Back when YC was getting started about 10 years ago, Paul Graham wrote some essays that predicted the way startup fundraising would change in the next decade - accurately, it turns out. Paul Graham predicted that there would be way more startups, that they’d be cheaper to start, that new kinds of investors would fund them, that founders would be more technical, and that founders would keep control of their companies. All of those seem to have come true.
I've noticed that raising money for a biotech or other life science1 company in 2019 looks a lot like raising money for a tech company 10 years ago. Since then, fundamental forces caused fundraising for tech companies to change dramatically. I see those same forces that Paul Graham wrote about happening with biotech companies now. And I believe that they are going to change biotech fundraising very much the way they changed tech company fundraising.
In 2005, when Y Combinator started, there was already a well developed ecosystem of venture capital firms in Silicon Valley and Boston. But access to those venture capital firms was limited.
VCs preferred to fund companies that already seemed like a sure bet - in other words, were far along. They also preferred to fund MBAs with previous executive experience and shied away from unproven teams with technical founders. Because they had a lock on the funding market, they asked for onerous financial terms and often replaced founders with favored executives. The only model of institutional seed funding was the “business incubator” model, where VC firms would fund well-connected founders they knew and incubate them in their office.
Then, the cost to start a tech company plummeted. It plummeted because new infrastructure was created: a combination of open source software, modern web frameworks, SaaS developer tools, cloud hosting, and better distribution channels. This meant that a lot of technical founders, who couldn't raise money from VCs off a PowerPoint, were able to launch a product and get users with minimal funding. Once they had proven that their idea had merit, they could use their traction to raise funding.
Companies like this now only needed a small amount of money to get started, but there wasn’t any place to get it, because institutional investors didn’t make small investments. This was the key insight that led to the creation of YC, and also to the hundreds of institutional seed funds that sprung up to take advantage of the new opportunity. Easy access to flexible, institutional seed funding led to an explosion of tech startups, and today this is the default path for tech startups to get started.
Because these companies wouldn’t raise VC until they were much further along and had leverage, the balance of power shifted. Founders increasingly retained control of their company. Investors lost the power to fire founders and bring in favored executives. And when they did, they realized something surprising: despite their inexperience, the founders were often the right people to run the company.2
Today, early stage biotech funding is dominated by the “venture creation model”. In the venture creation model, the VC firm creates the company. They have an initial idea and put together a team of favored executives, often from their pool of entrepreneurs-in-residence, to run it. The startup is typically incubated out of the VC’s offices. The VC invests a large amount of money upfront and takes a controlling ownership stake.
Just as VC-incubated tech companies made sense when tech companies were expensive to start, this model made sense when the cost to start a biotech company was high. Until recently, no one could get anything done before a VC wrote a $10M check, so this was the only way to get started.
But that’s no longer the case. Just like new infrastructure brought down the cost to start a tech company, new infrastructure has brought down the cost of doing biology dramatically. Today, founders can make real progress proving a concept for a biotech company for much less, often as little as $100K. There are low cost CROs that will do scientific work for a fee. Companies like Science Exchange make access to CROs and scientific supplies instantaneous and cost effective to small companies. It’s easy to rent fully equipped lab space by the bench, and there are companies to help you stock it. Affordable lab robots from companies like OpenTrons make it possible to automate batch experiments, and computational drug discovery from companies like Atomwise allows some experiments to be done completely in silico. Companies like Cognition IP are bringing down the cost of filing patents, and companies like Enzyme are streamlining FDA submission.
Because of this infrastructure, bio companies routinely clear major scientific hurdles during YC’s short program. Often therapeutics companies are able to show that their concept is effective in animal models. Diagnostic companies can show success with human samples. Synthetic biology companies successfully engineer cell lines.
I’ll give a couple of examples from recent YC companies.
In 2015, Jose Mejia Oneto was an MD/PhD who left orthopaedic surgery residency to pursue an idea for a way to localize the delivery of chemotherapy. When Jose applied to YC, he had developed the technique in academia but hadn't yet tried applying it to therapeutics in animals. When he was admitted to YC, he founded Shasqi. Using just the funding from YC, he was able to show in less than three months in a breast cancer mouse model that his localized delivery outperformed conventional chemo.
Athelas makes a device that does at-home blood tests for oncology patients, using a new computer vision based technique. The founders Tanay and Deepika started the company while still in college and were able to make a working prototype with just $40K in investment. During YC they were able to run a 350 patient initial study that showed very good results. Their device is now FDA cleared, and they’re serving thousands of patients.3
Of course, running clinical trials for drugs remains very expensive4, and biotech companies will ultimately need to raise tons of money to deliver on their initial promise. But this is not too different from tech companies. The biggest YC (software) companies have each raised over $1B. The important part is that these companies were able to get started with less than $100K and to de-risk their idea enough to raise more money later.
Because you can start cheaply, it’s now possible to start a biotech company the way people start a tech company. By raising money incrementally, rather than a giant amount upfront, you can keep control of your company. And you can work on your own idea, not just ideas that VCs come up with.
This new path has drawn a new kind of biotech founder. Many of the biotech founders we see at YC are grad students or postdocs5. Previously their career options were to stay in academia or to join a big pharma company. Starting their own company is now a viable third option.
If this plays out the way it did in 2005, we'll see an explosion in the funding options for biotech companies. Many traditional biotech investors are still looking for the controlling legal terms that went out of vogue in tech in the early 2000's. But just like what happened with tech investing, a new crop of biotech and tech/biotech crossover funds have created a vibrant new bio seed investor ecosystem. As a result, YC bio companies now typically raise $1-5M seed rounds after each batch.
Even more exciting, this would mean we're still at the beginning of an explosion in the number of biotech companies. And more of these companies will look like tech companies: instead of being run by VCs and hired execs, they’ll be run by the founders who care about their ideas, and who will sustain that passion building companies they love and that change the world for the better.
1. It’s common to use the word “biotech” to describe specifically therapeutics companies. I use it this way as well, but most of this post applies to all life science companies - anything related to biology.↩
2. Actually, this trend started with top VCs earlier, basically for the reasons Ben Horowitz wrote about in 2010. But I think the rise of institutional seed funding accelerated it.↩
3. The point here is not that these companies will ultimately succeed—we don't know that yet. My point is that with just a seed investment and a few months, they managed to go as far along the curve as companies that had to raise millions of dollars before.↩
4. Though companies like YC’s Curebase and Nucleus in Australia are chipping away at that.↩
5. Certainly not all of them. We’ve also backed many founders who came out of industry, along with MD’s and faculty.↩
Thanks to Dan Gackle, Abe Heifets, Elizabeth Iorns, Stephanie Simon, Geoff Ralston, Diego Rey, Uri Lopatin, Ethan Perlstein, Joe Betts-Lacroix, Jose Mejia Oneto, Tanay Tandon, and Thomas Folliard for reading drafts of this.