# How biotech startup funding will change in the next 10 years

**Author:** Jared Friedman
**Type:** Essay
**URL:** https://www.ycombinator.com/library/4L-how-biotech-startup-funding-will-change-in-the-next-10-years


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Back when YC was getting started about 10 years ago, Paul Graham wrote
[some](http://www.paulgraham.com/webstartups.html) [essays](http://www.paulgraham.com/future.html) 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
science<sup id="footnoteid1"><a href="#footnote1">1</a></sup> 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.

### How tech startup fundraising changed from 2005 to now

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.<sup id="footnoteid2"><a href="#footnote2">2</a></sup>

### What’s happening now with biotech companies

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](http://wuxibiologics.com)
[cost](http://evotec.com) [CROs](http://chempartner.com) that will do scientific work for a fee. Companies like [Science
Exchange](https://www.scienceexchange.com/) make access to CROs and scientific supplies instantaneous and cost effective
to small companies. It’s easy to rent [fully equipped](https://mbcbiolabs.com/) [lab
space](http://www.berkeleybiolabs.com/) by the bench, and there are [companies](https://www.quartzy.com/) to help you
[stock it](https://www.happilabs.org/). Affordable lab robots from companies like [OpenTrons](https://opentrons.com/)
make it possible to automate batch experiments, and computational drug discovery from companies like
[Atomwise](https://www.atomwise.com/) allows some experiments to be done completely in silico. Companies like [Cognition
IP](https://www.cognitionip.com/) are bringing down the cost of filing patents, and companies like
[Enzyme](https://www.enzyme.com/) 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](http://www.shasqi.com/). 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](https://athelas.com/) 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.<sup id="footnoteid3"><a href="#footnote3">3</a></sup>

Of course, running clinical trials for drugs remains very
expensive<sup id="footnoteid4"><a href="#footnote4">4</a></sup>, 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.

### Predictions for the future

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
postdocs<sup id="footnoteid5"><a href="#footnote5">5</a></sup>. 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.

**Notes**  
<b id="footnote1">1.</b> 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.[↩](#footnoteid1)  
<b id="footnote2">2.</b> Actually, this trend started with top VCs earlier, basically for the reasons Ben Horowitz
[wrote about](https://a16z.com/2010/04/28/why-we-prefer-founding-ceos/) in 2010. But I think the rise of institutional
seed funding accelerated it.[↩](#footnoteid2)  
<b id="footnote3">3.</b> 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.[↩](#footnoteid3)  
<b id="footnote4">4.</b> Though companies like YC’s [Curebase](https://www.curebase.com/) and
[Nucleus](https://biocomcro.org/cro/nucleus-network/) in Australia are chipping away at that.[↩](#footnoteid4)  
<b id="footnote5">5.</b> Certainly not all of them. We’ve also backed many founders who came out of industry, along with
MD’s and faculty.[↩](#footnoteid5)

*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.*

