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The Black Hole

Building on the accelerator model – addressing operating needs

BY JONATHAN THON | AUG 25 2015

This post was written with Sven Karlsson, CFA, an Energy & Technology Venture Investor with the Massachusetts Clean Energy Center and the co-founder and chief business officer for Platelet Biogenesis.

Business accelerators have become fashionable, and for good reason. They offer aspiring entrepreneurs access to expert mentors, marketing and media resources, funding opportunities, and office space. In part 7 of this multi-part article series we propose how existing and future business accelerators can address a biotech startup’s operating needs to better serve life-science entrepreneurs. The goal is to help academic research institutions learn what works and what doesn’t as they begin to construct incubator programs of their own.

To read the previous articles in this series please visit the links below:

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To attract early investors and support research and development, scientist-founders must find ways of keeping costs down. While the most cost-effective way for academic founders to meet their company’s early validation milestones is to continue this research in-house, most universities have very strict conflict-of-interest policies that prohibit research scientists from pursuing company-subsidized research if they own equity in the company. Most institutional conflict-of-interest rules are designed to direct/facilitate sponsored research agreements between large companies and academic investigators, and consistently fall apart when the company is a start-up founded by academic scientists, and the intellectual property is held by the employing academic institution. When agreements can be negotiated, universities often ask for significant indirect costs in these contracts that can be crippling for a burgeoning biotech company with volunteer employees and no revenue. Instead, the shared goals of the academic institution, the public, and scientist-founder at this stage should be to transition the research program into private research space as quickly as possible.

The biggest hurdle in negotiating these contracts is often discovery rights to new intellectual property. Typically, the startup company is required to pay to conduct research in an academic lab that the university will then control. This creates a disincentive to advance research when it is nearing a fundable stage because any value the start-up creates will be held hostage by the university if they want to license this IP. It also creates an interesting Catch-22.

Seed-stage biotech startups often can’t afford to hire their founding scientists full-time, but academic institutions are typically unwilling to permit their faculty/students to work part-time on the company. Private research labs are also pricey, but the administrative burden and legal cost of bringing a company employee into an academic lab is often enough to sink the venture. Prohibiting the scientist-founder from continuing the work in their current lab, or more commonly asking for significant (≥ 20%) indirect costs to perform this work in-house means that the requisite validation studies either cannot be done, or will be considerably delayed. If the mutual goal of both the academic institution and the scientist-founder is to accelerate transition of their basic research program from the bench to the bedside, efforts need to be directed to facilitate this critical stage in the development process.

The most practical solution to address this financing gap as VCs seek surer bets, and stronger returns, is for universities to directly support breakthrough technologies arising from their research programs by creating “3rd space” incubators that include transitional laboratory space. New IP generated in this space should remain entirely with the company (which should not concern the academic institution since it already lays claims to the founding IP); academic scientists operating in this space should be considered company consultants by the employing academic institution, and permitted to devote up to 20% of their time to supporting the venture; and company employees should be permitted access to this space as needed to advance the research program.

A model to follow is the University of Massachusetts’ Venture Development Center, which offers entrepreneurs-in-residence access to private laboratories, computing, genomics and analytical facilities, private office space, and a unique community of like-minded entrepreneurs as well as common team and community space in which to meet. Integration of an internship program is yet another area where this relationship can be mutually beneficial. Academic institutions (above all other incubator programs) can leverage their coop programs to offer their biotech startups heavily subsidized employees that are compensated in educational credits and work experience. Besides the “real-life” work experience they afford their students, they are also setting their students up for lucrative employment opportunities in fast growing businesses that improve the overall outcome statistics of universities and incentive future enrollment.

University business accelerators can build on this model by having teams compete for access to a lab bench, and core facilities (shared equipment) for 18 months. Finalists can share open concept lab space, and continuation in the lab for each subsequent year should be dependent on the achievement of key research milestones. A successful institutional financing round of (for example, ≥$3M), or a failure to secure some follow-on funding within a prescribed time period should trigger graduation from the program. The purpose is not to keep unfundable companies alive, but to provide a stepping-stone to complete the transition from the academic lab for the promising ones. Vacancies are subsequently filled with incoming teams, and space managed such that there is sufficient turnaround to support a yearly competition cycle.

It is important that considerable effort be made to retain teams that are showing significant progress but have not yet managed to raise the necessary capital to go at it alone, so as not to exclude them from the program prematurely (which can be equally disastrous to the startup). Janssen Labs has recently employed a similar model in their Quick Fire Challenge competition that is sponsored in part by the Massachusetts Biotechnology Council, an association of more than 600 biotechnology companies, universities, and academic institutions dedicated to advancing cutting edge research), and university departments can help subsidize these competitions through federal initiatives such as the National Institute of Health’s Centers for Accelerated Innovations program.

Alternatives exist in private lab space that are increasingly becoming available to biotech startups through companies like BioSquare, Cambridge Biolabs, North Shore InnoVentures, LabCentral, Mass Innovation Lab, and the Science Hotel, amongst many others. Nevertheless, access to research space can be prohibitively expensive, ranging from ~$4K-$15K/month, and while we are fortunate in Boston to be surrounded by a very strong biotech sector that caters to early stage startup companies, these resources are not available in most other cities.

Another viable option is for a startup to directly contract out its research program to third party contract research organizations (CROs) such as BioSciences Research Associates, Parexel, Boston MedTech CRO, Cambridge Biomedical, and CATO Research. This is often resource-limiting and usually reserved for later stages in the company life-cycle, but could be a valuable way for academic institutions to help biotech startups they spin-out complete key proof-of-concept studies. There are literally hundreds of companies such as these available to perform specific validation work, and geographic proximity is often less important as the work being outsourced. Where research contract organizations fall short are discovery-based research programs that require the significant direct input of the founder(s), as is typically the case very early on in the development pipeline, and development of future academic/startup partnerships should mostly be directed here.

ABOUT JONATHAN THON
Jonathan Thon
Dr. Thon is the founder and chief scientific officer of Platelet BioGenesis.
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