By Ivor Campbell, Chief Executive, Snedden Campbell
LinkedIn:Â Ivor Campbell
LinkedIn: Snedden Campbell Ltd
Wherever two or more MedTech start-up founders gather, the conversation follows the same depressingly familiar pattern. In the breakout areas and coffee bars of conferences and symposiums around the world, these identical stories unfold among our brightest scientific minds. Post-docs and PhDs recount how they have spent half-a-decade mastering a niche process in surface chemistry, lateral flow diagnostics, or immuno-oncology and then, at the moment of their greatest intellectual triumph, they have handed them a ball and chain, along with a business card that says ‘CEO’. When they should be in the lab, overseeing clinical trials and assay tests, they are in boardrooms with accountants, regulators and marketers with whom they have nothing and common and whose language sounds, to them, like double Dutch.
This is, and always has been, the natural order of things in the world of MedTech, biotech and pharma, the unchallenged route through which scientific discovery is commercialized and adapted to the demands of the real world. In this conventional pathway, we applaud the spin-out and fetishise the founder’s story because for us, success invariably means commercial success. In reality, however, it is not just inefficient, it is also actively hampering commercial and scientific progress. Adhering rigidly to this orthodoxy is the single greatest structural barrier to getting transformative technology from the lab bench to the patients’ bedside. The current model, forcing scientific geniuses to become business administrators, is the crime, and the 90% plus failure rate of life sciences start-ups is the smoking gun.
The frustrated founder
According to a study by Max G. Ostermeier, founder of Implandata Ophthalmic Products, the survival landscape for health tech startups is notably more perilous than for general startups. While around 90% of all startups ultimately fail, this number surges to 98% for digital health ventures specifically. Although nine out of ten startups manage to survive their first year, the medium-term outlook remains depressing, with a significant 70% of companies failing within the first five years of operation. The primary drivers of these failures are led by a lack of product/market fit (34%), followed by marketing problems (22%) and team problems (18%). The financial hurdles are equally daunting for medical device startups, particularly in the US market. Bringing a $510k product to market takes between three and seven years and costs an average of $31 – $24m of which is allocated to regulatory and FDA activities.
For more complex PMA products, the timeline is similar but the cost surges to $94m, $75m which is consumed by regulatory obligations. A study by MIT Sloan reveals that biotech startups led by first-time academic founders have a 40% higher failure rate than those led by experienced executives. There is a direct correlation between prior biotech experience and success rates.
The earnout chains
For the few survivors who manage to limp to an exit, selling their company to a larger CDMO, a pharma giant, or a private equity firm, the punishment is not yet over. The founder is invariably they only person who understands the proprietary algorithm, the specific surface chemistry, or the peculiar nuance of the regulatory submission and so they are retained, via an earn-out. For two years, they must stay in the saddle, acting as a consultant, or managing director, for a business that no longer belongs to them.
The motivation that person previously felt to found the company, intellectual freedom, ownership, the pursuit of a specific scientific vision, is gone, turning them into a jaded, expensive ghost. Like a band recording their third album, the creative spark has disappeared, the original tension is resolved, and the output is middling.
An auction of innovation
If the current pathway is a death march for good science, then what is the alternative? We need a radical inversion of the current model, that stops us trying to force square pegs into round holes. We need to stop expecting the scientist to become the CEO and instead accept that building a successful MedTech business requires a distinct skillset, including risk management, capital strategy, regulatory navigation, and sales execution.
Of course, the starting point for any company should be to include people at the helm who understand the nature of the business in which they operate. But rather than operate as buyers of services to help commercialize their discoveries, scientist founders should act as sellers to the highest bidder. Imagine an open tender or auction process in which a university or research lab identifies a promising therapeutic target or diagnostic process.
Instead of forcing the graduate student to file incorporation papers, the institution would package the Intellectual Property (IP) and bring it to a marketplace of professional company builders, experienced MedTech executives, turnaround specialists, and operational CEOs. From the outset, the scientist is removed from responsibility for the profit and loss account and, while they still have a seat at the boardroom table, it is as a consultant rather than an executive.
The reward for the scientific brains behind the discovery should remain significant, in the form of royalties, a substantial equity stake, or a licensing fee, but it should not require them to learn how to run a payroll. The scientist would retain a powerful say in the scientific direction of the company, with a seat on a scientific advisory board. They would retain veto power over the integrity of the technology, ensuring the business doesn’t cut corners on the science to meet a quarterly target. However, the CEO, in overall charge, would be a business professional, tasked with making crucial commercial decisions about scale-up, manufacturing partnerships, clinical trial design (from a regulatory perspective), and fundraising.
De-risking the human element
An auction system would allow investors to back the jockey (the operator) as much as the horse (the molecule), and it would also resolve the retention crisis we see after acquisitions. If the scientist has never been the CEO, rather than becoming a redundant part of the earn-out, they would remain the CTO or chief scientific officer role, continuing to innovate, troubleshoot and, crucially, to enjoy the science.
Critics might argue that taking the founder out of the command chair would remove their passion from the business, that only the inventor has the drive to push a drug across the finish line. However, passion does not pay for a Phase III trial or navigate the often capricious and costly demands of NICE or the FDA.
The way forward is a divorce of convenience, marry the capital with the operator, and keep the scientist as a treasured, well-compensated, highly influential partner. Let the businesspeople argue about the supply chain and the cap table, while the scientists argue about the science. Only then will we stop the hemorrhage of good ideas and start curing the diseases that matter.