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Anthony Sun: “Biology is complicated. Plenty of investments have not gone well.”
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ome like it risky. In 2014, venture capitalists pumped $8.6 billion into nearly 800 deals with fledgling biotechnology and medical device companies in the United States. It was the biggest cash infusion that the life sciences sector has received from venture capital in 6 years, according to the end-ofthe-year analysis in the MoneyTree Report. But most researchers who have great ideas (in their minds, anyway) for treatments, preventives, or diagnostics have only a vague notion how to transform their science projects into “value propositions” that can raise the millions needed to commercialize a concept. And fewer still have ever crossed paths with those who hold the purse strings: the venture capitalists, or VCs for short. VCs invest in scientific ideas they judge as hot, backed by investors such as pension funds and endowments, wealthy families, and “high net worth” individuals. Investors usually require that VC firms put some of their own money on the table, too. They provide guidance to the companies 1194
(which often means a seat on the board of directors) and ultimately hope to “exit” with a big windfall in 3 to 5 years, when the startup is gobbled up by a bigger company or goes public. Although the life sciences have never spawned a Google or an Amazon.com and often require longer term investments than other sectors, life science VCs can reap handsome profits for their backers and themselves: Between 2000 and 2010, investors who exited earned 15% returns, nearly four times the gain in the S&P 500 over that time period, according to an analysis published in the July 2011 issue of Nature Biotechnology. Science spoke with two VCs about their backgrounds and perspectives. Robert Nelsen, based in Seattle, Washington, is a co-founder of ARCH Venture Partners, which has funded more than 160 companies, including Illumina (sequencing), deCODE Genetics (genomics), and, more recently, Juno Therapeutics (cancer immunotherapy). Anthony Sun works across the country in
By Jon Cohen
New York City for Aisling Capital, which has a diverse, $1.6 billion portfolio that includes Chimerix (antivirals), Vivus (erectile dysfunction), and ZELTIQ Aesthetics (nonsurgical fat reduction). Nelsen does not have an advanced science degree, while Sun earned an M.D. at Philadelphia’s Temple University School of Medicine in 1997. Both went into the venture capital business immediately after finishing a master’s in business administration. Like scientists, VCs have a specialized language, and they can baffle outsiders when they speak of “halo deals” (highly profitable investments that cover shakier ones), “lockup periods” (time windows when investors can’t trade shares), and “family offices” (firms that manage investments for groups of wealthy relatives). VCs also have different appetites for risk—some like only early-stage, big gambles, whereas others favor more mature companies that have revenue. Science interviewed Nelsen and Sun separately, but their answers, edited for brevity and clarity, are combined here. sciencemag.org SCIENCE
12 JUNE 2015 • VOL 348 ISSUE 6240
Published by AAAS
PHOTO: DREW GURIAN
Two venture capitalists explain the investor’s mindset
NEWS | F E AT U R E S | E N T R E P R E N E U R S H I P
PHOTO: NATALIE FOBES
Q: How did you become a venture capitalist? R.N.: I kind of fell into it. When I got to the University of Chicago [for an MBA program], I started volunteering for an organization that eventually became ARCH, and I was the first employee. The trustees of the university created it to form a startup infrastructure with Argonne National Labs. They couldn’t figure out why all this cool stuff was happening in Boston and California when, of course, everybody at the University of Chicago knew that they were smarter than those guys. Harvard was a vocational school compared to Chicago. A.S.: I tried to start a small company during my residency program at [the University of Pennsylvania]. Normally, patients on a blood thinner called Coumadin get tested in the hospital, clinic, or the lab [to assess how fast their blood clots]. We were trying to start a company that was going to do Coumadin monitoring based on a portable test. It was a novel concept, but, unfortunately, it was too novel. The hard part wasn’t the science: We had a lot of good data. The issue was the business model was fundamentally flawed because insurance companies wouldn’t reimburse the concept. I also had no concept of what venture capital was. It’s a really opaque entity that doesn’t exactly hang a shingle or have a 1-800 line that you can call. So, it was a very eye-opening experience, and I saw that the intersection of business and medicine is a very interesting place to be.
