????3. Building too fast on back of a partnership. Biotechs often get seduced in premature scaling by the siren song of partnering: They do a big deal on their platform, and then expand their organization and footprint, and try to work on more projects – all increasing their net burn. In short, it's often an illusion that the partnership actually brought non-dilutive runway extension to the company. Sadly, when the sugar daddy partner terminates the deal, the biotech is left way out of balance and has to RIF its staff. In the public markets, this has recently happened to Alnylam with Novartis and Targecept with AZ.
????It's much more painful for private companies with weaker cash positions. This strategy – of aggressively funding internal burn rather than buying runway – can work if the company is lucky enough to develop some interesting assets with the free cash from their partner. But there's alot of luck involved (true of all of biotech, I guess). The alternative is to truly scale your organization to the partnership. Our portfolio company Vitae has managed this reasonably well. It last raised equity in 2004, and has used its pair of deals with Boeringher to extend its runway while selectively advancing internal projects. Plexxikon was similarly successful; hadn't raised equity for years before it was bought for more than $800 million by Daiichi.
????4. Building out before a big outcome. Drug approval, for instance. In Big Pharma, having product to sell into the channel the day after approval is the goal for most blockbusters; in the event of a CRL rejection, they can eat the costs. But in cash-strapped biotech, this tends not to work. Small companies that build out aggressively before an approval more often than not get crushed. Vicuron a few years back. Adolor. ARCA. All hired sales reps prior to a pending approval, failed to get approval, and had to RIF large numbers of their employees.
????This is not only tragic for those sales folks, but it also exacts a huge tax on the capital intensity of these businesses (especially the small ones). Hubris and excessive optimism are the typical causes of this one, but sadly Boards still let this happen. Horizon Pharma (another one of ours) recently did it right – kept the company under 20 FTEs through approval of its new drug Duexa in April 2011. It's now public and working on the sales & marketing organization.
????The counterpoint to premature scaling is what we at Atlas coined P/B/S. No, not Phosphate Buffered Saline. It's "Prove/Build/Scale." Thinking through small bets to prove a hypothesis, slightly more to test the programs, when to spend to grow a company, etc. Most of our seed investing is done to prove concepts. Building requires partners (which is where we often exit). And scaling requires functioning capital markets so rarely happens today.
????Premature scaling can kill companies and investments. Worth keeping that in mind for the next budget cycle.
????Bruce Booth is a partner with Atlas Venture. He blogs at http://lifescivc.com/.
