Last week Reuters published an article summarizing the “virtual” biotech business model. It was a strange article, considering that this is not a new approach. Indeed, we wrote about this model as far back as 2011.
According to Reuters,
The new model has grabbed attention as venture capitalists strive to improve returns in a notoriously risky sector, and it has been mirrored by other venture firms such as Symphony Capital, Atlas Venture and CMEA Capital in recent years.
The strategy is in sharp contrast to the traditional idea of building a fully integrated drug company and it depends on tapping into an ecosystem of out-sourced specialists who can be parachuted in to work on different facets of drug development…
The proliferation of external service providers means it has become a lot easier to create a virtual drug company. But challenges remain, particularly when it comes to scaling up the strategy, given the “human capital” still needed to decide the right pathway for developing individual drugs.
We are privileged to watch virtual companies through our relationship with Ventac Partners. All of these companies have a minimal staff (none full-time), to focus capital on drug development.
What is needed for “virtual” biotech companies to work? There are a few key issues that can drive the success or failure of these types of companies.
Bullpen – Investors and entrepreneurs need to have a bullpen of skilled individuals who are already independent consultants and comfortable working on a part-time basis for a company. From the consultant’s perspective, the virtual biotech is basically a client to whom they are committing a certain percentage of their time to deliver on a specific set of tasks and deliverables. Now that task could be significant, such as the oversight of a multi-national clinical trial. But the point is that it is well-defined, with a fixed time and budget associated with it.
Importantly, this bullpen must be populated with competent individuals who are committed to being independent consultants with their own practices. They are not job seekers who are merely passing the time until their next full-time job. This is important, because a job seeker may have part of their attention on the usual job seeking activities. And, there is the risk that the job seeker will leave the project, creating transitionary issues.
Stranger Danger – It is not as simple as merely picking from a bullpen and throwing them together into a company/project. Nobody works in a vacuum, so it is important to bias consultant selection towards individuals who have worked well alongside other members of the team. Again this is where Ventac Partners do a nice job of dropping in a team instead of a group of individuals thrown together, especially for key long-term roles such as Chief Scientific Officer and Chief Business Officer.
Cold Comfort – Having a minimalist management team overseeing the development of a novel asset can only work if the investors and their Limited Partners feel comfortable with this approach. And many do not. Some investors and LPs want to have a management team to be totally dedicated to the project. And, let’s face it, some investors want someone to blame when things go wrong.
This is a personal decision, in that it may require some degree of soul searching by GPs and their Limiteds. And for some, saving some money on management salaries is trivial compared to other problems, such as finding lab and office space in Cambridge.
Facilities – Lastly, virtual models may not work well when the product being developed requires special development or manufacturing facilities, or when the underlying technology is dependent on a blend of trade secrets and specialized know how that resides in the brains and hands of a few key people. In this case, investors may want to tie down a small team in order to better control confidential information and processes.
Will we have companies with zero employees?
In the Reuter’s article, David Grainger of Index notes that the zero-employee company will be possible in the future. Indeed, he wrote an elegant post on the subject in 2013. Again, this could work if the GPs in the fund, their LPs, and the investors from the rest of the syndicate (if there is one) feel comfortable with this approach. I would imagine the GP who is also an acting CEO in a portfolio company has to be exempted to a certain degree from the usual day-to-day activities of a GP. How will that impact other companies under his/her watch?
It’s pretty clear to us that the one-man band (or no-man company) is not for all investors and all companies. But, for the right assets with a clear set of “killer” experiments (and a corresponding exit via license or divestiture based on these data), then the virtual model will undoubtably become more common in the future.