“Give a man a fish and he eats for a day. Sell him the hook, line and rod and get a higher valuation.” - Unknown ;-)
KromaTiD™ is in the business of helping researchers working on cell and gene therapies make sure, for example, that their CRISPR edits are going to the right places and not causing unwanted structural variations. Those cells ultimately go back into patients and safety is a top concern. KromaTiD had been a service business. Customers sent their cells for analysis and KromaTiD sent back a report.
They have transitioned to a product (and service) business, selling kits to allow scientists to do more of their own analyses. I was curious about what this change would look like and what it means for the business in terms of not only processes but also valuation and future opportunities.
Nathan Wood is the CEO of KromaTiD and he was kind enough to share their story with me.
The valuation part is the easiest to understand. A service business is labor intensive, making it difficult to scale efficiently, although easier to get started. The customers in this case are often in a facility with access to the specialized microscopes that are the key piece of equipment for these analyses. Given the right reagents and good instructions, much of this can be done self-serve at a significantly lower cost.
That also means that researchers can afford to screen many more candidates much earlier in their work, which likely means finding better results faster (additional savings).
When assessing value:
…if you think about an exit for an organization like KromaTiD or others, it's much easier for a large strategic company in the marketplace to purchase a company that has grown to over 10 million or higher and has a mixture of services and products because the products can become just a product line for them, if you will, and they don't have to go build that out, and then they can decide how they want to grow the service business.
Lowering the cost of the analysis also opens up the market for academic scientists who likely can’t pay for the more expensive service option.
That all sounds great, but making the switch isn’t easy. You might think, “Hey, pack up the reagents with the protocol and send them out.” To which Nathan might reply, “Send them in what? By whom? And how?” Up to this point, the deliverable was a PDF.
There were no boxes, no containers, no labels. And believe it or not, getting those things right is important. This is the nitty-gritty of a small biotech beyond the sexy science. You need processes for taking orders, filling them, packaging and shipping. Quality systems… The list goes on. That means new employees. And lots of change for the existing staff.
The marketing message and the audience changes as well.
Once it gets going though, things get smoother, including revenue. As a service business, the revenue can be lumpy. A customer may order a report and be silent for a while. With easy-to-use products, they just reorder. Service takes time and is billed on completion. Product is billed on its way out the door. Revenue becomes more predictable which makes it easier to think about where to invest the money that is coming in.
In the end, there is the opportunity to leverage your service business as your R&D. What else can they do for customers that might eventually become a new product line?
If you went to business school, this might be marketing and finance 101 for you. For me, I just enjoy following and sharing the stories of people solving problems. It never gets old.
Schedule a 15-minute chat with Chris about turning conversations into content for your life science company.
Transitioning from Service to Product