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Being Strategic About Lab Investments

May 14, 2024
| Leadership

LinkedIn recently asked me to answer the question, “How can you use cost-benefit analysis (CBA) to make informed lab investments?” Their AI explained the basic steps for performing a CBA. However, there was zero context for strategically thinking about a lab investment. I want to explore the strategic reasons why you should invest in a laboratory or lab equipment and look at some alternatives if your budget doesn’t yet fit your strategic vision.

There are three strategic reasons to spend money on your own lab facility. All three focus on any business’s primary goal – making money. You’ll need capital to make the purchase, and you’ll need to understand how and when you’ll generate income to convince a lender or investor to back your plan. Even if you are self-funding, you’ll need a clear rationale to proceed wisely. What are these reasons?

Image of Spongebob with the caption "you need to make money"
Created at Imageflip.com

1. Expand lab capacity (to make more money)

Your product or service has an excellent market fit, and your team has been overwhelmed with the response. Revenue is steady, yet you could make more money if you can accommodate more orders. Furthermore, your sales funnel is brimful of leads and conversion rates are only limited by your capacity. Lab investments make the most sense when adding another instrument or adding space for high-demand work will bring immediate revenue at a decent margin. Larger expansions or relocations should be part of your success contingency planning. Either way, expanding capacity should be an action that fits within your strategic plan.

Picture of a chart print-out signifying the decision to expand a lab
Photo by Isaac Smith on Unsplash

2. Launch a new service (to make more money)

This reason takes more planning to implement. Your strategy may have forecast the demand for additional services. Alternatively, you and the market may be surprised by requests for new techniques. In either instance, you need to map out the near- and long-term revenue and profit margins to ensure your investment makes sense in the long run. If it’s new science or technology, the instruments will be premium priced, and you will need employees with specialized skills. You will likely need to adjust your facility to accommodate the tech, so check whether you have the appropriate space and services and plan for cost overruns. In my experience, you will likely have to make more changes than expected to get a sensitive new instrument to operate correctly (Faraday cage, anyone?)

It’s not hard to do this planning, but it will take time and energy. Consider whether your value proposition (technology access, customer intimacy, or low cost) supports the service addition. Gather data like you did when starting your business—what’s the total addressable market, who is serving it now, and what fraction you can capture in a reasonable period. Have your BD and sales team ask current and prospective customers what services they want to see and how much they would pay. Build new customer profiles and map out how you will reach them. Examine what your competitors offer in this area and review their messages. Keep track of the academic literature, particularly in rapidly evolving technologies. Starting a new service when questions about its efficacy or applicability haven’t been answered is like pushing a boulder uphill. You can do it, but you may be better off being the second or third to market when the supporting scientific data is more stable.

A woman works with samples in a lab
Photo by Chokniti Khongchum

3. Achieve a product development milestone (to bring a new product to market and make money)

This is the toughest reason to justify. If you are a startup, you are working with minimal funding, perhaps no revenue, and bringing something unproven to market. The only strategic reason to invest in dedicated laboratory space and equipment is that your team is the world’s only experts in what you can do. In other words, it should be inarguably a core part of your business. It’s a tricky decision because you can argue yourself into a position where everything is core. Be brutal in this analysis – you are more likely to succeed if you pare down to investing in the essentials and outsourcing the rest (see below). If you are an existing company, is the new product a good fit with your existing line? Can you reasonably use your current production and sales processes to support it? What’s the demand, and what revenue and margins can you expect? If it’s not an excellent fit, would spinning out a team into a new business make more sense? If yes, see the rationale for a startup to determine whether to make the purchase. In either case, if the answer is no, what can you do?

A man works in a lab
Photo by ThisisEngineering RAEng on Unsplash

What are your options if the strategic reasons don’t apply?

Laboratory space and equipment are expensive. As you’ve seen above, the business case may not make sense for a direct purchase. What if your company is pre-revenue? What if sales don’t support your strategic vision, yet you need access to specialized tools? How do you justify hiring an expert or taking the time to learn a cutting-edge technique? These are just some of the reasons that may torpedo your plans. Fortunately, you have options.

A woman works with medical equipment in a lab
Photo by National Cancer Institute on Unsplash

A. Find a contract service provider

The life science industry has long relied on contract service providers to fill in gaps in the process from discovery to commercialization. This is not unique – other industries, like aerospace, have a similar infrastructure. A contract service ecosystem allows those with narrow yet mission-critical expertise to run thriving businesses providing specialized service packages. These services are a capital-efficient way for companies of all sizes to meet infrequent development milestones, expand production capacity, or try out new service offerings. There are directories for specific areas like preclinical research or contract manufacturing. Your best bet may be to ask your network for help using queries like, “Who is the best person or company to speak with right now on <science or technology area>?” Don’t forget to ask for an introduction!

A woman in a lab looks into a microscope
Photo by Artem Podrez

B. Work with an academic lab

There may only be a handful of experts in cutting-edge science, and they are likely based in an academic or research organization. You can limit your financial risk by arranging to work directly with one of them. Most lab directors and institutions are familiar with this type of arrangement and will have processes and procedures to follow. You’ll need to cement your intellectual property protections and clearly document all objectives and deliverables. Respectfully challenge any request that makes you uncomfortable or increases your business risk. Much is negotiable – you should seek to find an outcome where all parties get more, even if they don’t get everything they want. Advantages include potentially finding and securing a key employee before graduation and staying current on the scientific outcomes and opportunities.

A drawing that says "be creative"
Photo by Pixabay

C. Find a less expensive approach

The soul of innovation is finding a way to do a thing better, faster, and cheaper. How else can you achieve your objective at a lower cost? The first two options are excellent choices; however, being creative may be a better choice. Can you make less detailed measurements and still achieve the necessary data? Is your approach fit for your development milestone? Yes, you can generate CGMP-quality data, but is preclinical, non-GMP data suitable at this stage? How did other companies meet the same need? What facilities and equipment do you have that could be used on the problem? I’ve seen founders do amazing things when faced with limited resources. Your customer’s problem may not be the only one you are solving!

Picture of words on a sidewalk that says "passion led us here"
Photo by Ian Schneider on Unsplash

Using a formalized structure like a CBA is a part of making the decision to invest in a dedicated laboratory or equipment. However, it’s not the first step. These decisions must have compelling alignment with your business strategy before you start making measurements or requesting quotes. It can be difficult to face this analysis, but you and your business will be stronger as a result.


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