know very quickly how a business concept or a company fits into the realm of health care. And being an internal medicine doctor, I’ve seen and studied all different types of diseases. That’s important because sometimes, say, a new diagnostic looks good on paper, but then I remember if that diagnostic test is going to take 40 minutes, that doesn’t really fit into the workflow if you spend an average 12 minutes per patient. But you can be a fabulous investor without having an M.D. Q: What stage do you like investing in? R.N.: We like early—before there’s a company, when there’s just a really cool idea. Highest risk and hypothetically highest return. A.S.: We try to take less risk than most. But no matter how much diligence you do and how well you think you know the science and mitigate the risk, this is biology and biology is complicated. Plenty of investments have not gone well. Q: What is an investment you made that didn’t work out well? A.S.: We had made an investment in a company called CeNeRx that was doing antidepressants through the monoamine
R.N.: Xcyte is a great example. We knew that if we took T cells out of humans and expanded them and put them back into humans that really cool things happen. It became the basis for what we call CAR T cells [a type of cancer immunotherapy] now. But it wasn’t enough to really cure people then. We were just too early. Q: How do you get ideas for companies? R.N.: I kind of avoid conferences. People who go to conferences are chasing old science, actually. If you don’t know about it a year ahead of when it’s presented at the conference, then you’re probably not up to speed on where the technology is. Scientists don’t tell other scientists in their fields what they have. But they will tell investors. We mainly go to universities and find out who the top five or 10 smartest people are. You can look at publications, you can look at grant funds, you can look at young investigator awards, and then just ask people. We back good scientific DNA, and we back good management DNA. We put all of them in a room and just see what happens. A.S.: People bring ideas to us, but oftentimes, the best ideas are ones where we understand there’s an unmet need, and then we try to go find solutions for that space. Those, I think, can also be the most rewarding. We generally invest, but on occasion, we form companies ourselves. If you’re trying to ride the wave, you’re oftentimes already late. You have to look across it and toward the horizon to see what’s coming and ride that one.
Q: Does a VC in the life sciences need a scientific or medical background? R.N.: I have a B.A. in biology, but Q: What are common misconceptions I consider it an advantage, actuyou run into? ally, that I don’t have an advanced R.N.: Most academic scientists don’t scientific degree. I’m an absorber: appreciate how hard it is to make a I learn my science by talking to a drug—how complicated it is to take bunch of smart scientists. I’ve never a molecule and make it safe and how worked in a lab and I have very much it costs to do all that. There thin knowledge in those areas. But are a few who have been through it the best investors are people who before, but it’s kind of hard to teach actually know how to bet on people people that. People’s emotions also get and have a sense of whether the in the way when it’s about their sciscience is good. The people that get ence or money. They can understand lost in the weeds in the science are that statistically there’s a high failure usually poor investors, because if rate. But those failures are other you ever really thought about how people’s drugs, not theirs. much risk there was in these things, A.S.: For a new entrepreneur coming you would never invest in anything. Robert Nelsen: “The people that get lost in the weeds in the science through, it’s hard. And it’s not just And so you have to do this based on are usually poor investors.” about the money. Working with the a belief and faith that big problems right venture capitalist can help you that people will tell you are not solvable oxidase pathway. We had a drug that had a get there quicker and hopefully with less are solvable. proven mechanism of action—we even saw risk. But it doesn’t mean it’s going to be A.S.: For me, being a physician is integral that the drug was actually making it into easy. I could go and say, “I got funded by soto doing this job. I’m board-certified in the brain, the site of action. We had all the and-so well-known venture fund” and that’s internal medicine, so I did see patients and basic science pieces worked out. But the great. It’s a huge milestone for any entrepregot extensive training. It really helps me trial failed. neur. But it’s just the beginning. ■ SCIENCE sciencemag.org
12 JUNE 2015 • VOL 348 ISSUE 6240
Published by AAAS
1195
NEWS | F E AT U R E S
Anthony Sun: “Biology is complicated. Plenty of investments have not gone well.”
