Jeff Behrens, “Why You’re Wrong About Biotech Funding”

Jeff Behren’s doctoral dissertation suggests that life science startups are not funded the way we all think they are. Listen to our discussion of his work and learn why he believes we have to revise what is taught to founders in entrepreneurship classes about how to raise money.


  • Sal Daher Welcomes Jeff Behrens Back on the Podcast to Discuss His Findings on Biotech Funding
  • “We published papers. We had a world class SAB, and ultimately, we sold these drugs. So, during that, you’d think, “Well, we should be able to raise venture capital.” We never could.”
  • The Conventional Wisdom about How Life Science Startups Are Funded 
  • Casma Therapeutics as an Example of a Startup Born Inside a Venture Firm
  • “There was no Lisa and Joe… There [was] no outside founders. This was born inside the venture firm.”
  • Jeff’s Research Result: Only 8% of All Startups Follow Path of Angel Funding Then VC Funding
  • Jeff’s Research Result: For Biotech Startups, 4.5% of those that Started with Angel Money Got VC Funding
  • “So, it’s almost like these are two distinct entrepreneurial streams that don’t intermingle very much.”
  • Angel Investors Should Not Expect Future Rounds to Come from VCs – Should Think About How to Fund Future Rounds in the Absence of VC Money
  • “Well, we want to have fewer new companies and more companies that we invest longer and heavier and over time.”
  • Jeff’s Research Result: In a Decade VC-Started Biotechs Went from Taking 20% of Funded Deals to Taking 80%
  • The Big Biotech VCs Don’t Take Pitches from Outside Companies Anymore
  • Only 3% Funding Goes to the Scrappy Biotechs Who Were Not VC-Founded or Did Not Have Famous Founders
  • Scrappy Biotech Startups Need to Draw a Credible Path that Does Not Include VC Funding
  • Corporate Venture Groups Created to Allow Big Players to Look at New Technologies
  • Being Funded by a Corporate VC Does Not Seem to Increase the Chances of a Venture Being Acquired
  • Trends Among Life-Science VCs Vary Geographically: Boston, NY vs. West Coast
  • “We never take pitches” – Dave Berry – Partner – Flagship Pioneering
  • Accelerators, Business Schools, Advisors Need to Revise their Ideas about Funding of Biotech Startups
  • “So, it is true that Polaris is probably… Of these companies that are doing venture creation, they’re probably more balanced than the others.”
  • Path Dependency of Funding
  • “…unfortunately, great science can languish unfunded.”
  • Parting Thoughts from Jeff Behrens, PhD

Transcript of “Why You’re Wrong About Biotech Funding”


Sal Daher Welcomes Jeff Behrens Back on the Podcast to Discuss His Findings on Biotech Funding

Sal Daher: Welcome to Angel Invest Boston, conversations with Boston’s most interesting angels and founders. Our guest today is an alumnus, Jeff Behrens. Welcome, Jeff. 

Jeff Behrens: Good morning. Good morning, Sal. 

Sal Daher: Great to have you on. Now, in Jeff’s original podcast, he talked about his background, his biography, and so forth. Today, our conversation is going to be focused on the topic of his doctoral thesis defense on the funding of biotech companies. It’s a topic of burning interest to me, because I’m an investor, early stage investor in startups. Jeff is somebody that I respect very highly. We’re on a board together. He has been the CEO of a very important company. He’ll talk a little bit about that when we get into the results of his research. So, take it away, Jeff. 

Jeff Behrens: Thanks, Sal. Maybe I can just start with one of the motivations for this research and I’ll come back to the PhD in a second. But it really was while I was running Siamab, which as you heard in our last conversation a few months back, was a seven-year process of raising $20 million, building some cancer drugs, and ultimately, getting a pretty decent exit last summer to a large pharmaceutical company. Actually, we ended up doing two deals. But during that time, one of the major frustrations through the entire process was our inability really to get traditional institutional venture capital. 

“We published papers. We had a world class SAB, and ultimately, we sold these drugs. So, during that, you’d think, “Well, we should be able to raise venture capital.” We never could.”

We had Novartis involved as an investor. We had a deal with Boehringer Ingelheim and another very large pharmaceutical company in Europe. We had a deal with a local biopharma, Momenta Pharmaceuticals. We had won all these grants. We published papers. We had a world class SAB, and ultimately, we sold these drugs. So, during that, you’d think, “Well, we should be able to raise venture capital.” We never could. I probably pitched to over 200 firms over the course of those years. It was always frustrating. 

Frankly, I’d ask the question, somewhat rhetorically, “Was it me? Is it something with how I’m presenting? Is it something about our product? What was that?” That I think was one of the things that I really wanted to understand in a more rigorous way. So, stepping back for a second, I had an opportunity to start a PhD late in life, which is a little bit nutty to do, but there was an opportunity in a way that was cool. I’ve always been interested in the academic side of things. I had done a master’s thesis on venture capital investing and healthcare performance over a decade ago. I really enjoyed that, but I could never imagine dropping out of work and going to school full time. So, was there an equivalent of like an executive MBA for a PhD? 

