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Monday, June 15, 2015

Incubating, accelerating and funding life science startups

On Thursday I visited the SF Indie Bio Demo Day. The San Francisco life science accelerator was graduating its first class of 12 early-stage startups.

Indie Bio was launched and funded by SOSVentures, a $200m seed fund based in Cork, Ireland. Its launch was seen as a reaction to the decision of Y Combinator to take on 5 biotech firms last summer, although Indie Bio founders insisted that their plans predated Y Combinator’s interests.

Y Combinator
The Mountain View-based Y Combinator is widely considered to have invented the accelerator format — or at least to have perfected it with its 2005 launch in Silicon Valley. Its model includes:
  • Cohort admission process (two cohorts per year)
  • Incubator-style office space combined with seed-stage equity funding
  • Mentoring services to help firms refine their product and strategy
  • Mandatory on-site participation of the CEO during the intensive 3-month process
  • At the end of the incubation period, a hype-filled “Demo Day” graduation ceremony that both brands and publicizes companies being kicked out of the nest
Most of its 800+ alumni have been software or software-enabled companies that fit its original focus. Its best known graduates are online services companies such as Dropbox, Airbnb, Reddit and Weebly.

While Y Combinator has been a great success — in terms of publicity, investments and picking (and perhaps helping†) winners, there have been questions about whether the model could be used for companies with longer development cycles. There are also obvious economies of scale and scope if each cohort has overlapping technology orientations.

Y Combinator had some successes in hardware — and now a handful of recent life science graduates — but IMHO the generalizability remains an open question.

† There is a longstanding debate in higher ed whether schools such as Stanford and the Ivies mold their students into successes, or merely pick students who are bound to succeed no matter what. There are obvious parallels to angels, VCs and incubators

Indie Bio
As a former software entrepreneur who has spent the past four years teaching business at a biotech graduate school, I was eager to see how the Silicon Valley formula would be adapted for starting life science companies. On average, life science startups are different — with greater technical uncertainty, capital costs, development costs and time to market.

SF Indie Bio has adapted the accelerator format of Y Combinator: in some cases, the language and terms are almost identical. However, a crucial difference is the need for wet labs; healthcare IT companies can be incubated at a software incubator, but therapeutics, device and most diagnostic companies cannot. Designing and staffing a wet lab isn't cheap, and every life science incubator faces the challenges of which equipment is needed and how to cover it.

Another advantage for Indie Bio is an (acclaimed) life science-specific incubator team. Ryan Bethencourt and Ron Shigeta earlier started the Berkeley Biolabs, while Arvind Gupta is a venture partner with the parent venture fund. At this week’s Demo Day, there were clearly synergies between the companies in the first cohort, particularly for the tools companies that had ready-made customers while those customers saved capital as free beta sites.
Ron Shigeta, Ryan Bethencourt and Arvind Gupta at Thursday’s rollout
As with other Bay Area incubators and accelerators, the Indie Bio location means that tenant companies are close to a wide range of potential investors.

The companies in the first round received $100K of cash and in kind funding in exchange for an 8% equity stake. The next round of firms will get this, and also the option of a $150K of cash in exchange for a convertible note.

Seizing a Place in the Value Chain
After visiting Indie Bio — and talking to its founders and entrepreneurs — I got a better sense of where an accelerator would fit in the entrepreneurial value chain of a life science company. (Other life science incubator/accelerators seem to have been launched in Berlin, Houston, Israel, and Winnipeg.)

As the name suggests, an accelerator can make a big difference in accelerated a firm's growth. However, it covers only one brief phase of a longer process of development.

Indie Bio focuses on the steps of the lean startup process where entrepreneurs develop the minimum viable product and decide whether to proceed or pivot. However, before firms are ready to join an accelerate they will need to develop their science. This could be at a university, at a biohacker space (such as BioCurious), or a local life science incubator such as QB3 or J&J's JLabs — or the Berkeley BioLabs cofounded by Bethencourt and Shigeta.

At the same time, once they leave the accelerator they will need a home. If the company is small (< 5 employees), it might still fit in an incubator. If they hire multiple employees, they're too big for either an incubator or accelerator and will need an actual office. Either way — as earlier in their development cycle — they will need a shared wet lab rather than just (as with a software or healthcare IT company) access to cloud servers.

Bethencourt and Shigeta are aware of this imperative. They’re working to identify an affiliate or partner facility that the Indie Bio companies can graduate into.

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