Health care requires special incubator
Every community wants to nurture entrepreneurs in the hope of an economic windfall from birthing the next Apple or Facebook.
Catching lightning in a bottle, though, is not easy.
Experts offer all kinds of recipes for catalyzing the chain reaction that creates the next Silicon Valley. Typically, they involve great research universities throwing off talent, business communities embracing innovations, investors taking risks and governments accommodating small businesses.
More controversial ingredients are so-called incubators to help companies move from an idea to product, and accelerators to help companies ramp from prototype to commercial sales. These programs offer young companies office or lab space, business coaches and a community where they can interact with experienced CEOs and
investors.
These facilities may sound like good ideas, but more than 90 percent of startups enrolled in incubators and accelerators fail. Incubators and accelerators also rely on outside investors and demand an ownership stake in the startup company, immediately diluting the stake of the founders.
Many big companies have started outsourcing research and development to incubators. For a relatively small amount of money, they can take a gamble on several new technologies. Thanks to their ownership stake, the big companies can sweep in and buy a startup once the product is ready for market.
That’s why many experienced tech entrepreneurs advise against incubators because you lose on the upside. But for entrepreneurs in the life sciences, where startups can take eight years to reach the market, founders who give up equity in the incubator stage frequently see very little profit when they finally receive government approval.
“That is why you don’t have a lot of entrepreneurs in the life-science space,” Melinda Richter, CEO of Johnson & Johnson’s JLABS incubator, told me.
To encourage more startups, JLABS does not demand equity from the more than 450 startups that have joined its 13 incubators around the world since 2012. But Johnson & Johnson Innovation and other investors have provided $11.6 billion in funding to 107 companies to help them along.
“We want to give the entrepreneur the opportunity to build value right up front, and then they’ll be in a better position, in the long run, to negotiate with venture capitalists,” Richter explained.
Instead of a 90 percent failure rate, about 88 percent of JLABS companies are still in business or bought by a larger company. A quarter have taken a product to market and a quarter are testing products in humans, the last step before seeking approval from the Food and Drug Administration. Fourteen companies have held initial public offerings.
The Houston JLABS facility in the Texas Medical Center has added 70 companies since opening in 2016. Half of the startups focus on drugs and therapeutics, a third on medical devices and the remainder on other technologies or consumer products, said Tom Luby, head of the Houston JLAB.
“Three or four years ago, you could not have thought of Houston as a place where there was a lot of life science startup activity,” Luby said. But over the next year, he plans to keep adding companies as the community thrives.
JLABS success comes from cherry-picking the best startups. Experts determine who is invited to apply for the incubator, and out of 2,100 companies from 50 countries, only 435 have made it.
Part of JLABS’ mission is creating new health care innovation hubs outside of Boston, New Jersey and the other traditional locations, Richter said.
They are also trying to diversify the industry. In a field dominated by white men, JLABS’ leadership team is majority female. A quarter of resident companies are led by women, and 23 percent are minority-led.
“We had an intent to support diversity,” Richter said. “We make it so open for everyone to come in, but we are very discerning about who comes in.”
By no means is this charity work. Johnson & Johnson uses the incubator to find new ideas and build relationships with promising startups. But instead of betting on 1 in 10 succeeding as the tech industry does, they hope for a higher success rate.
“The industry needs to create a more efficient model; I think we can all agree to that. Patients deserve it. They need access to more solutions that are more affordable,” Richter said. “We need to create an engine that drives up the volume and the quality of options.”
JLABS is only one of several life-science incubators, but it has demonstrated that a discerning process and a no-stringsattached approach can boost health care startups. Sometimes a creative business model is as important as an innovative idea.