GIVE US YOUR BEST PITCH
S
ome like it risky. In 2014, venture capitalists pumped $8.6 billion into nearly 800 deals with fledgling biotechnology and medical device companies in the United States. It was the biggest cash infusion that the life sciences sector has received from venture capital in 6 years, according to the end-ofthe-year analysis in the MoneyTree Report. But most researchers who have great ideas (in their minds, anyway) for treatments, preventives, or diagnostics have only a vague notion how to transform their science projects into “value propositions” that can raise the millions needed to commercialize a concept. And fewer still have ever crossed paths with those who hold the purse strings: the venture capitalists, or VCs for short. VCs invest in scientific ideas they judge as hot, backed by investors such as pension funds and endowments, wealthy families, and “high net worth” individuals. Investors usually require that VC firms put some of their own money on the table, too. They provide guidance to the companies 1194
(which often means a seat on the board of directors) and ultimately hope to “exit” with a big windfall in 3 to 5 years, when the startup is gobbled up by a bigger company or goes public. Although the life sciences have never spawned a Google or an Amazon.com and often require longer term investments than other sectors, life science VCs can reap handsome profits for their backers and themselves: Between 2000 and 2010, investors who exited earned 15% returns, nearly four times the gain in the S&P 500 over that time period, according to an analysis published in the July 2011 issue of Nature Biotechnology. Science spoke with two VCs about their backgrounds and perspectives. Robert Nelsen, based in Seattle, Washington, is a co-founder of ARCH Venture Partners, which has funded more than 160 companies, including Illumina (sequencing), deCODE Genetics (genomics), and, more recently, Juno Therapeutics (cancer immunotherapy). Anthony Sun works across the country in
By Jon Cohen
New York City for Aisling Capital, which has a diverse, $1.6 billion portfolio that includes Chimerix (antivirals), Vivus (erectile dysfunction), and ZELTIQ Aesthetics (nonsurgical fat reduction). Nelsen does not have an advanced science degree, while Sun earned an M.D. at Philadelphia’s Temple University School of Medicine in 1997. Both went into the venture capital business immediately after finishing a master’s in business administration. Like scientists, VCs have a specialized language, and they can baffle outsiders when they speak of “halo deals” (highly profitable investments that cover shakier ones), “lockup periods” (time windows when investors can’t trade shares), and “family offices” (firms that manage investments for groups of wealthy relatives). VCs also have different appetites for risk—some like only early-stage, big gambles, whereas others favor more mature companies that have revenue. Science interviewed Nelsen and Sun separately, but their answers, edited for brevity and clarity, are combined here. sciencemag.org SCIENCE
12 JUNE 2015 • VOL 348 ISSUE 6240
Published by AAAS
PHOTO: DREW GURIAN
Two venture capitalists explain the investor’s mindset
NEWS | F E AT U R E S | E N T R E P R E N E U R S H I P
PHOTO: NATALIE FOBES
Q: How did you become a venture capitalist? R.N.: I kind of fell into it. When I got to the University of Chicago [for an MBA program], I started volunteering for an organization that eventually became ARCH, and I was the first employee. The trustees of the university created it to form a startup infrastructure with Argonne National Labs. They couldn’t figure out why all this cool stuff was happening in Boston and California when, of course, everybody at the University of Chicago knew that they were smarter than those guys. Harvard was a vocational school compared to Chicago. A.S.: I tried to start a small company during my residency program at [the University of Pennsylvania]. Normally, patients on a blood thinner called Coumadin get tested in the hospital, clinic, or the lab [to assess how fast their blood clots]. We were trying to start a company that was going to do Coumadin monitoring based on a portable test. It was a novel concept, but, unfortunately, it was too novel. The hard part wasn’t the science: We had a lot of good data. The issue was the business model was fundamentally flawed because insurance companies wouldn’t reimburse the concept. I also had no concept of what venture capital was. It’s a really opaque entity that doesn’t exactly hang a shingle or have a 1-800 line that you can call. So, it was a very eye-opening experience, and I saw that the intersection of business and medicine is a very interesting place to be.
