Failure in Biotech - Should the Founders be Fired?

by Josh Bueller

The Biotech industry is truly the hardest business to be in.  The enormous capital requirements, the scientific expertise needed, the regulatory red-tape, and the challenge of adoption by multiple people (payers, prescribers, and patients in the case of therapeutics) make successes in biotech few and far between.  In fact, the current stats are that 9 in every 10 business will fail.  This is a staggering statistic and caution is warranted for any new entrant to this field.

There are many reasons for these failures.  In pharma, the success of a new compound will largely be based on the science.  In diagnostics, the success might be based on execution of the product.  No matter your specific segment of the industry, however, there is one unifying factor that ultimately will determine the company's success - The management team.

At the beginning of a biotech start-up, the company is typically formed by a scientist (CSO) and a business driver (CEO). These two people, along with some other potential VPs make up the New Venture Management Team (NVMT) and will usually take the company through early seed financing and carry out some early R&D until Venture Capital (VC) investment can be attracted for further development.  However, at the time of the first VC round, these executives are typically replaced with "more experienced" people.  For example, in the time from company inception through a liquidity event (IPO or acquisition), the average biotech company gets through 3.5 CEOs (Walton, A. 1999). Other members of the NVMT are fired as well soon after the first VC investment in favor of more professional management.  Clearly, VC's have commonly fired the founders as they believe that a more experienced team has a greater likelihood of success than does the original team - but are they right?

William Bains, Ph.D. biochemist, serial entrepreneur, and previous member of Merlin Ventures (London), recently explored this issue (Bains, W. 2007).  He examined the effect of NVMT removal in a set of 77 UK venture-backed biotech companies to see if the investors in the company fared better than if the NVMT hadn't been removed.  By analyzing the relationship between company performance (achieving liquidity, attracting further investment, company size) with length of NVMT retention as a primary metric, he determined that removal of the founding team is correlated with poorer  performance of the company for all of his performance measures.  He concluded that VC investors' tendency to routinely remove founders and change CEO's is damaging to their own interests and suggested that ways in which the founding members can continue to contribute to the company should be explored.

Commercial experience is an essential component of any executive's skill set and I would still caution any newly minted MBA's, Ph.D.'s, or M.D.'s from starting their own companies without working in industry for some period of time. That being said, this is good news to all you future entrepreneurs out there!  While serial entrepreneurs are still the most valued executive, there is hope for all of us novices that we'll be able to survive after the initial VC rounds, gain our well deserved stock options, and see our products come to life.

refs:
Walton, A (1999) Some thoughts on bioentrepreneurship. Nat. Biotechnol. 16(Supplement), 7-8
Bains, W. (2007) When should you fire the founder?  J Com Biotechnol. 13, 139-149