Investing in Life Technologies
In his webinar, Dr William Janeway discusses key lessons learnt from managing finances to keep a biosciences start-up afloat and the culture of investing in biosciences.
Dr William H. Janeway is a private equity giant from Warburg Pincus and a lecturer in the Faculty of Economics, University of Cambridge. In this webinar, he shares about his experience with managing Bethesda Research Laboratories (BRL), a company which merged with GIBCO Corp. in 1983 to found Life Technologies. His story is documented here: https://www.billjaneway.com/downing-college-reading.
During this time, Dr Janeway learnt two key lessons on how to manage and sustain a bioscience start-up in the times of uncertainty. The first key advice is that the company should secure unequivocal access to sufficient cash which they have control over to sustain themselves if they run into deficits. This will prolong the survival of the company during investigations to address the root problem. In addition to that, the second principle is that the positive cash flow is crucial for a company’s growth. To maintain corporate happiness, the company’s profit should exceed and fund the cost of running the business, as opposed to depending on external investors to pay bills.
In bioscience ventures, even if the financial profile of the venture is well characterised, positive cashflow is a distant reality from the point of the initial public offering (IPO). In Gary Pisano’s book “Science Business: The Promise, the Reality and the Future of Biotechnology”, he shows that the time to achieve positive cashflow is often beyond the expectations of the investor. For example, the average time to the first year of positive cashflow from the date of IPO was around 11 years. In spite of this, venture capitalists have persistently committed billions of dollars to the bioscience industry. This level of investment is only second to the information technology sector. This is partly due to the almost continuous access to the IPO market for biotechnology ventures. In fact, during the past decade after the global financial crisis, the biosciences sector has accounted for >50% venture-backed IPOs (cf. National Venture Capital Association Yearbook 2019).
Why have public market investors persistently committed cash in increasing absolute amounts to companies with no revenues and substantially extended cashflow deficits? One explanation is that investors project their expectations based on the successes of the small portion of surviving giants such as Amgen. In addition to that, Dr Janeway explains that investors also place more importance on market risk compared to technology risk. Biosciences is unique in that the estimate of the addressable market and cashflows are available at the moment of the conceiving of a venture. While life sciences ventures may face high technological and regulatory uncertainty, the potential market can be well-characterised. In contrast, a consumer product venture may have low technological barriers but may have to identify or create new market demand. Experts were able to evaluate the ventures effectively for life science and medical devices sectors, but not for consumer product, consumer web and mobile, and enterprise software sectors (Scott, Shu and Lubynsky, 2019, forthcoming).
To find out more, you can check out Dr Janeway’s book “Doing Capitalism in the Innovation Economy” where he explores these concepts in greater depth.
