Monday, June 2, 1997
Is first best?
By Karen Bernstein
Imitation is the sincerest form of flattery. Any company that is formed around what is perceived as a hot new technology will be followed in short order by a plethora of competitors.
Conventional wisdom has it that being first is best. But a quick historical survey of several technology areas shows the reality to be more complicated. While being first may confer advantages, particularly in terms of financing and valuation, in many cases being a fast follower can be even better.
In some fields, being first can mean locking up intellectual property so that competition is effectively precluded, while in other areas improvements in technology can rapidly render first generation technology obsolete. And while rapid acceptance of a technology and its value can enable the first in to dominate in hiring, fund-raising, university collaborations and partnering, if the technology isn't accepted, falls out of favor, or takes too long to mature, those that are first can languish for years.
A critical determinant of whether it's best to be first or second is the nature of the technology itself. Technologies that can be tightly controlled confer great advantages on first entrants, while those that can't, or those that haven't been optimized in the first generation, provide opportunities for later entrants.
Either way, every company has to address the issue of whether it has a sustainable advantage based on its perception of whether it is leading or following.
Early entrants also are widely perceived to capture better valuations compared to companies that come in later to a field.
Oxford BioScience Partners typifies the first-in strategy from the venture investor's point of view. "The Oxford party line is unequivocally to be first in a category, first to identify a category, and we believe in that down to our tippy toes," said partner Jonathan Fleming. "If you look at genomics, gene therapy, antisense, the first companies in were the ones that got the best valuations. They get perceived as the leader, they get better corporate deals, they get the best technology. Companies that come in later get second-class technology, scientists, investors and corporate partners. By the second, third or fourth company in a category, you're just not as attractive to people."
However, the common wisdom is not absolutely true over the long haul, for reasons that go beyond the simple fact of first entry (see chart, A2).
In genomics for instance, Genome Therapeutics Corp. (GENE, Waltham, Mass.), was founded far earlier than any of the other companies - in 1961, and entered genomics in 1982, yet has a lower valuation than three others in its group. Incyte Pharmaceuticals Inc. (INCY, Palo Alto, Calif.) entered the field second and has the second highest valuation, while Human Genome Sciences Inc., which began its genomics program shortly after INCY, has the best valuation in its class. Genset (GENXY, Paris, France) started its genomics program last - in 1993 - and is third in terms of valuation.
In antisense, Isis Pharmaceuticals Inc. (ISIP, Carlsbad, Calif.) and Hybridon Inc. (HYBN, Cambridge, Mass.) were both founded in 1989. ISIP has a higher valuation, and more cash ($71 million v $50 million at March 31). Genta Inc. (GNTAC, San Diego, Calif.), founded even earlier, made several wrong technology bets and is valued far less than either.
As a final example, combinatorial chemistry illustrates a field where fast followers such as Pharmacopeia Inc. (PCOP, Princeton, N.J.) and ArQule Inc. (ARQL, Medford, Mass.) have an advantage over first generation companies such as Trega Biosciences Inc. (TRGA, San Diego, Calif.).
Advantages of being first
One of the key advantages of being an early entrant is in the ability to lock up the underlying value of a field in terms of intellectual property, employees and relationships with thought leaders in academia.