Oct 17, 2005 | Last year I wrote a column that spoke of the great enthusiasm in the VC community about the investment potential around biomarker discovery technologies (see A Bet on Biomarkers, June 2004, Bio-IT World, page 22). Well, the extraordinary potential still exists, but I fear that my colleagues have become more jaded about the investment potential. The question now is: Can an independent successful biomarker tools company be built in this environment?
Some novel and potentially important companies were funded this year, and much of the rhetoric out of pharma suggests that biomarkers have finally arrived on the scene and that their impacts will fundamentally redefine their businesses. Trust me, I really want to believe that, but funding monthly burn rates while pharma and the FDA sort all this out is very expensive.
There are a couple of fundamental methods to identify biomarkers, and each approach has launched a number of new companies. Protein separation, such as is being developed by Protein Forest (where I am an investor and on the board), promises to physically separate proteins to allow for specific identification of the protein analyte. Another group of companies has developed powerful mass spectral analysis software tools to search for patterns and protein signatures that correlate to certain known diseases. Also, there are numerous companies that have developed elegant assay kits to achieve protein identification.
How the biomarker discovery industry evolves is still very much under debate. It is clear that many approaches will need to coexist to give a complete understanding of a particular sample; this troubles many VCs, as small and emerging markets are not good at supporting numerous competing solutions.
Specifically the software tools in the mass spectral analysis sector seem quite promising. Keith Warner, CEO of Efeckta Technologies, which develops elegant image analytic tools, welcomes the day when “these tools move mass spectral analysis out of the research community and into the commercial realm.” He says that existing bundled solutions from hardware vendors or proprietary solutions “retard expanding the market because they are so inadequate; we are about driving data quality and reproducibility from raw data to final data applications.” He estimates that 25 percent of the installed mass spec base does not use any mass spectral analytic tools.
Identifying the constraints, or at least those perceived to exist by the VC, should guide the entrepreneur when raising capital as to the risks that need to be addressed. In addition to the omnipresent regulatory risk with all of the attendant delays and uncertainties for success, the patent landscape is becoming increasingly muddied. Who would have guessed that Correlogic Systems, which generated attention two years ago with its software analytics solution, is now to be regulated as a medical device manufacturer — or that the Patent Office would now begin to grant patents based on certain mass spectral images?
Muddle Over Models
A central concern remains around articulating the most appropriate business model. Are you a software company, will you use your software to provide a service (“selling software as a service” model so prevalent today in the IT sector), or will you simply OEM your offerings so that they are bundled as a private label solution with other hardware offerings?
This fundamental question is very complex, and unfortunately there are few sustained successes in the market to provide guidance. Selling bio-IT software has been a challenge the past three years. Notwithstanding the biomarker buzz emanating from pharma, an entrepreneur’s worst nightmare is to be caught in a spiral of never-ending pilot projects. The service model is intriguing but still largely unproven in this space. VCs also will not put much confidence in the ability to drive upside royalty streams from pharma from any future discoveries utilizing these tools. There is growing acceptance that an OEM strategy may make sense.
VCs are loath to fund large horizontal software companies now in large measure because the cost of sales is too high a hurdle for startup companies to clear. The OEM strategy, while perhaps limiting the potential upside, will greatly reduce the cost structure of the company. This also plays to my favorite investment strategy, which is to be fanatically focused on capital efficiency: Raise modest amounts of capital to build more tightly focused companies and ensure that you own a lot of it. Remember it is not how much you raise but how much you own.
Michael A. Greeley is managing general partner of IDG Ventures. E-mail: email@example.com.