidence that the biotech behemoths of San Francisco and Boston have academic institutions at their heart.

  • Network Pharmacology Blog

    David, Euan

    Thanks for these responses, they are very encouraging. Some of our comments look out of date, which must be good news.

    Some concerns remain however.

    Specifically:

    · Cost of Phase III trials.

    They remain very expensive with big pharma the only funder except in exceptional circumstances.

    · Bias toward a failing paradigm
    If big pharma are the only entities with the appetite and funds for Phase III then most drug programs will end up in this destination. As the buying audience, investment decisions are biased toward their view of the world. A view that is failing to deliver success in terms of compelling new efficacy in the treatment of complex disease.

    · License not an exit
    Interaction with big pharma usually takes the form of a corporate sale or licensing. Noted your points on packaging companies for easy sale which seems sensible. Licensing is rarely an exit for investors as it represent milestones swallowed by the biotech and a high risk future annuity. Annuities are unpopular with stock markets and rival pharma companies, a licensing deal therefore can reduce the likelihood of an exit.

    · Longevity of investment
    Earlier investors are locked in for a long-time unless there is a corporate sale. There is no market place enabling investors to get in and out during the process based on their preferred risk/ reward space with definitively reliable predictors of likely progress later in development when dealing with complex disease.

    · Risks & mitigation not framed
    An investment cases normally involves specifying the opportunity, risks & the plan to exploit the former & mitigate the latter. Biotech & pharma companies have indirectly exempted themselves from this discipline.

    On the last point, the mainstream investment community has many choices and given the continued high failure rate of drug in clinical development, the ‘trust us we’re scientists’ may not have the authority it once held without proper framing of risks and plans to mitigate them.

    Take for instance the majority of large molecule and small molecule drug programs which are derived from genetic trends &/or pathway biology approaches. Genes are not responsible for biological function, though their output can obviously influence function through their impact of protein systems. Proteins are statistically very unlikely to be responsible for function, rather how they interact within systems drives biological function.

    Drug interaction with the relevant biological systems will decide their efficacy and safety. Differences between biological systems of varying phenotypes will determine whether the drugs impact is generic or phenotypic or somewhere in between.

    In other words to frame the major risks and mitigation the context of investment case must state & explain how they deal with the fundamental risk for efficacy and safety – biological complexity and how it is to be addressed.

    When & if biological complexity is addressed (we are obviously biased toward Network Pharmacology having done some of this) pandora’s investment box could conceivably open. For example a market place of investors for differing stages of development, new biomarkers for efficacy & safety potentially reducing trial patient numbers & duration plus a wave of opportunity framed in the manner of normal investments.

    This is fascinating topic for the UK and globally. We apologise for our comments being out of date and the initiatives described look encouraging.

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  • http://eventurebio.wordpress.com Eva Castagnetti

    A bit late, but still I would like to comment. The same problem is true everywhere in Europe, and certainly in Switzerland. But founding a biotech company is not “obvious” because you need the scientific knowledge and the idea or “product”, and the people who “own” the idea (generally in universities) on one side have mostly no clue of how to start “doing something” with their idea (understandably), on the other side have a great fear of “giving the idea away” and not to own it fully anymore if someone else offers to help with the building of a new company: entrepreneurial spirit coming from the “outside” is very suspiciously seen, more like a desire to “steal the asset” than to “create something new that might work and be a win-win situation”, or maybe even not. Entrepreneurship for sake of it is not “accepted”: people tend to ask “what do you get out of it?” and cannot conceive that the answer is “I get to try to do something that might be very good”. This brings to the paradox that nothing is done for fear of losing the idea, which ends up on some scientific paper at best, even if initiating the process to found a start-up with an external partner would imply no risk at all for the idea’s owner, who could go on being employed in his academic institution as he was before, own the asset and participate in the venture anyhow, and would be a reward “per se” for the entrepreneur. Sad for the idea’s potential (and for the society who could benefit from it), for the idea’s owner, and also sad for the would-be entrepreneur who is not given the chance to try to get the idea out of the drawer, and make something out of it.