Many biotech startups decide to operate in what is known as “stealth mode”. Here, they are almost invisible to the outside world, able to look inward and avoid the distractions and tribulations that can potentially arise from being in the public eye. But what exactly is stealth mode and what benefits does it offer young biotech startups? Are there any risks associated with it? And how can strategic partnerships help strengthen companies’ positions in the industry once they emerge from stealth?
In this article, we answer all of these questions and more, exploring the ins and outs of operating in stealth mode.
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What is stealth mode and why do biotech startups choose to operate in stealth mode?
Stealth mode is essentially a company’s temporary state of secretiveness. It is a strategic phase for startups that minimizes public exposure and media attention, allowing them to focus on their research and development (R&D) and drive forward innovative technologies without external distractions.
”Operating in stealth mode offers biotech startups several strategic advantages, particularly in protecting intellectual property (IP) and allowing focused development away from the prying eyes of competitors,” explained Natalie Dolphin, managing director of Investor Relations at HLTH Communications. “By keeping a low profile, these startups can better position themselves in the market, observing competitors and refining their innovations without the pressure of public scrutiny.”
When operating in stealth mode, companies generally limit the amount of information they share publicly about their projects, technologies, and progress, whether they are working on groundbreaking scientific research, developing proprietary technologies, or preparing for regulatory approvals. The ultimate goal is to build a strong foundation and make significant progress before unveiling their efforts for the rest of the world to see.
As Dolphin mentioned, protecting IP is important to companies operating in stealth mode and it is perhaps one of the main reasons companies choose to operate in such a secretive manner. The biotech industry is highly competitive and proprietary technologies and novel therapies are the lifeblood of a company. Disclosing company assets too early could lead to other companies copying them, and it could even lead to costly legal disputes. In stealth mode, however, biotech startups have the time to secure patents and develop robust IP portfolios, ensuring that their innovations are well-protected before they go public.
Stealth mode also gives biotech startups the opportunity to control the narrative around their brand and technology, helping them avoid premature criticism or misinformation and ensuring that, once they emerge from stealth mode, the first public impression is largely positive.
Furthermore, if companies happen to be in the later stages of product development, operating in stealth mode allows them to focus on meeting regulatory requirements – a potentially lengthy and complex process – without the added pressure of public expectations. For example, it gives them the time to conduct clinical trials, gather necessary data, or address regulatory feedback away from prying eyes.
The potential risks of operating in stealth mode
The point of biotech startups operating in stealth mode is to maximize the potential for success while minimizing risks. However, as with most things in the business and biotech world, there are still risks involved in this approach.
One of the main risks is the potential leaking of information. “The intricate nature of biotech operations often involves collaborations with academic institutions, contract research organizations, and suppliers, all of which increase the risk of inadvertent information leaks,” commented Dolphin. “Additionally, even while in stealth mode, companies must comply with regulatory requirements that may necessitate disclosures, potentially revealing key aspects of their research.” She also added that managing confidentiality among employees, partners, and investors is difficult, “as the more people involved, the greater the risk of leaks through social media, patent filings, or even hiring patterns.”
But there is a way to mitigate this risk. According to Dolphin, companies must enforce strict IP protection strategies, secure communications, and conduct regular security audits. “These ongoing efforts are crucial to maintaining the secrecy that can provide a first-mover advantage upon emerging from stealth mode,” she said.
Artem Trotsyuk, operating partner at LongeVC, concurred with Dolphin’s sentiment, saying that while maintaining secrecy in stealth mode is challenging, it can be managed. “To mitigate these risks, companies must enforce NDAs [non-disclosure agreements] and limit external communications. Compartmentalizing information within the organization is essential to ensure that only those who need access have it. Regular security audits and comprehensive employee training programs are critical to maintaining confidentiality and preventing leaks.”
Trotsyuk also noted that another possible disadvantage of operating in stealth mode is that the limited public presence can restrict networking opportunities. This makes it more difficult to connect with potential partners, investors, or collaborators. “Additionally, securing funding might be more challenging, as stealth mode companies lack visibility, and attracting top talent could be difficult due to the absence of public recognition or brand awareness,” concluded Trotsyuk.
