Companies find it challenging to justify long-term, risky R&D investments — particularly in science-based fields such as biotechnology. Maybe it’s time to consider a different financing model.
Science-based industries such as biotechnology offer the potential of high growth, but they are fraught with risk. The payoffs, if they ever come, can take many years to materialize. Amid intensifying capital market pressures for short-term financial results, even large and successful companies are finding it increasingly challenging to justify longer-term risky research and development investments. The challenge is particularly acute in research-intensive fields including biotechnology, nanotechnology, and advanced materials, which involve massive R&D investments, extended gestation lags before investments bear fruit, and high risks of failure.
Many would argue that given these requirements, such industries don’t lend themselves to corporate R&D and are more suited to early-stage venture capital (VC) investment. However, even though the traditional venture capital/entrepreneurial model has been shown to stimulate innovation in a wide range of technology settings (software, computers, Internet, electronics, etc.), it wasn’t designed to deal with the costs, risks, and slow payout of science-based industries. In biotechnology, for example, the journey from basic scientific discovery to fully approved drug can span 10 to 20 years and require investments exceeding $2 billion. Moreover, only a tiny percentage of drug R&D projects ever result in approved drugs; a recent study in Nature Biotechnology calculated a success rate for drug development from initial indication to approval by the U.S. Food and Drug Administration (FDA) of only 10%.1 The success rate was only about 7% in important therapeutic categories such as oncology. In comparison, the Google search engine was operating on Stanford University computers about a year after Sergey Brin and Larry Page, cofounders of Google Inc., began collaborating on their research. Although venture capital continues to flow into industries like biotechnology, there has been a significant shift away from funding ventures at the earliest stages of the R&D cycle.2
The typical science-based business startup is not unlike a long-range multistage rocket mission: Each stage must fire perfectly for the next step of the mission to begin. If any stage fails to execute, the entire mission fails. Even investors with a high tolerance for risk are deterred by the uncertainty of the risk — the “unknown unknowns” associated with a lack of well-defined indicators of day-to-day performance.