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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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April 25, 2014

Ycombinator Gets Into Biotech

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Posted by Derek

Here's an article from Nature News on the startup incubator company Ycombinator moving into biotech funding. Those of you familiar with them will wonder a bit about this, because it's a space that they've avoided. But read on:

In 2008, Y Combinator founder Paul Graham wrote that funding biotechnology start-ups was too expensive. Why the change now?
Sam Altman: Six years ago, the starting costs for biotech firms would not work with our model: it took millions of dollars to get anywhere. But the landscape has changed. We’ve noticed, over the past year, more and more promising biotech firms asking about Y Combinator. I think there is a real trend for biotech start-ups looking more like software start-ups. In ten years it won’t even be unusual for a biotech firm to begin in the same way a software firm does, and we want to be on the leading edge of that trend. Given that we haven’t done this before, we don’t know a lot of people that have a background in it, so we were very lucky that Elizabeth agreed to help.

Elizabeth Iorns: I think the fundamental changes that are happening in the biotech space are like the changes that happened for software start-ups with the introduction of Amazon Web Services. You saw the economics completely shift. Previously, you needed significant investment in physical infrastructure to start a firm. Then all of a sudden you could just turn on servers. That same ability to access the entire technical infrastructure that’s required to start a biotech company is now also available with basically no investment. We see Science Exchange as an example of that platform, and you also see it with QB3 [a life-sciences incubator based at the University of California, San Francisco], which rents out lab bench space for less than US$1,000 per month. That means you can cheaply have access to laboratories, instruments and experts. That’s completely different than it has been at any other time for biotech firms.

I'm on the fence about this. I'm very much in favor of new funding mechanisms for biopharma research, and I'm very glad to see new organizations getting into it. My worry for the Ycombinator folks is that they may be coming into this with a bit too much of the weltanschauung of the tech sector, where companies that start off sounding like "Hey, kids, let's put on a show in the barn!" can turn into huge operations. (Two that Ycombinator has been in on, for example, are Dropbox and Airbnb, but plenty of other internet startups have had similarly small-scale origins).

I would very much like for biotech to work the same way, but my fear is that we're much more money-intensive, and that we have a much higher chance of expensive failure. There's a lot of criticism being thrown back and forth here, with people coming down hard on the Ycombinator stuff (naive, underfunded, etc.), and the folks there saying that they're being singled out mostly because they're not members of the club. Problem is, none of these complaints (from either side) are unfounded. I myself am not quite so sure about all these dramatic cost savings - all the work I've been in on has been, sooner or later, hideously expensive. But Ycombinator can pretty much shut everyone up, though, with something successful, and I think that they should go right ahead and try for it. I don't always enjoy being right.

Update: more from Wavefunction, who's fairly optimistic.

Correction: I'd originally written that Ethan Perlstein's Perlstein Labs had gotten funding from Ycombinator, but that's not accurate. He's worked with the Ycombinator-backed Science Exchange, but isn't being funded by them.

Comments (21) + TrackBacks (0) | Category: Business and Markets


COMMENTS

1. pgwu on April 25, 2014 12:08 PM writes...

I remember the dude saying somewhere you need a perfect English accent to present on their stage. What has changed?

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2. devicesRus on April 25, 2014 12:10 PM writes...

Unlike software startups where code is completely unrestricted by the laws of physics and all you need are some servers (cheap compared to fume hoods in a lab) and you don't need to do experiments, biotech both the wet kind and the device kind needs both hardware and experiments. I think that the real issue though is the timelines involved. You can go from paper to Square in a couple of years, while any kind of FDA reviewed product will take at least 5x longer (and 10x more expensive).

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3. Hap on April 25, 2014 12:21 PM writes...

1) "That means you can cheaply have access to laboratories, instruments and experts." No, none of those things are terribly cheap - if you rent the first two, they can have limited upfront costs, but you still have to pay for what you need, one way or the other. And experts aren't cheap unless they're not getting paid, which is possible, considering the job market, but not so likely, particularly if companies are worried about their ideas. It might require lower initial investment, which opens the field to a lot more people, but it won't be cheap - it will simply require more gradual investments which can likely be more easily gotten and cashed out. That would help, but wouldn't make anything cheaper overall (unless the investment costs are a significant factor in total costs).

