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Silicon Valley's biggest start-up factory is making a bet on biotech, but it's not an obvious fit

  • Silicon Valley's best known startup accelerator, Y Combinator, thinks it has found a new type of biotech startup.
  • It is looking to fund companies that add machine learning to drug development processes.
Sam Altman of Y Combinator, September 23, 2015 in San Francisco.
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Sam Altman of Y Combinator, September 23, 2015 in San Francisco.

Y Combinator, Silicon Valley's best known start-up accelerator, thinks it has found a new type of biotechnology start-up.

Life-sciences companies come with a high risk of failure—often, the science behind a proposed invention isn't entirely proven, and turns out not to work. Because of this risk, the traditional way to fund early-stage life sciences companies is for a landmark East Coast investor, such as Third Rock or Flagship, to take a huge equity stake in the business and replace the founder with a seasoned executive. In exchange, it pumps tens of millions of dollars into the company over many years. It often takes more than a decade to generate a return.

But YC is betting that biotech start-ups that use the latest computer science technologies such as machine learning, will grow much more quickly than their counterparts, and thus should be funded more like tech start-ups.

A classic example is YC's first biotech company: Ginkgo Bioworks, which bills itself as scaling the process of organism engineering using "software and hardware automation." After graduating from YC in 2014, the company went on to raise more than $150 million from tech investors including Felicis Ventures and Data Collective.

Biotech is is now a serious category for the fund. Y Combinator is about to add another part-time partner with health and biotech expertise to its ranks, alongside existing partner Elizabeth Iorns (Altman declined to name them, as the plans have not yet been finalized).

"When I took over YC in 2014 I made a list of things I wanted to get into," said the company's president Sam Altman. "Health and synthetic biologies were two of the categories."

Getting funded

Y Combinator's interest in biotech came at an ideal time.

In the past few years, Sand Hill Road investors ranging from Andreessen Horowitz to GV (formerly Google Ventures) are eyeing companies that bring advanced computing to areas like disease detection and drug development, which they hope will scale at fraction of the cost than traditional biotech companies.

CRV investor George Zachary is also a convert, recently shifting his focus from tech to companies that are "advancing health through computer science."

Altman said it wasn't always this way. "When we started funding bio companies, Sand Hill Road hadn't decided they liked it yet," he explained. "But it turns out that there was interest in a few years from West Coast tech."'

But so far, YC's biotech founders have found only mixed success appealing to Silicon Valley.

YC graduate Ethan Perlstein is currently fundraising for Perlara, a start-up that is focused on finding treatments for rare diseases. In his experience, it has been a challenge for many Y Combinator alumni in the sector to raise their first big round of venture financing. Sand Hill Road's investors will open the door, he said, but few are willing to write a big check for a first round.

YC's partners acknowledged the challenge, but said it isn't unique to its health care companies.

"I think that raising a true series A round is challenging for a lot of companies right now, which isn't specific to therapeutics," explained Iorns, CEO of a start-up called Science Exchange and a part-time partner at Y Combinator.

Iorns said Y Combinator companies that have an "element of machine learning or computational biology" are actually among the most sought-after overall. That's in large part due to the success of cancer drug development start-up Stemcentrx, which sold in 2016 for $10.2 billion to AbbVie. Stemcentrx, which was funded in 2008, claimes to use "new technologies and paradigms" to discover new drug therapies.

Not an obvious move 

But biotech is an uneasy fit for a culture steeped in software, and online companies that can turn on a dime.

Unlike traditional biotech start-ups, which remain in stealth mode for years until they get strong scientific evidence to back up their claims, start-ups that get accepted into the Y Combinator's must demo a minimally viable product in 3 months.

Some outsiders are skeptical.

"YC wants to fund tech people that do biotech, rather than embracing what it takes to do biotech," said Ryan Bethencourt, venture partner with IndieBio, an accelerator program that focuses on synthetic biology companies.

"But YC doesn't have the expertise to tackle an established industry with regulatory hurdles, pricing and reimbursement complexities," he added. "They haven't changed the model enough to reliably build therapeutics companies."

Altman said that Y Combinator recognizes that health companies have some unique challenges relative to tech — and that "it takes longer" than other sectors. But he also believes there are some aspects of the business that can be done quickly, such as getting introductions to potential customers for early pilots. He also thinks the opportunity is too huge to pass up.

"I'm super excited about the entrepreneurial focus in health and biotech," he said. "It's one of these mind-blowing moments where we're not that far away from an A.I. doctor."