Basic Business Models for Bioinformatics

There are three basic business models in bioinformatics:

• A consultancy
• Licencing of insights
• Selling a tool

In the consultancy model, you are being paid for your time and expertise. The risk lies with the payer (employer) in this case. There is no guarantee that you will come up with anything useful. Therefore your margins are also low.

The licencing of insights essentially relies on the fact that you know something that your customer doesn’t know. And this something would be a valuable contribution to a product if somebody used it wisely. Of course, you could go out and learn how to build an entire pharma business, but sometimes the wiser thing is to find an existing pharma business and sell them exclusive rights to your insight. In this business model the early risk is entirely with the insights team. It costs time and money to develop insights. But once the insights have been developed and validated the risk shifts to the acquirer. They are paying for this knowledge, but it is still not guaranteed that they will be able to deploy it profitably. The hardest aspect of this business model is that there is no guarantee of repeatibility. For every new insight that you try to generate there is a strong possibility of failure.

Building and selling tools is one of the best understood business models in the world. With the advent of software, this business model has become easily the most profitable. Software is infinitely reproducible at negligible costs – the only issue is the size of the addressable market. In this model, you bear almost all of the risk, since you must bear the development costs until the product is finished. After this point, you can turn around and sell it for considerable markup.

Where things become complicated is when it comes to funding these different models. Most bioinformaticians will try to self-fund, either of the second two models, by running a consultancy service. Very few people succeed in having enough time and energy left over, after consulting, to build a successful insights or tools business on the side. Also, the type of skillset needed for consultancy often differs from that needed in the other two businesses. Remember, knowing something about bioinformatics is only part of your business.

Turning to external investors is difficult for different reasons. In the case of insight generation, it is hard for an investor to credibly believe that you will regularly generate new insights, therefore they are more interested in funding the validation and protection process of a single insight (a traditional small-molecule biotech funding model). The tool building space is much clearer for the investors but, ironically, is the area that bioinformaticians feel less comfortable in. This is a product-space which is relatively far removed from traditional scientific work – it just requires considerable scientific experience to identify which products should be built.