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The rise of biotechnology companies in San Francisco

The rise of biotechnology companies in San Francisco

Originally written for a graduate-level journalism class assignment at the University of California, Berkeley on March 30, 2015.

Inside a laboratory, behind an unmarked door in a bare-bones industrial complex in San Francisco overlooking the bay, something was whirring.

The thing looked like a metallic CD player with a glowing green light, and it was swallowing a small, transparent plate with 96 tiny, circular pockets – pockets designed to hold individual chemical compounds for testing. Called a Plate Reader, it allows researchers to conduct multiple experiments simultaneously. “Little mini-reactions,” said Ryan Bethencourt, program director and venture partner at IndieBio, the accelerator that owns the machine.

The machine is one piece of the $1.5 million worth of equipment offered at IndieBio, a new accelerator that funds early-stage life science startups. It’s a program that aims to fast-track the development of new biotechnology and medical device companies that have a workable product idea, but lack the resources to bring it to fruition.

“In the biotech space, there’s nothing like IndieBio. We’re removing two very big hurdles in the biotech industry – funding, and building an idea. It’s harder to start a biotech startup,” Bethencourt said, contrasting it with software and hardware startups. “There’s an additional layer of difficulty and failure.”

According to Bethencourt, IndieBio is the first accelerator in the Bay Area that only focuses on life science startups. The accelerator provides shared lab space and equipment, mentorship, and $50,000 in seed funding to startups accepted into its program in exchange for 8 percent equity in their company. Having launched its first round of startups on February 28, the program will last for 100 days and culminate in a demo day at which startups will pitch their products to venture capitalists in hopes of obtaining funding.

At IndieBio, entrepreneurs come from a variety of different backgrounds, including academia, industry and biohacking. But they all have one thing in common: An idea that they have proved to IndieBio is feasible for development, and that they hope will have a positive impact on the world. Products they will be working on include developing a genetically engineered rhino horn to eliminate poaching, a machine that mass produces stem cells to reduce research costs and a new textile to replace cotton.

Twelve startups are currently enrolled in IndieBio’s inaugural program, which had a ten percent acceptance rate. The accelerator is backed by SOS Ventures, a $200 million venture capital fund.

Other prominent Bay Area accelerators include 500 Startups, Rock Health and Y Combinator. They mainly focus on software and hardware startups, but Y Combinator – which funded over 800 startups since it launched in 2005 – just accepted its first few biotech startups into its program last summer.

In recent years, there’s been an increased interest in the life sciences industry – an industry that now appears to be rapidly booming. With the potential for developing practical solutions to pressing world problems like global warming and deforestation, biotechnology innovations have become increasingly important, promising high societal and financial rewards.

Yet despite the huge publicity surrounding late-stage biotechnology startups, early-stage companies are still grappling with intense challenges. Even with accelerators like IndieBio offering more support to new life science companies, they still face tremendous hurdles from overcoming technical risks to finding adequate funding.“[For] early-stage biotech companies, it’s still really hard to raise money. Outside of human health care, there’s very little money flowing out there.” Bethencourt said.

Although there’s no way of calculating the amount of private financing pouring into biotech companies, one indication of the so called biotech boom is the value of late-stage life science companies on the public market. In 2014, the number of initial public offerings from U.S. biotech and pharmaceutical companies hit a record high, with 59 biotech companies going public, according to a January report from Thomson Reuters and the National Venture Capital Association. In the past year, the NASDAQ Biotechnology index also increased by about 26 percent, roughly 12 percent higher than the S&P stock index.

“The public market activity has never been greater, and that seems to be causing great optimism for the early stage [companies],” said Douglas Crawford, associate director of QB3, a state-funded life sciences incubator shared between UC Berkeley, UCSF and UC Santa Cruz. Founded in 2005, QB3 does not provide seed funding to startups, but gives them access to lab space, equipment, mentorship and other resources.

In many ways, the boom can be attributed to the advancement of technology and increased accessibility to resources, according to Crawford. Biotechnology has historically been an industry plagued by staggering startup costs: startups often require access to advanced equipment and technology – technology that may not even exist yet – in order to bring their ideas to fruition.

But scientific advancement in recent years has spurred the development of new technologies, causing the cost of equipment and processes like DNA sequencing to drop drastically, Bethencourt said. The decrease in federal funding for research has also increased the number of skilled technicians creating biotech startups to pursue their own research, he added.

In some instances, researchers in universities or private companies also want to work independently on projects that their employers won’t support, or won’t allow them complete ownership over. “There’s some people that have ideas that they can’t work on in their lab,” Bethencourt said, referring to scientists in traditional institutions such as university laboratories. “If the PI [principal investigator] doesn’t like your project, you can’t do it in his lab.”

The price of sequencing a human genome has dropped from about $10 million in 2007 to just a few thousand dollars in recent years, according to Nature article published in 2014.

“It’s almost so fast and so cheap, it’s almost as if our creativity and imagination haven’t caught up,” said Matthew Markus, CEO of Pembient, a biotech startup receiving funding from IndieBio.

Technological advancements like improvements in DNA sequencing have allowed Markus to now pursue a dream he had as an undergraduate ten years ago – to create a genetically engineered rhino horn.

Markus and Pembient co-founder George Bonaci are working to create faux wildlife products, beginning with rhino horns, that can be sold below black market prices in an effort to eradicate the illegal poaching of wild animals. Rhino horns are traditionally used in medicine in some Asian countries. Eventually, they hope to create other faux-wildlife projects, and perhaps sell their company on the public market.

