By Ankit Mahadevia, founder and board director of Spero Therapeutics, as part of the From The Trenches feature of LifeSciVC
Biotech leaders love talking about ‘margin of safety’—but what if the safety nets we build are just illusions? In The Intelligent Investor, Ben Graham defines the margin of safety —the cushion that a decision leaves for the unexpected—and its singular importance for the “rightness” of that decision. 
I was recently part of a discussion with a NewCo on the trade-off between waiting for a better molecule versus declaring a candidate now and pushing it to the clinic. It dawned on me that many tough calls in biotech—cash runway, quality of a molecule, pipeline breadth, and team construction—are all margin-of-safety choices. Since buying safety in one place often compromises it elsewhere, it’s essential to invest in areas that truly mitigate risk. I’ve highlighted tradeoffs from my experience as a CEO and Board member where, contrary to my initial thinking, one side of that trade wasn’t as helpful as I thought.
Cash runway vs. pipeline breadth
The choice: Concentrate on one program to extend cash or keep multiple to diversify risk.
In my experience, the margin of safety created by a pipeline is often false. Great programs are rare, and the chances that a company has multiple, truly exceptional lead programs are even rarer. To gamble on that low probability, a team needs to accept the certainty of burning extra cash and taxing focus. Even platform companies typically deliver a significant amount of their value from their most advanced drug. Very early (early LO or earlier) assets can be an exception – the cost of failure is usually lower, and some data-driven processes (for example, with assays that correlate with clinical efficacy) can yield a more informed choice. In a previous company, setting expectations with our Board on this evolutionary process gave us the time to choose our lead program wisely, even though it took a little extra time for one program to catch up. As we learned, board and investor management are essential in this process; prospectively communicating the bar to beat for a drug can support tough decisions on programs when they reach a decision point. There is another circumstance where pipeline breadth makes sense – with a substantial cash cushion and enough capacity on the team. Lately, this has not been the privilege of early-stage company builders, and the onus is still on a team to prove that multiple programs are truly extraordinary.
Speed to clinic vs. quality of a drug
The choice: Get to the clinic fast with a good drug, or take extra time to get to a great drug
Being ahead of competitors is often discussed as a margin of safety for multiple reasons – it may unlock a company’s next round and ensure a seat at the table in the competitive landscape if things take longer. That said, it will require millions to get a molecule through first-in-patient studies, and that molecule must deliver. I think about tradeoffs in terms of which end is recoverable. It’s a lot easier to find cash later than to deal with a lukewarm efficacy result because your compound could have had better PK or potency. When speed is the only optimizing variable, there’s also an incentive to shortchange key steps (CMC, for example) in ways that ultimately prove costly. Furthermore, there is evidence suggesting that second-in-line compounds can perform well commercially, especially if they have advantages over the incumbent. Some judgment is required when testing this; if waiting is not feasible from a capital perspective, of course, follow the 80/20 rule and proceed. In the competitive landscape, being first can sometimes matter greatly – for example, in an ultra-orphan indication where first to clinic has a decided advantage in enrollment.
Depth and breadth of team vs. Burn rate
The choice: Hire a full-thickness team to plan for success, or stay lean/fractional and preserve cash
There is a perception that a full-time C-suite (comprising a CEO, CSO, etc.) is a required margin of safety. This is generally true, but it may not be right for the earliest stages (such as prior to entering the clinic). First, team building depends on strategy, which is fluid at the earlier stages. At one platform company I advise, primate data on biodistribution changed our TA strategy completely over a few weeks. A team mismatched to the strategy may create confusion or require transitions downstream. Second, experienced leaders have options, and data can drive conviction. It may not be possible to recruit a top-quality team at an early stage; searches can be time-consuming, costly, and low-yielding if the data is not yet available to build conviction. There’s also a danger of locking the company into a team that is OK for now, but not the long term. Finally, cash is precious in the early stage. Often, an experienced, fractional team can drive a company towards key go/no go data efficiently, and the lower investment required creates its own margin of safety by preserving cash for pivots and delays. There’s often a “chicken or egg” conversation in boardrooms, about whether a strong C-team is required to raise capital, or capital is required to recruit a strong C-team. Both are right, and in my experience, the right fractional leadership in the short term can solve this quandary until the team signs up full-time or helps recruit their replacements. Half of the right team is far better than all of the wrong leadership.
Tradeoffs between a company’s cash, time, and human resources are tough, with no right answers. Sometimes, though, tradeoffs that seem wise and safe in the moment do not actually build more cushion against the unexpected. Knowing the difference can leave you even better prepared for all the challenges and opportunities ahead.
