In WIRED, “One Startup’s Struggle to Survive the Silicon Valley Gold Rush” by Gideon Lewis-Kraus is a very long read for a magazine article but works to compare/contrast the social and economic lives of tech startup founders and employees at larger tech companies. Here’s a passage that stuck with me for hours after reading the story this weekend:
As the engineer and writer Alex Payne put it, these startups represent “the field offices of a large distributed workforce assembled by venture capitalists and their associate institutions,” doing low-overhead, low-risk R&D for five corporate giants. In such a system, the real disillusionment isn’t the discovery that you’re unlikely to become a billionaire; it’s the realization that your feeling of autonomy is a fantasy, and that the vast majority of you have been set up to fail by design.
This quote gets to one of the fundamental issues that distinguishes investors from management and scientists in their companies: Investors distribute their risk among multiple ventures. Founders, management, and key scientists are all in on the company they are building. This difference sets up a natural tension that shouldn’t be ignored.
Over at The New Yorker, Epic Fails of the Startup World by James Surowiecki discusses the overconfidence of entrepreneurs, based on studies that show these folks overestimate the likelihood of success of their businesses. The end of the piece is what actually caught my eye:
The economy has come to rely on this Darwinian process to drive innovation. “Overconfidence means that many more companies start up than will ever succeed,” Brian Wu, a professor of strategy at the University of Michigan, told me. “That’s unfortunate for individual companies. The paradox is that it’s really beneficial for society.” In the delusions of entrepreneurs are the seeds of technological progress.
While the overall result might be progress, the opportunity cost for the entrepreneurs starting these businesses rather than getting traditional jobs is not accounted for in this analysis. (The loss of capital by the majority is also likely not a net benefit.)
Winning (Financially) at Biotech Entrepreneurship
As with everything, the biotech world is changing.
- Biotech/pharma deals in this space have shifted to include smaller upfronts and large biobuck components, which shifts greater financial risk to earlier investors and employees.
- Lean/virtual* biotech companies have become the norm, shifting the majority of hands on R&D to contract research organizations, where the employees don’t have the chance to participate in an eventual financial upside of the company.
- Pharma appears to have reentered the consolidation phase of mega mergers, which limits the potential buyer/funder pool as these companies digest their large meals. (Brian O’Relli lists 30 biotechs that could be purchased for the ~$100B being discussed for AstraZeneca.)
- Life science IPOs are happening but they are primarily fundraising events, not exits.
If you are thinking of building a biotech company (asset) because of the financial payoff, there are likely much more straightforward ways to trade your scientific/operational/management talents for good wages and benefits than a binary bet in an industry with high failure rates and increasingly long term financial rewards.
I am thankful for the opportunity to build Quintessence, something that I had the chance to do because of our equity investors. And I appreciate the people in my personal life supporting the many tradeoffs that this job entails. For me – in my situation – I wouldn’t change the path I’ve traveled.
*Mini-rant: Small biotech companies with a handful of employees aren’t “virtual”. At Quintessence, there is nothing virtual about the patients who enrolled in our clinical trial, the shareholders who have contributed capital or the work our scientists have done to advance our drug.