Securing funding in stealth mode
Despite the potential challenges for biotech startups in securing funding while in stealth mode, there are still a few ways in which companies can help their financial situation. Firstly, companies must present a compelling value proposition to potential investors. Even though they are trying to maintain their secrecy, it is important that they demonstrate the uniqueness of their technology, the potential market impact, and the robustness of their R&D efforts, just as companies not operating in stealth mode would do.
Stealth mode biotech startups often rely on strategic investor outreach to bring in funding. In this scenario, companies need to approach investors with a deep understanding of the biotech sector who are willing to support companies that show promise despite not having a public presence. It is also common for stealth mode companies to seek non-dilutive funding, such as from grants, government funding, and research partnerships.
Venture capitalists (VCs) and angel investors also have a role to play in funding stealth mode biotech startups. VCs that specialize in biotech are often more inclined to invest in these companies, understanding the long-term potential and the need for confidentiality during the early stages. Meanwhile, angel investors, which refers to individuals who want to finance small business ventures in exchange for equity, are often willing to take on higher risks in exchange for potential high returns, providing early-stage funding and mentorship.
Emerging from stealth mode: How strategic partnerships can help
Dolphin explained that when a biotech startup eventually emerges from stealth mode, the shift to public visibility provides significant benefits, such as increased exposure and the opportunity to attract additional financing. “This visibility can open doors to a broader range of investors, who are more likely to engage with a company that has a clear and public strategy.”
Early strategic partnerships are also crucial for providing biotech startups with resources, funding, and market entry support. But, according to Dolphin, the secrecy of stealth mode can delay the formation of these early partnerships. Therefore, when a company is ready to emerge from stealth mode, it is important that it forms key strategic partnerships as soon as possible to aid the transition into the public eye.
“Strategic partnerships can provide immediate funding and access to resources, enabling companies to rapidly scale and advance their product development,” said Trotsyuk. “They also bring industry expertise and networks that can accelerate clinical trials and regulatory approval processes. Moreover, partnerships enhance a company’s credibility with investors, regulators, and the broader market. Established partners often facilitate market entry, leveraging their existing distribution channels and customer bases.”
Stealth mode success stories
There have been several notable success stories for companies that have emerged from stealth mode. Both Trotsyuk and Dolphin instantly pointed to Moderna, now famed for its COVID-19 vaccine. The company operated in stealth mode as it developed its mRNA technology before eventually emerging from stealth in 2010. Shortly after, in 2013, it formed a significant partnership with AstraZeneca – a $240 million deal to develop mRNA therapeutics that ultimately validated Moderna’s platform.
GRAIL is another good example of a successful post-stealth company that formed important partnerships after emerging from stealth. “After coming out of stealth mode, GRAIL attracted over $1 billion in investment and was later acquired by Illumina in a landmark $8 billion deal,” commented Dolphin. And, in a slightly more unconventional (less biopharma-related) partnership, GRAIL also partnered with Amazon Web Services (AWS), leveraging AWS’s cloud computing capabilities to process the vast amounts of genetic data required for its cancer detection tests.
Dolphin also noted that Editas Medicine, which is focused on CRISPR gene-editing technology, operated in stealth mode before gaining significant attention and going public in 2016, becoming a pioneer in genomic medicine.
“These examples illustrate that while operating in stealth mode presents substantial challenges, it can ultimately lead to significant success if companies adopt the right strategies,” said Dolphin.
There are, however, times when companies struggle after emerging from stealth. A timely example of this is Tome Biosciences. The genetic medicines startup emerged from stealth in December 2023 with an impressive $213 million in series A and B funding, and quickly went on to acquire biotech company Replace Therapeutics, as well as offer Genevant up to $114 million to combine its PGI tech with the Roivant lipid nanoparticle science in the hopes of developing an in vivo gene editing treatment for a monogenic liver disorder. But, just nine months down the line, Tome has had to make operational cuts and has laid off more than 100 of its employees. In fact, according to an exclusive report by STAT, the startup might even be winding down operations altogether and seeking a buyer by November 1, 2024.
But that’s just one bad example and it isn’t to say that the reason Tome ended up in this situation is because they decided to operate in stealth mode.
Ultimately, while it’s not all sunshine and roses for every post-stealth biotech startup, the secrecy provided by stealth mode does have its benefits, and if companies can navigate this phase correctly, there is no reason why it can’t bring them success in the long-run.
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