As with everything in life, it’s always about the people. Bet the jockey, not the horse. Great entrepreneurs and C-level executives are very hard to come by in R&D-intensive biotech companies, and its probably one of the biggest bottlenecks in the sector in terms startup formation and company growth.
At the recent BioPharm America meeting, I had the privilege of moderating a panel session with some great folks – Kevin Starr of Third Rock, Liam Ratcliffe from New Leaf, Robert Gould of Epizyme, and Jeff Jonas at Sage. It was a fun discussion, and one of the themes that resonated for me was when Starr said that recruiting great talent was #1 biggest issue in biotech today. If the industry is starting 25 new companies a quarter, that’s 50-100 C-level entrepreneurial executives in demand each quarter – adding up to hundreds per year.
I couldn’t agree more with the point – talent is everything.
Like other early stage VCs, we are constantly working to expand and augment our “PeopleFlow” at Atlas, cultivating a network of talented individuals that we either want to get plugged into our portfolio, or that we want to get to know. We’ve recently (in the 30 days!) hired two new CEOs and two new CBOs; thrilled to get them on board. Over the past 18 months, we’ve recruited at least 36 new C-level hires into our portfolio by last count. It’s a huge part of what all venture investors do: moonlighting as executive recruiters.
But this isn’t new news: everyone knows finding great talent to actually start and run new companies is critical, and I’ve written on various angles of the subject before, including:
- How Pharma is the best training ground – and is the “lifeblood” of talent – for biotech sector (here)
- The unsung benefits of biotech M&A to cast out a diaspora of recently bought-out exec’s looking for their next opportunity (here)
- Equity as the currency of entrepreneurship to engage and motivate talent (here)
But the subject that’s not acknowledged as frequently is the importance of recruiting talent to the Boardroom.
In a 2011 post, I highlighted the lack of biotech talent in Big Pharma boards; by and large, this talent gap still exists in most large corporate boards (here). Very timely, yesterday there was an article in the Wall Street Journal highlighting the trend of adding industry specialists with “field experience” rather than generalists to large corporate boards to help improve governance (here); this makes a ton of sense in a regulated, R&D-heavy sector like biopharmaceuticals.
While the problem is still real, in my opinion, in these large company boards, its become a critical and acute problem in emerging biotechs over the past two years – one of the consequences of an unprecedented number of newly-minted public biotech companies.
With over 100 life science IPOs, there’s going to be a huge demand for new Board Directors over the coming years, as most recently IPO’d biotech boardrooms still have with several venture investors and a cadre of others often more suited to being on the Board of a private company.
To put some numbers around the problem, I spoke at length with John Archer at Catalyst Advisors, a well regarded biotech executive search firm. He and colleague Sara Hagar put together some data to frame the magnitude of the issue. They took at look IPOs by year over the past five years and looked at the turnover rate, using the number of starting Directors at IPO and the replacement rate. In their dataset, there were 101 therapeutic biotech IPOs and 751 initial Directors, mostly biased of course to the last two years. Here’s a graph plotting the turnover rate (percentage of initial “at IPO” directors that have since departed; line, left axis) and the number of initial Directors across five annual cohorts (columns, right axis):
- The “half-life” of an recent IPO’s Directors is about four years. In other words, within the first four years or so post-IPO, ~50% of the Directors on a newly public biotech Board have departed and been replaced. At least a quarter of these Directors depart in the first two years. Amazingly, one-out-of-five Directors have departed in only their first year or so (e.g., 48 Directors from 2013 IPOs have already left).
- A big wave of Board replacements is ahead of us. With 560 Directors on biotech Boards in the 2013-2014 IPO classes, and the historic replacement rates expected in this chart, we can assume that these ~75 biotechs will need to add 280 new Directors over the next couple years.
These numbers are staggeringly large. Nearly 300 new Directors.
Let me put it this way: the biotech sector has never in its 35 year history ever needed as many new Board Directors as it will in the coming two years.
As you might expect, and Catalyst Advisor’s confirmed, there are two highly sought over skillsets right now:
- Financial experts able to chair the 80-100 audit (and increasingly compensation) committees of these new companies, who have the financial “field experience” in biotech to understand the nuances of R&D-intensive, often loss-making businesses. Many of those were already on the initial Board slates at time of IPO, but its still a phenotype in very high demand.
- Seasoned CEOs or other C-level folks who have “been there and done that” and can provide a veterans perspective to how to build and scale emerging biotech companies. But this pool of CxOs is constrained. Many already serve on 1-2 other Boards, and if they are active CxOs of their existing company’s, its hard to add a bigger Board load than that. This isn’t an easy logjam to break.
When I’ve brought this up in the past few weeks, some have dismissed this a less critical issue, and that the world is full of great Board Directors waiting for their turn – including lots of folks out of Pharma and Big Biotech ranks. It may be true, but finding the right talent for the right Board is not easy and is often a months long process.
Furthermore, if we get this wrong, and put cronies and friends on these Boards, rather than independents with the right mix of talent, experience, and objectivity, we’re at risk of seriously impairing the ~5 year governance of the sector. With this many new companies, all tackling challenging issues like transitioning their shareholder base, raising further capital, allocating funds to lead programs vs pipeline, striking creative partnerships, scaling their organizations into late Development – governance that truly embraces the shareholder’s best interests will be critical. If we mess this up, burn the buyside with weak governance, and we’re going to scar the sector’s public market potential for years to come. That’s happened before (think 2000’s post the Genomics collapse).
For sure, this Board “talent gap” is a high-class problem for a sector to have. But it still needs to be addressed head-on. It’s certainly an interesting consequence of the prolific IPO window we’ve been enjoying in biotech – I’m hopeful we as a sector can rise to the challenge.