The financial crisis of 2007-2008 had a chilling effect on venture investing. In October 2008, Sequoia Capital sent a warning to its portfolio companies and its presentation went viral among investors as a harbinger of the downturn. Venture investing plummeted in 2008 and 2009 and many Venture funds allocated more of their capital to keep their existing portfolio companies going.
A week ago Thursday, Sequoia Capital sent a letter to its founders warning that the coronavirus was a “black swan” event and startups should “brace themselves for turbulence” by considering if they have enough cash and preparing to face supply chain disruptions. The letter also warned they could have a harder time fundraising, similar to the market downturns of 2001 and 2009. (https://techcrunch.com/2020/03/07/vcs-warn-coronavirus-will-impact-fundraising-for-the-next-2-quarters/)
This market downturn is far more rapid than in 2008. It has yet to play out fully and with markets down 30-35% this past month, the drop is only about half of what was experienced in the bear market of 2007-2009, although that bear market was over 17 months and took many months to reach the half-way point. It is possible that we are still far from the bottom and early in this bear market and the effect on investors’ willingness to make new investments in non-COVID-19 healthcare startups will be very negative.
However, there is another area of perhaps greater concern. Unlike the economic downturn in 2007-2009, this pandemic severely impacts the healthcare system upon which life science startups depend to develop and clinically test new products. These same medical systems and healthcare practitioners are expected to have tremendous stress placed on them as they are on the front line responding to the pandemic. The effect on clinical studies may be severe in the short run which includes next flu season in the fall and winter when a second peak is possible. This is likely to significantly delay the initiation of new clinical studies as well as affect the enrollment and data gathering in ongoing studies except for trials of COVID-19 treatments or vaccine candidates. Travel restrictions, supply chain disruptions, emergency hospital containment procedures affecting patients’ and sponsors’ access to trial sites, and study personnel or patients contracting the disease, are among the anticipated impacts. Closing of trial sites and temporary halting some trials is contemplated.
What to do now?
- Maximize your runway – reduce all non-essential expenses unless you have at least 18 months of cash.
- If you have clinical studies underway, work closely with your staff, clinical research organizations, principal investigators and/or study sites to understand what will change in the ability to conduct existing studies and/or start new studies. You may need to change timelines for the studies and this may affect clinical trial supplies, stability studies and other related activities. Postponing what you can extend your cash runway.
- Virtual startups have an advantage right now – natural social distancing. So much of life science product development can be done remotely and collaboratively with contractors. If not already doing most of your business this way, now is the time to transition.
- Notify investors and shareholders – they need to know changes in plans in a timely fashion. No one will be surprised that this pandemic is affecting the business. You may need their support if a bridge financing is necessary to reach the other side of this crisis.
- This will eventually pass or become a new status quo to which we adapt. Regular financing and clinical study conditions will return. How fast is anyone’s guess but we all hope it will be measured in months. When things improve, the survivors will be able to re-emerge and resume activities aggressively.
- This may be the time to consider China and Korea or other places where clinical studies can actually get done in the next year because they got control of the pandemic earlier and will potentially be back to normal operations sooner.
- The growth of video conferencing and remote work will cause startups that operate from offices and labs to rethink how much being together was essential and how much can be saved by being more flexible.
Keeping your business alive is mission one. Figuring out how to conduct clinical testing is mission two. If both are managed well, your business is likely to prosper when the inevitable improvement comes. But until then, startups may have to hunker down just like citizens.
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About the Author: Dr. Weickert works in the service of medical innovation, with entrepreneurs and companies ranging from large public pharmaceutical and medical device companies to small private startups, and the investors who cultivate them. He is CEO of a pre-clinical oncology startup and has been CEO or acting CEO of 4 other medical startups, CBO of three, and advisor to scores of others. Whether consulting on business or financing plans, or providing executive leadership, his focus is on providing the vision for how breakthrough products will improve medicine and patient care. His blog, “Musings on Medical Startups”, and work examples are at his web site: www.witcreek.com and on LinkedIn www.linkedin.com/in/weickert.