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VCs, Please Don’t Let the Past Hold the Future Hostage

The status quo of shifting sands

Ask any startup entrepreneur about their biggest challenge and most will answer, “funding.” Funding is a perennial problem for biotech startups because, in our industry, it usually takes millions of dollars and many years to turn an idea into a product.

In biotech, the natural route is to use grants to build a prototype or conduct proof-of-concept experiments. With this basic data in hand, entrepreneurs can start pitching to incubators and accelerators or private investors such as angels and VCs.

Biotech entrepreneurs fight to get any share of the private investment honey pot. In a world where investors have made billions of dollars from companies like Facebook, Snapchat and Airbnb, biotech is a strange animal. Historically, fewer investment firms are taking on biotech companies and only 10-20% of VC money goes to biotech.

This will hopefully change over the next few years, as traditional investors are starting to see synthetic biology as a high-growth industry with the potential to produce big returns. An example of this trend is Ginkgo Bioworks’ recent $275 million Series D round.

The past is holding the future hostage

This bias against biotech (or other important science) has been, in part, because many VCs like to stick to what they know, due to familiar bias. They invest other people’s money in each deal. They look for companies and founders similar to those who have been successful in the past. What resembles something that has worked before is perceived as a safer bet.

This approach is similar to the machine learning algorithms that uses past data to predict which customers are the most valuable or which job seekers will make the best employees. However, as data scientist Cathy O’Neil argues, extrapolating from the past codifies past injust and bias into the future. It’s also a terrible way to predict the future success of something you’ve never seen before—and there’s a lot of that in the rapidly moving field of synthetic biology.

There are more biases at play under the high-gloss veneer of the VC world. VCs are more likely to invest in companies in their home city or region. They also prefer people who have a similar background to them—people who went to the same (Ivy League) school or had worked in the same company. And VCs are very open about the fact that they almost exclusively invest in entrepreneurs referred by someone within their trusted network.

In a country like the US, where nearly three quarters of the population are women or people of color, almost 90% of VCs are white males. Likewise, 87% of venture-backed founding entrepreneurs are white and 97% are male. When people of color do raise startup funding, they receive less than half the amount their white and Asian peers receive ($1 million versus $2.2 million respectively in Series A rounds). These numbers show that a large proportion of the population is being shut out from startup investment simply because they don’t look like investors and don’t have access to an investor’s inner circle.

Strength in Diversity

Startup entrepreneurs are constantly problem solving as they work to develop a product or service and bring it to market. Diverse teams benefit from a wider range of experience, skills, knowledge and network than teams with similar founders. Objective studies have shown that companies with one or more female executives or with higher racial and ethnic diversity outperform those with all-male or all-white leadership teams.

Investors stand to improve their success rates by acknowledging and minimizing the unconscious biases they use to make investment decisions and by using more quantitative data. Earlier this year, two MIT researchers created a startup investment algorithm based on Brownian motion and quantitative startup data such as the number of years of education and work experience for each startup founder. This algorithm constructed investment portfolios with up to 60% exit rates, twice that of the average VC firm.

Synthetic Biology is trailblazing a better path

Y Combinator and SOSV’s IndieBio are two of the most active investors in the synthetic biology space and both see the value that diverse founders can bring to startups.

Y Combinator pioneered the model of providing seed funding and business training boot camps for early-stage startup entrepreneurs. In recent years, Y Combinator has actively invested in startups with more diverse founders. In 2016, 22% of their portfolio companies had at least one female founder, 12.5% of all their founders were female and 11.6% were African American or Latin.

IndieBio is a seed-stage life science accelerator that runs on a similar model to Y Combinator. They offer funding and support to synthetic biology startups looking to change the world. To date, 81 startups have gone through IndieBio’s four-month intensive program.

IndieBio is led by a diverse team that truly understands the importance of diversity in founding teams.

“Early startups thrive when the founding team has a diverse and complementary set of skills, all working towards a common goal. Startups’ greatest strengths are agility, adaptability, and creativity, so bringing diverse perspectives to problem-solving is critical for success,” said  Jun Axup, Scientific Director and Partner of IndieBio.

“At IndieBio, we get applications from all over the world, which naturally brings in diversity. Our program and space is designed to encourage collaboration, and over six classes (and 81 companies) we’ve seen the positive impact of funding founders of different genders, races, nationalities, etc. Founders constantly share lessons learned in leadership, fundraising, and hiring. Broad perspectives better prepare everyone for the challenges of building a company. As a result, when we select teams, diversity is an important consideration for us.”

Their approach shows in the numbers, which are drastically different from the industry-wide averages. IndieBio has backed founders from 31 different countries. Out of their 81 portfolio companies, 40% of companies have at least one female founder. This is over twice the global average of 17% for all startups.

Perhaps if more investment firms took the same approach as Y Combinator and IndieBio, we would see not only more diverse startup teams, but more resilient teams capable of building more successful companies, leading to a higher exit rate across the whole industry.

About the Author

Leah Cannon

Leah Cannon is a freelance science communicator and a strategic marketer. She helps scientists, community groups, and life science companies to connect with target audiences and provide them with a valuable experience.

Like the article? Check out Leah’s book “How to Start a Life Science Company”.

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