2) I am being (perhaps unfairly) cynical, but I am wondering whether the improvement in cost that YC intends to exploit is based on profiting from costs imposed on others. The NYT had an article about the arguments between NY state and Airbnb, and while there are artificial barriers to competition in their field (and others YC wishes to enter probably), it also seems like they also make money on people operating stealth businesses - people who don't have to pay the costs (taxes, etc.) that (legal) businesses would have to pay. Those costs could potential be large in biotech and drugs - I don't imagine cleaning up a house used for drug research (noncomputational) would be any fun.

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4. Anonymous on April 25, 2014 12:28 PM writes...

Yeah and maybe we can do 90 day tox in 10 days or better yet 90 day tox in silico. We can even invent virtual NCEs, put them in virtual formulations, manufacture them in virtual factories and market virtual pills via Facebook after our virtual successful clinical trials. Yeah that is the ticket to the future of biotech.

Now if we are talking about doing a killer in vitro biological experiment to prove a concept or demonstrate in vitro activity of a drug prototype, yeah that can be done on a one person bench. However when did VCs start dropping real money on such early-stage stuff again, especially when so little data is available after such an experiment? Of course if the killer experiment kills the concept, I guess we don't need to worry about spending more money. On the other hand, such an approach would have killed a lot of wonder drugs had that been the SOP for drug invention in the 50-80s.

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5. MarkySparky on April 25, 2014 12:46 PM writes...

Get ready for a bunch of half-baked ideas about "disrupting" the biotech "space" with buzzwordomics. Regulatory and cost issues aside (ta-da!), it really can't be overemphasized how much biology is not software. At least not the simple app-based software that consumes so much of the oxygen in Silicon Valley.

I would bet that this will provide a way to turn existing preliminary data into a one-time cash payout, with a tiny fraction of ideas being sold as IP to Big Pharma. Like a university research foundation, but with energetic young people and flashy websites. Actually, that doesn't sound like a terrible approach, now that I think about it...

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6. Ethan Perlstein on April 25, 2014 12:48 PM writes...

Although I'm a huge fan of YC and I know, have worked with and currently do business with YC-backed companies, Perlstein Lab is NOT funded by Y Combinator. In fact, we're raising a Series A round.

That said, if YC had backed biotech when I began my startup journey a year ago I would have applied. As Elizabeth Iorns from Science Exchange pointed out in the interview $120,000 is what you'd get from Phase 1 of a SBIR.

Perlstein Lab rents labs space at QB3@953 and sources experiments on Science Exchange. Those two features -- incubation + sourcing -- stretch each investment dollar.

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7. Christopher Ing on April 25, 2014 1:04 PM writes...

Skeptics of this announcement might not understand that "Science Exchange", a company in the YC portfolio, allows biotech start-ups to exist without purchasing a single piece of lab equipment or setting foot in a wet lab. There is much less overhead when you can outsource all your experiments.

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8. MILFShake on April 25, 2014 1:06 PM writes...

While I like the idea of Science Exchange in theory (as a lazy academic/person), it stretches dollars in the wrong direction!

I am yet to get a quote that I find reasonable, relative to doing it myself. Alas this is true even for things I absolutely don't want to do, will take forever to get working, and never plan to do again.

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9. Curious Wavefunction on April 25, 2014 1:06 PM writes...

I wrote about this too Derek (click on my handle), and I am a bit more optimistic than you are, especially based on advances in sequencing, software and DIY biotech over the last few years.

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10. Andrew on April 25, 2014 2:26 PM writes...

maybe they will fund biotech-related software in addition?
i could see a couple of hackers coming up with drug modeling software, etc.

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11. MikeC on April 25, 2014 9:26 PM writes...

The first big difference between tech and biotech: The marginal cost to put one more great developer on your team for a year, work for hire, might be $75K-175K all in. If they are willing and able to work for a founder's share of the company instead of salary/benefits that cost decreases to coffee and snacks.

The marginal cost to put one scientist on the bench for a year has traditionally been about $250K+. If they are willing to work for a founder's share in the company that cost decreases to ... $150K+. Incubators like QB3 certainly decrease that cost, but even if you are only spending $12k per year to put a scientist in an incubator materials and outside services will still ramp up quickly.