know very quickly how a business concept or a company fits into the realm of health care. And being an internal medicine doctor, I’ve seen and studied all different types of diseases. That’s important because sometimes, say, a new diagnostic looks good on paper, but then I remember if that diagnostic test is going to take 40 minutes, that doesn’t really fit into the workflow if you spend an average 12 minutes per patient. But you can be a fabulous investor without having an M.D. Q: What stage do you like investing in? R.N.: We like early—before there’s a company, when there’s just a really cool idea. Highest risk and hypothetically highest return. A.S.: We try to take less risk than most. But no matter how much diligence you do and how well you think you know the science and mitigate the risk, this is biology and biology is complicated. Plenty of investments have not gone well. Q: What is an investment you made that didn’t work out well? A.S.: We had made an investment in a company called CeNeRx that was doing antidepressants through the monoamine
R.N.: Xcyte is a great example. We knew that if we took T cells out of humans and expanded them and put them back into humans that really cool things happen. It became the basis for what we call CAR T cells [a type of cancer immunotherapy] now. But it wasn’t enough to really cure people then. We were just too early. Q: How do you get ideas for companies? R.N.: I kind of avoid conferences. People who go to conferences are chasing old science, actually. If you don’t know about it a year ahead of when it’s presented at the conference, then you’re probably not up to speed on where the technology is. Scientists don’t tell other scientists in their fields what they have. But they will tell investors. We mainly go to universities and find out who the top five or 10 smartest people are. You can look at publications, you can look at grant funds, you can look at young investigator awards, and then just ask people. We back good scientific DNA, and we back good management DNA. We put all of them in a room and just see what happens. A.S.: People bring ideas to us, but oftentimes, the best ideas are ones where we understand there’s an unmet need, and then we try to go find solutions for that space. Those, I think, can also be the most rewarding. We generally invest, but on occasion, we form companies ourselves. If you’re trying to ride the wave, you’re oftentimes already late. You have to look across it and toward the horizon to see what’s coming and ride that one.
Q: Does a VC in the life sciences need a scientific or medical background? R.N.: I have a B.A. in biology, but Q: What are common misconceptions I consider it an advantage, actuyou run into? ally, that I don’t have an advanced R.N.: Most academic scientists don’t scientific degree. I’m an absorber: appreciate how hard it is to make a I learn my science by talking to a drug—how complicated it is to take bunch of smart scientists. I’ve never a molecule and make it safe and how worked in a lab and I have very much it costs to do all that. There thin knowledge in those areas. But are a few who have been through it the best investors are people who before, but it’s kind of hard to teach actually know how to bet on people people that. People’s emotions also get and have a sense of whether the in the way when it’s about their sciscience is good. The people that get ence or money. They can understand lost in the weeds in the science are that statistically there’s a high failure usually poor investors, because if rate. But those failures are other you ever really thought about how people’s drugs, not theirs. much risk there was in these things, A.S.: For a new entrepreneur coming you would never invest in anything. Robert Nelsen: “The people that get lost in the weeds in the science through, it’s hard. And it’s not just And so you have to do this based on are usually poor investors.” about the money. Working with the a belief and faith that big problems right venture capitalist can help you that people will tell you are not solvable oxidase pathway. We had a drug that had a get there quicker and hopefully with less are solvable. proven mechanism of action—we even saw risk. But it doesn’t mean it’s going to be A.S.: For me, being a physician is integral that the drug was actually making it into easy. I could go and say, “I got funded by soto doing this job. I’m board-certified in the brain, the site of action. We had all the and-so well-known venture fund” and that’s internal medicine, so I did see patients and basic science pieces worked out. But the great. It’s a huge milestone for any entrepregot extensive training. It really helps me trial failed. neur. But it’s just the beginning. ■ SCIENCE sciencemag.org
12 JUNE 2015 • VOL 348 ISSUE 6240
Published by AAAS
1195
