How to minimize your company’s ‘liability of newness’

By David Spellmeyer, Ph.D.

Your life-science startup might have breakthrough science and a rock-star team, but as long as the company is “new,” it’s inherently at high risk of failure.

I can confidently make this claim based on my own first-hand observations, but you don’t have to take my word for it. Data from the Bureau of Labor Statistics shows that approximately 50 percent of new companies don’t survive more than five years — which is true regardless of the year or even decade the company is started. And a 2016 analysis of seed-stage startups found that less than a third survived long enough to raise a Series A.

The threat of early failure is known as the “liability of newness,” a term coined more than 50 years ago by researcher A.L. Stinchcombe, who laid the theoretical framework for organizational mortality. But the concept is just as relevant today as it was in 1965, and is something that life science entrepreneurs must confront head-on.

The dangerous shift

For founders, starting a life science company requires a massive shift from a scientific focus to a business focus — and that involves substantial intellectual change and rebalancing of efforts. Founders must learn about corporate frameworks, intellectual property, employment law, contracting, facilities (rents, permits, waste management), commercial banking, accounting practices, bookkeeping, cash flow management, and so much more.

Each of these things takes bandwidth when founders have the least-available time to spend. Simultaneously, the founders must figure out what roles each will take on, what that means to their commitment to the firm and to each other, and who will fill what duty and with what authority. Forming a team out of a group of individuals is not easy. To be considered legitimate by investors and other stakeholders, these roles must conform to the expectations of the industry. The team must be able to learn together, share information seamlessly with one another, and make important decisions quickly. Not surprisingly, personalities often clash.

Meanwhile, the primary reason that many founders cite for starting the company — moving a new technology or therapeutic forward — often becomes second priority. That’s not good in a highly competitive scientific landscape where speed to market is critical.

Defeat the odds

The risks of failure will always be highest for early-stage companies. But there are many things that entrepreneurs can do to minimize the liabilities of newness.

  • Take your doubts seriously. There are a lot of good ideas out there. If you are in doubt about yourself or the product, consider not starting the company or consider starting a different company. Remember, this is going to consume your life for several years.
  • Find the business support you need. As scientists, we love to focus on the science. Business success is critically dependent on understanding the mechanics of what it takes to start a business. So, focus your research efforts away from science and towards the mechanics. Resources can be found at local universities, at the Small Business Administration site and through their SCORE program, and through local incubators and accelerators.
  • Learn from other entrepreneurs. Conduct informational interviews with founders in your area. It is tempting to find those who have succeeded, but also seek out those who have failed, to avoid survivor bias. This can help understand the magnitude of the endeavor and the speed bumps encountered along the way.
  • Experience the mechanics of starting a business. The practical experience of knowing what it takes to start a company can reduce risk of failure. Consider joining another company before starting your own. By helping someone else start a company, you can learn about business operations, establish relationships with the service providers in the area, and gain tremendous insights into the dynamics of early stage companies.
  • Surround yourself with a rich ecosystem. Your ability to connect with and engage specialized knowledge will define your success. This may include joining an incubator, choosing an optimal location, and hiring the right consultants. (Read more on this.)
  • Advance your science before branching out. If you can, develop the scientific assets inside your university for as long as possible. Doing so decreases risk with non-dilutive capital.
  • Bond with your co-founders. Create shared experiences with your founders to really get to know each other under pressure – before starting the company. Several universities offer courses in starting companies, such as the UCSF Entrepreneurship Center’s Startup 101. These experiences are intense microcosms of working together on shared deadlines. One of the best outcomes is the experience of resolving non-overlapping priorities, outside commitments, and disagreements about how to present the business and science.
  • Establish the true costs involved, financially and emotionally. Keep in mind that we always underestimate how hard it will be and how much money it will require.
  • Learn about the laws in your city, county, state and country. They vary and differences can be significant.

Finally, I strongly urge you to take a cold, hard look at the potential impact on you and those around you. Starting a business is more than a full-time job. It is a passion-filled, emotional commitment that can change who you are. Take the time to make sure it is for you.

David Spellmeyer, Ph.D., is a biotechnology executive with 25 years of broad experience in the life sciences industry. He is an executive-in-residence at ShangPharma Innovation. Read full bio

Read more

Coad, A. (2018). Firm age: a survey. Journal of Evolutionary Economics 28, 13–43.

Henderson, A.D. (1999). Firm strategy and age dependence: A contingent view of the liabilities of newness, adolescence, and obsolescence. Administrative Science Quarterly 44, 281–314.

Stinchcombe, A.L. (1965). Social structure and organizations. In Handbook of Organizations, J.G. March, ed. (Chicago: Rand McNally), pp. 142–193.

Yang, T., and Aldrich, H.E. (2017). “The liability of newness” revisited: Theoretical restatement and empirical testing in emergent organizations. Social Science Research 63, 36–53.