A war between proponents of founder-led and VC-led venture models
An initial thought piece on the landscape of biotech venture
This article is a commentary on contemporary discussions (mainly through Twitter) about the “right way” to do biotech venture. Thank you to Egan Peltan for the insightful discussions related to this post’s topic, particularly about the advantages and limitations of institutional venture creation. Unlike other Insights articles, this one doesn’t have any neat figures - just a wall of text. Eventually I’ll expand much more broadly and deeply on these initial thoughts.
Happy new year! Also, my apologies for the long hiatus and lack of blog output over the last several months, I have been spending a lot of time reorganizing my activities and priorities. I am planning to get back to generating more content for Ergo Bio Insights! I will be working on unfinished drafts and collaboration pieces. Please stay tuned and share the blog with your friends and family! I have also been organizing biotech venture meetups, if you are interested in participating, please sign up here.
Highlights and takeaways
Everyone has a bit of cabin fever, leading to a fair amount of online argumentation around different approaches for biotech venture. Incumbent and emerging players are throwing out light jabs (some heavier than others), clamoring that their approach is better than the others. However, some have nuanced viewpoints and appreciate what both sides have to offer.
A brief overview about the landscape of venture models and some deeper thoughts about what works in biotech.
An underappreciated third venture model are companies bankrolled by billionaires and ultra-high-net-worth individuals (UHNWI). This completely circumvents the dichotomy of founder-led and VC-led venture models, in which the would-be LPs directly back the venture due to significant alignment of personal ambitions with the company mission. Who needs early-stage VCs when you have a ton of money and connections?
I share my emerging theory on “academic VCs”. These are professors that use their “IP” to invest across multiple portfolio companies, as exemplified by the CRISPR pioneers. Through advancing the gene editing discipline, professors can accumulate IP to deploy into new companies. This enables academic VCs to have a valuable investment portfolio.
As the biotech venture world continues to evolve, I encourage everyone to keep an open mind! Please share your thoughts, I am always happy to discuss ideas and innovation.
Tribalism exists in football, politics, and even biotech venture
There’s been rising conflict among biotech venture leaders espousing different views on what is the best venture model for creating societal value. Some have firm beliefs that companies led by its founders, who are putatively younger and less experienced individuals, are much more likely to be successful. Conversely, others hold beliefs that companies led by experienced veterans are much more likely to be successful. Players from each side quote plenty of examples of successes, e.g. Moderna as being VC-led and BioNTech as being founder-led. There are also debates (skirmishes) about whether Genentech was founder- or VC-led. I highly recommend reading Sally Smith Hughes’ book about the founding and growth of Genentech to properly understand its history. Richard Murphey of Bay Bridge Bio also has a great blog article discussing how Bob Swanson (29 years old) and a team of young scientists launched Genentech in the 1970s.
Here are notable tweets across a multitude of threads. These are shared solely for the purpose of providing context. I am not endorsing any views! Please note, regardless of where you stand in this game, let’s encourage fraternization and be cordial with each other.
A philosophical take on venture
Venture capital (VC) is a type of private equity financing. VC firms organize limited partnerships that provide capital for the general partner (GP) to speculatively invest in startups. Limited partners (LPs) could be wealthy individuals, family offices, university endowments, foundations, pensions, and other types of organizations. Usually the GP will take an annual management fee and a carried interest (i.e. performance fee). Most VC funds are structured to have life cycles of 10 years, although some firms like Sequoia are restructuring to have funds with longer or indefinite life cycles (press release). VCs deploy capital early in the fund’s life cycle and invest in startups that could provide significant returns despite high risks. VCs aim to liquidate their stake in portfolio companies through exits like M&A and IPOs. Thus, the core work of the VC boils down to fundraising and sourcing, both of which can be generalized as attempts to win deals.
To win deals requires considerable persuasive ability and perceived differentiation. For the LPs, the VC needs to have asymmetric access to quality deals and an uncanny ability to derisk investments. There are a multitude of additional factors for why LPs may invest with a particular VC. The LPs may be seeking exposure to a particular sector, like the life sciences, or its subsectors, such as therapeutics, life sciences tools, or medical devices. Alternatively, the LPs may have a mandate of impact investing and this particular VC is an appropriate match. Or, the LPs could simply have a long-standing relationship with the VC and they get along well.
For the portfolio companies, the VCs must convince the startup’s founders and/or management that they are worthwhile to partner with, despite relinquishing substantial equity and/or control. VCs will take an equity stake and a board seat in exchange for an investment. Some VCs take multiple board seats and thus can more readily exert control over the company. The founders and/or management could be sensitive to dilution, both in equity and control. Each round of venture financing will lead to further dilution for the startup. Alternatively, the company could be excited about having a particular VC supporting the team (e.g. brand, services, advisors), or the large amount of capital that will be given.
