The investing world is rapidly evolving. Today, investment rules under the JOBS Act allow all Americans to invest in startups and small businesses. This means you can now diversify your portfolio away from the public markets (which I’ve written about here) and invest in private companies, ranging from local breweries, to video games, to fitness products and real estate. You can now even invest in cutting-edge biotech and healthcare companies that were once the exclusive domain of venture capitalists and institutional money managers.
In the case of biotech, my company’s area of focus, this is made possible not simply because of the relatively new investing rules, but moreover because today’s biotech startup business models are beginning to resemble those applied to early-stage technology startups. Just as inexpensive tools and open-source technologies, such as Amazon Web Services, created the infrastructure to dramatically reduce the cost of launching a technology startup, an ecosystem has emerged to support biotech startups. Recent years have seen significant advancements in the tools and infrastructure for conducting basic research, preclinical and clinical studies that are reshaping early-stage innovation and improving the efficiency and speed at which products are being developed. For example, take the declining cost of DNA sequencing, which initially took 13 years and cost $2.7 billion to fully sequence the first human genome. Fast forward, and the declining costs of sequencing has far outpaced Moore’s law, declining to roughly $100,000 in 2009 to about $1,000 in 2019.
In addition, advances in artificial intelligence, machine learning and automation are leading to faster and lower-cost laboratories than the old “by-hand” methods used only five years ago. Biotech entrepreneurs now routinely utilize in silico modeling and contract research organizations to conduct early-stage experiments. Instead of having to purchase or lease expensive lab space and equipment, an entire sub-industry has exploded that offers companies fully equipped lab space for rent, by the bench. There’s even a host of companies that offer to do all this work in the cloud, remotely so companies don’t even need their own lab space, which can save hundreds of thousands of dollars of operating expenses.
According to data from IQVIA, emerging biopharma companies account for approximately 80% of the total industry drug development pipeline, meaning small companies are the primary driving force behind developing innovative new therapies. Look no further than the lessons learned from the Covid-19 pandemic. Moderna and BioNTech (which partnered with Pfizer), are both small biotech companies that developed novel mRNA vaccines, the first two vaccines approved in the U.S. And with underlying trends such as the aging population, increasing life expectancy, and the burden of chronic diseases such as obesity and diabetes, the stakes of developing novel therapies has never been higher.
While investing in early-stage startups offers the potential to generate outsized financial returns, like any investment, these investments carry risk, and the nature of early-stage investing makes these investments especially risky. To generate financial returns, companies will need to demonstrate their science and technology are sound and can be validated — first in preclinical proof-of-concept studies and later in clinical trials. Strong evidence that a procedure or therapy could have a benefit is not a guarantee that the scientific studies will bear this out; biology is inherently unpredictable. Furthermore, healthcare is made up of various sub-verticals, including biotech, medtech, diagnostics and more, each operating in a highly regulated environment with its own unique pathways to approval and each with its own reimbursement frameworks.
As many professional investors have learned the hard way over the years, just because a product is approved by the FDA doesn’t ensure it will receive reimbursement, or adequate enough reimbursement to build a sustainable business. Thus, when looking to invest in the sector, it’s best to work backward from the demands of the patients and the market: Is what is being developed truly an unmet medical need?