I ended up finding a program by accident in Lausanne, Switzerland, where I had been traveling to one of their top tech universities in Switzerland called EPFL, École Polytechnique Fédérale de Lausanne. They have an external PhD program designed for business executives while they’re there running companies and working. Just spend a few weeks a year in Lausanne, do a lot of things remotely, and then do research. So, I got involved with that program and really enjoyed it. Just wrapped up, as you know, with a public defense last week, but part of that process, you take a bunch of classes, then you got to do a research program. So, there was an interesting intersection between my need to find a research program to get engaged in a project, a question, and this puzzle around Siamab. 

So, that’s what brought me here. I think there’s more than just our example. You know that I run LabShares, which is an incubator for biotech companies. We have 20 or so companies. Another company that I changed the name of called ABB Bio has raised money from a big hospital venture capital group, Chinese venture groups, has raised over $10 million phenomenal technology. They too have struggled with converting over to mainline mainstream venture capital. And then the last thing that really struck me as something that those of us in the biotech world know well, I think it’s a little bit less observed outside, is that certain companies seem to be being born inside the venture capital firm. 

The Conventional Wisdom about How Life Science Startups Are Funded 

The way that we’re taught this in business school, the way that many of us talk about this is two people in a garage, Lisa and Joe start a company. They dream it up, and then they go into their garage. They start working, and they convince their friends and family to put a little money in, things look good. So, they go out to the angel community, raised some angel money. And then with that money, they build prototypes, or they make some progress and beta versions of something. And then they go out and raise the real funding, the VC funding, to really launch the product to go commercial. And then they go public, and everybody wins.

Sal Daher: Jeff, if I could interrupt you. Yeah, while they’re in the garage, they get seed funding from their family. They get some angel funding along the way. Eventually, they go to the big league, the VCs.

Casma Therapeutics as an Example of a Startup Born Inside a Venture Firm

Jeff Behrens: Right, right. But what was interesting was that this didn’t seem to be the pattern that a bunch of the venture finance companies in Boston in biotech were following. I use an example of a company called Casma Therapeutics that was born about two years ago out of Third Rock Ventures. When you dig in, they’ve got a traditional press release. I’m friends with the CEO, a guy named Keith Dionne, who’s fabulous. Well, it turns out that he worked a year and a half before the company was formed [as an EIT]. And then he became CEO of Casma.

Sal Daher: Entrepreneur in residence. 

Jeff Behrens: Yup. 

Sal Daher: SAB is Scientific Advisory Board, entrepreneur in residence. 

Jeff Behrens: Yeah, yeah.

Sal Daher: I’m sorry, for the podcast, that is.

Jeff Behrens: Keep translating, please. Thank you. 

Sal Daher: Yes, yes.

“There was no Lisa and Joe… There [was] no outside founders. This was born inside the venture firm.”

Jeff Behrens: And then you read the press release. You see that they had a team that they announced as part of the funding of the company. Got in Bob Tepper as the interim CSO, but he’s also a co-founder of Third Rock. Similarly, their CBO, Chief Business Officer, was a partner at Third Rock. So, the entire management of this company, Casma, at the beginning, at its birth, was Third Rock. There was no Lisa and Joe, one of the two names. There was no outside founders. This was born inside the venture firm. So, this is a curious thing too. 

So, this led to two questions, right? How often do companies actually follow this, what’s supposed to be the common goal? Born in the basement in the garage, raised the angel money, go on to raise venture capital. How common is that? I think that was the core thing I was trying to answer. Jumping right to the answer, it’s incredibly rare. It turns out that is not at all how companies actually are born. A few do.

Sal Daher: Even in the good old days, you think?

Jeff’s Research Result: Only 8% of All Startups Follow Path of Angel Funding Then VC Funding

Jeff Behrens: I looked at data from 2000 to 2015. I looked across multiple industries. So, I looked into biotech, general healthcare, high tech software and hardware, clean energy. Across all of those companies, only 8% of the companies in this data set of over 40,000 companies did that path, born in angel, graduate to venture, only 8%. 92% don’t do that. If you look at biotech, it’s even more dramatic. Only about 4.5% percent of the companies are born into angel and graduate to raise venture. So, that it made me feel a lot better about Siamab that I wasn’t alone.

Jeff’s Research Result: For Biotech Startups, 4.5% of those that Started with Angel Money Got VC Funding

Sal Daher: It wasn’t bad breath or something. It was just a condition of being a biotech startup at a time when VCs are not investing – creating their own startups.

Jeff Behrens: Yeah. It’s a fascinating dynamic, because it has all sorts of implications. That’s not the way that biotech firms are being funded. It seems like the way they are is they’re either born into the angel world. At the time, I used to call it angel land or scrappy land. These are the scrappier companies. They often just stay there. They may get some grant money, like we did at Siamab. They may get a deal or an exit, but pretty rarely, they go on to raise venture capital. Similarly, those that are born into venture land, stay there. So, it’s almost like these are two distinct entrepreneurial streams that don’t intermingle very much. There are exceptions. There are always exceptions, but not a lot. 

“So, it’s almost like these are two distinct entrepreneurial streams that don’t intermingle very much.”