“The current strategies to work with this crisis isn’t producing results. Either the rhinos survive and cultural traditions die, or the cultural traditions survive and the rhinos die,” Markus said. “I thought: we could just produce this without any rhinos being harmed.”

Using funds from IndieBio, as well as equipment and lab space, the startup aims to create a prototype in the next three months by replicating DNA from real rhino horns through biochemical processes. Having created their first rough prototype – the horn in powdered form – they are now working on bioprinting a larger form, eventually working their way towards a full horn. “Hopefully we can make a positive impact,” Markus said. “Biotechnology is more hard and real – closer to people’s fundamental needs.”

The biggest challenges that early stage life science companies like Pembient face are often technical. According to Crawford, the most pressing technical challenges for biotech startups include conducting the right experiments accurately and getting access to lab space and equipment. “The issues that we’re facing are often biological uncertainty and biological risk or failure,” Crawford said, adding that life science experiments often require rounds of modification to find the appropriate parameters for effective testing.

In order to gain funding, startups must also prove to investors that their products are viable by producing adequate data. But to conduct the necessary experiments to produce data, the startups need funding. “They suffer from this terrible Catch 22,” Crawford said.

For Pembient, creating their first rough prototype took about eight months. It cost about $50,000. “A lot of it was trial and error,” Markus said, adding that it would be hard to predict how long it would take to reach their goal of eventually producing a fully-formed rhino horn.

According to Bethencourt, renting just a workbench and equipment in a laboratory typically costs about $2,000 per month, and most startups usually require both for at least a year. The cost of lab equipment can also range from about $10,000 to a couple hundred thousand dollars each, said Adriana Tajonar, entrepreneurship program manager at QB3.

Unlike many early-stage biotech startups, Pembient had their own laboratory space and were able to fund their own research. However, they lacked access to high-tech equipment, and did not have the necessary expertise to take their product to the next level, Markus said. Because of this, they decided that the startup’s best shot at getting a lead investor was through an accelerator. They chose IndieBio because the program not only established itself as an accelerator willing to take risks, but also boasts an impressive list of mentors who are successful biotech entrepreneurs.

Bethencourt, having co-founded biotech accelerators Berkeley Biolabs, Sudo Room and Counter Culture Labs, is a leader of the DIY biohacking movement and previously led the life sciences prize group at the nonprofit XPrize. Arvind Gupta, a co-founder at IndieBio, is a venture partner at SOS Ventures and a former design director of product development and strategy at global design company IDEO.

If Pembient hadn’t been accepted into IndieBio, developing their product would be a lot more expensive, and the process would move at a much slower pace, Markus added. “We’d have to scale back our vision,” Markus said.

Should startups require regulatory approval down the line, they must face yet another challenge – dealing with the federal Food and Drug Administration (FDA). The process of getting a drug or a diagnostic reviewed and approved by the FDA is not only costly, but can also take years, Crawford said.

In addition to getting the science right, startups must also assemble the right team that can effectively develop, commercialize and sell their product. “Most startups fail. It has to be a team that’s willing to take risks and build a risky startup,” Bethencourt said. “Scientists underestimate the amount of work and insight they need in commercialization – they’re almost naive.”

According to Ron Shigeta, Chief Scientific Officer at IndieBio, it takes about five to ten years for a biotech startup to get from securing its first round of funding to actually launching a product into the marketplace, and many companies die in the process.

Another problem is that biotech startups are high-risk investments. To overcome this hurdle, scientists must be able to persuade investors that their innovations will work. Yet since biotech startups often aim to create technologies that currently don’t exist, many entrepreneurs in the life sciences find it difficult communicating their ideas to investors and convincing them that their product is viable, Shigeta said.

“They are pioneering, so investors that they’re talking to haven’t heard from companies like them,” Shigeta said. “If you spend $2 million investing in a company and it goes bomb, that’s a very unpleasant experience. The stake is very high for these investors.”

Although biotech startups are high cost and high risk, they can produce great financial returns if they become successful. QB3, one of the first life science incubators in the Bay Area, is now about a decade old and operates five sites with 86 companies. In 2012, 23 percent of startups at QB3 were able to raise their first round of seed funding, and the incubator raised $513 million from public and private sources from 2005 to 2013.

But even established incubators like QB3 don’t churn out new startups that experience the sort of overnight riches associated with successful software startups. “We have very few 25-year-old billionaires in our industry. We don’t have wild success stories of brand new startups that sell for millions of dollars, but we regularly create companies worth hundreds of millions of dollars,” Crawford said. The life sciences, he said, “attracts more dollars than tech.”

Looking ahead, IndieBio aims to build companies valued at $100-200 million, Bethencourt said. The accelerator’s goal is to launch startups that demonstrate potential for producing significant impact on the world. “What we look for in IndieBio is positive impact to as many people as possible,” Bethencourt said.

But despite the myriad challenges that early stage life science companies must overcome in order to develop a viable product and bring it to market, biotechnology entrepreneurs and scientists believe that new startups are the key to paving the future.

“It’s gotten easier for companies to find space, but the balance of all those other challenges – getting capital, assembling the team, focusing on the right technical issues, building partnerships – still remain,” Crawford said. But, he added, “Come on. Do you want an app to find friends at a bar, or cure your grandmother’s Alzheimer's?”

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