PINCUS: State needs better life sciences startup ecosystem

May 18, 2013

Indiana’s life sciences sector is mostly composed of legacy companies. To help grow the sector and ensure its continued viability, the state has undertaken initiatives to create a life sciences entrepreneurial ecosystem. There have been some notable life sciences startup successes, but an ecosystem is not really developing.

An underlying assumption in Indiana and other states that want to create life sciences ecosystems is, venture capital and one or more incubators helps unleash university startups.

AnnaLee Saxenican, dean of the School of Information at the University of California-Berkeley and an expert in the Silicon Valley ecosystem, calls this approach a high-tech recipe and believes it is flawed. In “Boulevard of Broken Dreams,” Josh Lerner, professor of investment banking at Harvard Business School, asserts that public efforts to boost entrepreneurship and venture capital have failed.

Successful life sciences and technology ecosystems were not planned or catalyzed by economic development programs. Most grew slowly and took at least two decades to reach their full potential. Multiple factors were responsible for their success.

A common characteristic of regions that grew successful technology ecosystems is research-intensive universities and/or research institutes that selectively hire opportunistic faculty who run large labs (some with as many as 40 members) that work on multiple projects. These faculty take the initiative to forge close ties with their corporate counterparts and entrepreneurs. Research-intensive universities supply a critical mass of technologies to seed and grow an ecosystem.

Dense networks of researchers, entrepreneurs, service providers and investors form over time to help foster connections and diffuse information. Service providers in entrepreneurial ecosystems facilitate startup formation by sharing risks with entrepreneurs. Service providers also help make important business connections.

Entrepreneurial service providers in startup ecosystems facilitate startup formation. They help lower the barriers to company formation by providing discounted services and/or waiving fees until the client raises capital. We have not seen similar behavior in Indiana.

Angel and venture capital flows into regions with sufficient opportunities. It does not precede them.

As a startup community grows, entrepreneurs and executives that have had successful exits form venture firms or become angel investors. They provide added value to their portfolio companies because of their experience, lessons learned and connections.

Indiana’s universities have some faculty that run large research programs. Some have produced commercially significant technologies and notable startups. But we do not have the critical mass of researchers needed to grow and sustain an entrepreneurial ecosystem.

Verge, a 1,700-member Indianapolis network, has formed in the software space. Attempts to organize a similar life sciences network have been less successful.

We have had several successful exits in Indiana. Marcadia Biotech was acquired by Roche, Endocyte had a successful initial public offering, and Suros Surgical was sold to Hologic. However, we have not seen much reinvestment of the returns in startups founded by other entrepreneurs or mentoring of fledgling companies.

Two other points are worth mentioning. Government and not-for-profit organizations often try to catalyze entrepreneurial communities.

In “Startup Communities: Building an Entrepreneurial Ecosystem in Your City,” Brad Feld, managing director of the Foundry Group, notes that startup communities must be led by entrepreneurs—service providers, investors and government are participants, not leaders. Startup communities co-opted by government might be short-term activity, but the community will fail over the long term.

Leaders in entrepreneurial ecosystems recognize that startups are not small versions of larger companies. They are temporary organizations to find a path to product development or a product/market fit. Then they transition to an operating company. Adding management before that point accelerates their burn rate without an effective return.

Rather than following a flawed high-tech recipe, Indiana should build research capacity at the universities with faculty who think big and push the envelope. The state’s leadership then should step away.

Building research capacity will not be an easy task, and will require significant effort and resources. Indianapolis has committed major resources and effort to build Circle Centre and win a Super Bowl. Why not commit the same for life sciences?•


Pincus is president of BioStrat Consulting LLC, which provides strategic advice to life sciences companies. Views expressed here are the writer’s.

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