The biotech venture landscape is actually quite diverse in terms of methodology. There is a dichotomy between founder-led and VC-led venture models, which seems to have localized regionally in the Bay Area and Boston, respectively. However, this demarcation is becoming increasingly blurred as venture models continue to evolve. This is likely forced as increasingly more capital flows into biotech and VCs have to remain relevant and competitive to win deals. Here are some general VC classifications, although no firm perfectly fits within a tight box (let’s appreciate nuances!):
Some VCs take pride in being self-described founder-friendly investors, e.g. Playground Global and Civilization Ventures. These firms tend to be led by previously successful operators, so they deeply understand the needs of emerging founders and nascent startups. Moreover, these VCs aim to arbitrage on founder capabilities and coachability, as well as on early technical risks. They may like to take board seats and work closely with the founders on their endeavors. Some founder-friendly VCs aim to back inventor-led startups at the earliest stages, such as Axial and SciFounders. These firms may have extraordinary deference to the founders, as their perspective is that the founders understand and can develop their technologies better than any VC could. For example, SciFounders recently raised a fund with a legal pledge in transferring back voting rights to the portfolio company founders (press release).
While many VCs focus on certain stages (e.g. seed-Series A, Series B-crossover), some will routinely invest throughout the life cycle of a portfolio company and support them through multiple value inflection points, e.g. Foresite Capital, a16z, Lightspeed Venture Partners. Securing an investment with these deep-pocket investors would ease future fundraising efforts. By alleviating financial burdens and providing a multitude of services, this enables founders to focus on building their startup. Last year, Foresite had raised a $1B fund (ref). This year, a16z raised $9B across three funds, in which the bio-specific fund has $1.5B (ref).
Some VCs have built out venture creation engines, e.g. Atlas Venture, Flagship Pioneering, Third Rock Ventures. They will utilize in-house expertise to form and launch new companies. Many of the associates and principals will take leaves to drive the initial stages of the companies. However, for the most part these companies will recruit experienced management from reputable pharmaceutical companies. Venture creation engines have built a robust ecosystem for driving companies through rounds of financing. These firms have also restructured existing companies to fit with their operational strategy. An exemplary company is that of RayzeBio. It was co-founded by Deborah Charych, Aaron Kantoff, and Aron Knickerbocker. However, none of its co-founders are in management roles at RayzeBio and only one has a board seat. In the launch press release, Kantoff is described as a founding independent board member and venture partner at Medicxi. Since the launch, RayzeBio had a rapid series of fundraising. In October 2020, RayzeBio raised a $45M series A financing co-led by venBio Partners and Versant Ventures (press release). In December 2020, RayzeBio raised a $105M series B financing led by Venrock (press release). In June 2021, RayzeBio raised a $108M series C financing led by Venrock (press release). We can expect additional capital to be raised this year and an IPO to follow quickly. This is just one example of many.
In a related way, there’s been significant online discussions about preclinical startups that go public without clinical-stage assets. These concerns are rooted in whether the established biotech VCs are primarily leveraging the frothy capital markets to reach a quick exit. The best way to evaluate this is to quantify where each VC is deploying capital and when they liquidate their positions. Is it right after the lock-up period? Or are they holding on to their equity stake through clinical catalysts? If you’re interested in collaborating on this analysis, please reach out!
Between the rapid fire launches of new startups and the relative ease of capital raises and IPOs, the “founder-led” movement remains a hot topic for debates. Some will rightfully say that biotech startups should be founded with a “patient-centric” model, but let’s focus on the contemporary debates around the ventures being founder-led or VC-led.
It is often noted that the strength of the extant models of venture creation is in bringing experienced management to push forward good ideas. What is the value of experience? Experience could be a decent proxy for a given individual’s professional network. That is, those who have more experience could have a more extensive network as a result of spending more time in industry. Access to human capital is a major challenge to overcome in biotech, so there is significant value to having well-networked individuals involved with the venture. Experience also serves as more data points to evaluate an individual’s capabilities. If they’ve had prior success in advancing a drug program, they should know how to “do it again”. Of course, this is really only the case if they have relevant experience to the new endeavor. Furthermore, it may be difficult to evaluate and decouple the success of an individual from the success of the team. Hence, simply having more experienced management does not necessitate a better team.
More broadly, what is the fungibility of leadership? Is experience the only thing that matters, and individual traits can be glossed over in favor of experience? Arguably, an outsized prioritization of (irrelevant) experience can distract from proper evaluation of an individual’s ability to lead and build teams. The needs of a new biotech startup are far different from that of an established pharmaceutical company. Jan Skvarka, who was the CEO of Trillium Therapeutics and led it to a successful $2.2B acquisition by Pfizer (press release), wrote a fantastic article about transitioning from an R&D startup that primarily does drug discovery and development to an integrated company that is ready for commercial drug launches (Skvarka and Farkas 2013). Executive replacements are extremely common in this transition period. This is because the right person to lead a biotech startup may not be the right person to lead a large pharmaceutical company, and vice versa.
