The Experiment Begins: Y Combinator Admits First Biotech Startups

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Iorns, on the other hand, has been challenging the status of peer-reviewed publications as a guarantee of scientific validity. Studies published by established academic scientists often can’t be reproduced by other labs, she says. Through Science Exchange, pharmaceutical companies are now arranging to have key experiments repeated before they pour money into drug development projects based on the original papers, she says.

Iorns says entrepreneurs can now bypass the standard academic cycle of discovery, whose slow pace she calls “ridiculous.” Researchers write grant proposals, wait for the funding, do the experiments, write up the results, then submit the paper to a journal for a long review process. “The whole iterative cycle is about five years,” she says.

Meanwhile, Perlstein is an example of how that cycle can be circumvented. The former Princeton post-doc is developing a screening platform for drugs to treat extremely rare orphan diseases. Through social media, he recruited a network of advisors to evaluate the business plan for his company, Perlstein Lab. One of his Twitter contacts became an investor. Perlstein told Xconomy he recently signed part of a deal for an early financing round that is substantially larger than the $120,000 Y Combinator will invest in each of its startups beginning this summer.

Y Combinator doesn’t usually announce the names of the 60-odd startups it chooses for each of its two annual sessions in summer and winter. During the three-month program, company founders may ditch their original idea and pivot in a whole new direction.

Outsiders will be eager to see whether Y Combinator can help biotech companies enough to make them attractive to the next round of investors, in time for the incubator’s big Demo Day at the end of the summer session.

Some of Y Combinator’s core benefits transfer easily to biotech companies, Iorns says. For example, the incubator makes sure each startup’s incorporation paperwork is in good shape, a requirement to attract new investors. It also mediates disputes that can arise between co-founders.

But it has to adapt, as well. Y Combinator will recruit outside biomedical experts as advisers, and it will arrange for private meetings with life sciences venture firms if necessary, Iorns says.

Y Combinator will not build its own lab facilities (it doesn’t provide office space for tech participants, either), but it will keep a file of resources on hand so its biotech participants can line up lab space, Iorns says.

To help meet the higher capital needs of biotechnology startups, Y Combinator has changed the standard terms of its investments. Most participants will now receive $120,000 in exchange for a 7 percent stake. Under the former terms, the startups got $17,000 for the same 7 percent stake, and a later investment of $80,000 from affiliated venture firms and angel investors.

Y Combinator will advise its biotech flock to get an early product to market if possible while pursuing longer-term goals. As an example of this strategy, Iorns points to Menlo Park, CA-based Stem Cell Theranostics, which was founded in 2013 to commercialize stem cell research from the labs of two professors at the Stanford University School of Medicine. Its co-founders include a former Stanford undergraduate, Divya Nag, and a Stanford post-doctoral student, Andrew Lee, who also co-founded StartX Med, the student-run campus incubator for biomedical entrepreneurs. Stem Cell Theranostics now supplies a research tool, stem cell-derived heart cells, to drug companies. Drug developers use the living cells to evaluate the safety and possible effectiveness of treatments for cardiovascular disease.

Whether Y Combinator will be able to scale up its biotech development model remains to be seen. Lab space rental facilities may not expand to meet the demand. Even if starting up is easy, further growth may be hard. Less than a few dozen early stage investors are active in biotech, compared to the crowd of angels, venture firms, and established tech companies that compete to invest in Y Combinator’s hot Web startups, Atlas Venture partner Bruce Booth said in an extensive analysis of the incubator’s new initiative on his blog, Life Sci VC.

Nonetheless Booth applauded the Y Combinator experiment and defended the group against criticisms that biotech would be too hard: “The risk of failure for a tech startup is way higher than biotech.”

Y Combinator also got a vote of confidence from Breakout Labs, a hybrid philanthropic and investment initiative funded by PayPal co-founder Peter Thiel. The organization, a unit of the non-profit Thiel Foundation in San Francisco, is helping to fill the funding gap for life sciences companies with grants of up to $350,000.

“At Breakout Labs, we’re focused on taking ideas from the lab into the economy,” says executive director Lindy Fishburne. “The companies making that move would certainly benefit from the strategic rigor that Y Combinator is known for providing its companies.”

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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