I find it hard to believe that entrepreneurs coined the phrase “Valley of Death” and the term should be rebranded to capture the potential opportunity and challenge that the valley provides rather than focus on the most dire potential outcome. I say this largely because entrepreneurs, particularly in biotech, can be passionate every day for year after year in an industry where the chances of success are frankly not good at all.
I have seen a variety of definitions of the Valley of Death but generally the term references a gap in specific funding mechanisms. For example, the valley has been described as the gap between angel and venture financing or the gap between venture capital and private equity. In talking with small business owners from other industries, including construction and advanced manufacturing, they all have seen the inflection point where more capital is needed to grow the business than is available at that time. The height of the mountains or the distance between them may be different but businesses across industries face their own version of the valley of death. Within the biotechnology industry, companies have very distinct business models. In my opinion, descriptions of this valley that focus on the product/technology/business are more accurate. For example, a very general description would be the stage of a business between basic research and commercialization.
Here are a few hypothetical company examples to provide context for what the valley might look like in different sectors of the biotech industry:
- A company with a technology that provides research reagents with significant improvements in identification of new drugs. The company’s goal is to produce the product and sell them to the pharmaceutical companies to do discovery, reaching break even in the short to mid term.
- A company with a truly disruptive technology that will allow them to produce the next generation of tools for drug discovery, replacing a key component of the existing drug discovery infrastructure. While the company plans to sell product along the way, the company must maintain a rapid growth curve to ensure that the products can be produced on large scale. Break-even and profitability are not anticipated in the near or mid term.
- A company developing a drug from a university discovery must carry the drug through “proof of concept” to attract the interest of a pharmaceutical company to take on the large Phase III clinical trial. The company has no plans for product sales or licensing revenue. (I spend my time here with Quintessence.)
Each of these companies may look to fill the gap in a different way. A while back, I put together the following graphic to highlight some of the main potential funding mechanisms for biotech businesses. Gratifyingly, Fred Wilson of Union Square Ventures recently started a series of posts on financing options for tech companies. He has broken out some of these into finer categories but the general mechanisms are all represented.
Equity financing (angel and venture capital) is more common to biotech than some of the funding mechanisms (e.g. debt) used in more traditional businesses. One of the major issues when considering whether equity financing is a good strategy for a business is the plan for shareholder exit. Bruce Booth, a life sciences venture capitalist, recently wrote a great post on how to approach a VC. I think the only thing that might have been missing was this: if you have no plan to exit and/or there is not a marketplace to sell your company, your investors can’t get a return and you should not look for equity financing.
Over the last few years, the exit for biotech companies developing FDA regulated products (e.g. therapeutics) has been changing and this evolution has led to a different marketplace, impacting the return for investors. In turn, equity investors are increasingly interested in phrases like capital efficiency, virtual (or backyard) biotechs and are even revisiting corporate structure to get returns. Given the changes in the biotech equity markets, flexibility in funding mechanisms to advance past the valley is as critical as ever. Ensuring the next round of funding allows the company another chance at bat, which could be the home run.