Another article to read is from Richard Murphey’s blog, which discusses the case for young biotech founders. No matter your current age, at some point you were a young person! And that is true of all founders, whether young or old. Importantly, there are many examples of young founders that led the creation and development of successful biotechnology companies. To keep it simple, I define young as under 40 years of age and successful as unicorn status (>$1B) and on its way to much higher valuations. Here’s a list of selected co-founders (many were adapted from Richard’s article):
In 1976 and at age 29, Bob Swanson co-founded Genentech
In 1986 and at age 39, Sol Barer co-founded Celgene
In 1986 and at age 38, Harry Stratford co-founded Shire
In 1987 and at age 29, Michael Riordan co-founded Gilead Sciences
In 1988 and at age 35, Leonard Schleifer co-founded Regeneron Pharmaceuticals
In 1989 and at age 38, Joshua Boger co-founded Vertex Pharmaceuticals
In 1989 and at age 34, Randy Hamilton co-founded Salix Pharmaceuticals
In 1991 and at age 37, Roy Whitfield co-founded Incyte
In 1992 and at age 32, Leonard Bell co-founded Alexion Pharmaceuticals
In 1997 and at age 36, Clay Siegall co-founded Seattle Genetics
In 2011 and at age 22, Sean McClain co-founded AbSci Corp
In 2012 and at age 24, Zach Weinberg co-founded Flatiron Health
In 2013 and at age 34, Jeff Marrazzo co-founded Spark Therapeutics
In 2014 and at age 29, Vivek Ramaswamy founded Roivant Sciences
In 2015 and at age 24, Nish Bhat co-founded Color Genomics
In 2017 and at age 28, Trevor Martin co-founded Mammoth Biosciences
This is obviously not an exhaustive list. The point is that there are historical examples of young founders having a profound impact in biotechnology. Let’s see where our contemporary young founders take us!
Another consideration about the venture creation model is the patience of the investors, i.e. the LPs that want to see returns back in (typically) 10 years. Time constraints are likely more prominent with VC-led companies than founder-led companies. This is certainly a major contributing factor to the accelerated financing of startups, particularly those emerging from the extant venture creation engines. An extrinsic need by impatient capital to exit by M&A or IPO could hinder proper growth of the startup.
One more note. Biotech activities are so disparate and require significant expertise and ability to build teams that address all faucets. I recently ran a brief Twitter poll (n > 50) on whether founders should be generalists or specialists, and likewise whether their startups should hire generalists or specialists. With the caveat that it depends on the exact role, the overall sentiment is that founders could be either or both, while employees should be specialists. These are just trends that emerged from a small sample population, but do posit the way to build teams is to have a blend of individuals that are capable of learning broadly and likewise in a focused manner.
I have many more thoughts on this topic and will write more in the future. Feel welcome to reach out to discuss these ideas!
An underappreciated venture model is to get bankrolled by the LPs themselves
Venture can be considered a professional game played with significant capital. VCs will raise from LPs to invest in companies, but this does not preclude individuals from directly investing significant amounts. Nikhil Basu Trivedi has a great article on the rise of solo capitalists. I will briefly highlight an adjacent group, which are UHNWI that directly undertake the efforts to launch their own startups by seeding with their personal capital and leveraging their own connections. It is difficult to find publicly available information on such investors and companies, but one can learn of it through the grapevine.
LPs who launch their own startups will have significant alignment of their personal ambitions and the company mission. This is exemplified by Altos Labs, a biotech startup focused on extending longevity (Regalado 2021). Altos Labs is being bankrolled by billionaires like Jeff Bezos and Yuri Milner. Despite just incorporating in 2021, the company has already raised hundreds of millions of dollars. Being well capitalized, the company has been extraordinarily successful at recruiting top scientific talents from both universities and industry.
Keep an eye out on these stealth companies that are uniquely financed and launched by UHNWI!
My emerging theory on academic venture capitalists
Biotech venture has its roots with academic involvement. Genentech was founded through the joint efforts of Bob Swanson, an unemployed venture capitalist, and Herb Boyer, a professor from UCSF. At the time, however, it was strongly discouraged that professors try to launch their own companies. These days, especially at certain universities, professors are often incubating their ideas in the laboratory and spinning out companies, either through their trainees or through a venture creation engine. Some may even leave academia to start companies, but that’s a discussion for another day.
A few professors are now effectively becoming academic VCs through investing their IP. This is exemplified by the CRISPR pioneers, who include Jennifer Doudna, Emmanuelle Charpentier, Feng Zhang, Matthew Porteus, David Liu, Keith Joung, and others. These professors have not only advanced the entire field of gene editing, but also leveraged their research laboratories for generating valuable IP to invest into new companies. This is analogous to how traditional VCs invest capital, but in this case academic VCs are those that invest their IP.
The CRISPR pioneers have significant equity stakes across numerous companies, including CRISPR Therapeutics, Intellia Therapeutics, Editas Medicine, Beam Therapeutics, Caribou Biosciences, Graphite Bio, Mammoth Biosciences, Prime Medicine, and numerous other privately-held startups. They are called “scientific co-founders” but they really should be viewed as “academic VCs” through the lens of investing IP rather than capital. It also puts them in a position of negotiating for better terms as founders.
Author information
Ergo Bio closely follows innovation in the biotechnology space and evaluates interesting drugs and deals. It is run by Vandon T Duong (LinkedIn), feel free to connect! I am a biotech enthusiast and a molecular engineer by training. I am also an avid consumer of news and research around precision medicine.
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