I'll guess Ycombinator will be focusing on virtual (IP + IT) biotechs that involve few lab costs, not even many outsourced ones, before the next round of funding.

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12. bank on April 26, 2014 2:23 AM writes...

To those pointing out the costs and hurdles in getting a drug from the bench to the bedside, I don't think this is the area that Y Combinator will be focused on.

The model for software-based start-ups that Y Combinator supports is providing the founders with sufficient cash for proof-of-concept and testing the market, as well as advice from seasoned industry players.

Once proof-of-concept is generated, the later rounds of investment would very likely be similar to the current environment for small biotechs.

It isn't that much different from providing small "seed grants" to academic researchers, except that the research scientists have a much larger potential upside in the event of success.

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13. MTK on April 26, 2014 10:01 AM writes...

@12,

I believe your reasoning is correct here. This is seed funding for a company and is in no way designed to take the start-up to any kind of exit, just to the next round of funding.

The terms, if I read the article correctly $120,000 for 7% of the company, puts the startup's valuation at $1.7M which actually sounds like a pretty good deal for a small company just starting out. Depending on the fine print, of course.

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14. M on April 26, 2014 12:56 PM writes...

I met a software startup guy applying for Ycombinator funding years ago, and he said that the value was not in the money, but in the support / community / connections / people. Even for the software world, the amount of money Ycombinator invested was very small. It wouldn't support their 3-man (or 3-kid) team in any meaningful financial way. But being a Ycombinator-funded team opened doors, people gave them guidance, etc. At least this was my impression.

Maybe this sort of people-infrastructure assistance would become valuable when coupled with physical infrastructure assistance like QB3.

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15. bank on April 26, 2014 1:53 PM writes...

@13, MTK

I expect that Ycombinator will get tons of applications from the legions of frustrated postdocs in the Bay Area and Boston, each eager to shake free the chains of the academic funding model.

I hope it works well enough early on, i.e. there is at least one big success from the first cohort of companies, that it will become a new model for funding research and development.

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16. Anon on April 26, 2014 10:50 PM writes...

"That means you can cheaply have access to laboratories, instruments and experts."
That's cute.

Once again we see someone undervaluing talent. If a codemonkey makes a mistake on a AngryBirds you get immediate free feedback from thousands of users telling you what is wrong..and you simply go back and fix it. If you have someone make a wrong decision in drug devepment, you don't for a very long time (sometimes years) and at a very high price.

My only thought is that YCombinator is going to just do simple projects like medical instruments. Drug discover is a totally different story...

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17. Dr. Manhattan on April 26, 2014 11:05 PM writes...

" If you have someone make a wrong decision in drug devepment, you don't for a very long time (sometimes years) and at a very high price."

Especially if you get far enough and the lawyers show up! "Have you or anyone in your family taken wonderstatin and had any of the following problems...?"

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18. gippgig on April 27, 2014 9:25 PM writes...

Do not confuse biotech with drug development. There are many areas of biotech that have nothing at all to do with medicine.

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19. milkshake on April 28, 2014 10:03 AM writes...

This is not the first time that Paul Graham is venturing into fields he knows very little about - see "Dabblers and Blowhards" at Idle Words.

I am actually with a miniature biotech company that is developing excipients for IV drug formulation. We are located in university incubator, we share NMRs with other companies here. The salaries are below average. And It still costs lots of money - the burn rate is couple millions a year - and it takes 10 years to get anywhere in our field. If our company was little less financially strong we would not have made it through the 2008 economic crisis, and would have to fold and sell our IP for pennies on the dollar.

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20. milkshake on April 28, 2014 10:06 AM writes...

Also, the comment #8 is not from me, it is some random dude

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21. Adam on April 28, 2014 10:25 AM writes...

I don't think YC is interested in funding drug development. There are quite a few biotech startups that are closer to their traditional target, where the primary product is a computer program of some sort, especially now that gene sequencing is getting so affordable. These sorts of companies will be able to use a YC investment for its traditional purpose, which is to build enough of a product to go for a Series A investment.

As #5 pointed out, there will also be a lot of companies trying in vain to "disrupt" something. And there will probably be more than a few 23 And Mes.

This will be very interesting to watch...

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