So, I think that was one of the first really interesting findings that really was surprising to me and I think surprising to a lot of the folks in the academic business school community that I’ve shared this with. This is not how it’s supposed to work. Venture capitalists are supposed to be evaluating business plans, listening to pitches, selecting where to invest their money, and picking teams that they’re really good stock pickers of private companies. It turns out that’s at least in the biotech world not what they’re doing much of, and even less so that we think in other areas too. There are three papers. Let me touch on all three, then we can dive into them a little more deeply if you’d like.

Sal Daher: Okay, so let’s just recapitulate the upshot from paper number one. Paper number one is the traditional model of Joe and Mary in a garage, friends and family round, angel round. They prove out this product. And then they go to a VC. The VC funds them. And then they go public or they get acquired, so forth. That doesn’t happen. The VC funding happens only 8% of the time.

Jeff Behrens: That’s right. That’s again across all companies in healthcare to biotech to [inaudible 00:09:19].

Sal Daher: In biotech, it’s only 4.5%. That was at biotech, medical equipment. Is it just biotech?

Jeff Behrens: So, I used the coding that was provided by Crunchbase, which is the data source. So, I was really looking at, I think, true therapeutics. There are probably some diagnostics that are in there as well, not as much med tech, med device. So, pharmaceuticals, diagnostics, therapeutics. There’s important lessons in that for angel investors, right? I’ve gotten to know a bunch of angels who have been super helpful in companies I’ve been involved in.

Sal Daher: He’s gotten to know a lot of angels. You raised $14 million from angels. You’ve gotten to know a lot of angels.

Angel Investors Should Not Expect Future Rounds to Come from VCs – Should Think About How to Fund Future Rounds in the Absence of VC Money

Jeff Behrens: We’re doing it with a new company now as well, alongside some venture, but I’ll come back to that. I think one of the lessons is I think that if you’re running a venture group and you’re investing in these kinds of companies, particularly the life sciences, the biotechs, don’t expect that the later funding comes from the venture community. That’s just probably not going to happen. 

So, instead, you need to think about as an angel investor, maybe the future money’s going to have to come from us too. That we’re going to put in potentially multiple rounds, potentially increasing rounds in biotech. We better plan for that. We better set up a structure where we bring back companies, not just for a quick update, but for a second pitch, because they’re going to be coming back, but they’re not going to necessarily be graduating. You can’t expect them to graduate to other sources of financing. 

That’s an important change that a lot of angels, I think, at least the groups that I’ve gotten to know, don’t typically… They’ll support those as best they can. But they seem to be much more looking at how many new companies can we bring in through this funnel and having three new pitches every meeting and if we have five minutes for an update. Well, maybe in this model, you might say, “Well, we want to have fewer new companies and more companies that we invest longer and heavier and over time.” So that I guess I call it paper number one. There’s implications for entrepreneurs too, which let me know if you want to dive into those entrepreneurial implications or go into paper number two.

“Well, we want to have fewer new companies and more companies that we invest longer and heavier and over time.”

Sal Daher: Let’s do paper number two, and then we can come back to the implications for entrepreneurs. 

Jeff Behrens: Sure. So, paper number two was leaning into this founding phenomenon that venture firms, particularly in Boston and particularly in biotech, seem to be acting as the entrepreneur and there’s no other entrepreneur around. There’s no one pitching them. So, I wanted to try to look at this carefully. So, I went ahead and pulled out every venture capital biotech deal across four different years, from 2007 to 2008 and 2017 to 2018. So, I looked at every single A round, biotech deal, no matter how it was funded. It had to be of at least $5 million. 

I went through the press releases and LinkedIn and websites and every way I could to try to figure out, “To what extent was there anybody working in the firm that is working in the new company, the new biotech company that came out of the venture firm?” Because my assumption was if some of the staff in the new co were from the venture firm, the venture may have been more involved in giving birth of the company. But if all the staff are different, maybe they’re set. So, that’s the criteria I used. 

Jeff’s Research Result: In a Decade VC-Started Biotechs Went from Taking 20% of Funded Deals to Taking 80%

What I found was that recently 2017 to 2018, in the top four firms, so Third Rock, Atlas, Flagship and Polaris, that did the majority of the deals in the Boston area. I only looked at Massachusetts here. Of those, the vast majority were founded by these folks. So, that’s not necessarily surprising. That’s about what I’ve observed. So, 9 out of 10 that Third Rock did, 10 out of 11 from Atlas, 13 out of 15 from Flagship and so on. So, that’s an enormous amount that’s being started by the venture firm. They’re only investing in outside stuff rarely.

Sal Daher: By the way, listeners should know that we’re looking at a slide deck, which is going to be available on the website for people to look at. Jeff, can we go back to Polaris? In 2017 to 2018, they did 9 deals. Of those, 6 were companies funded, they funded 3 deals outside. Whereas Third Rock funded only 1 deal outside out of the 10 deals that they did. Same thing for Atlas out of the 11. Flagship pioneering 15 deals, only two of those were outside deals. Okay. The reason for Polaris is because I want to bring up a company that’s funded by Polaris that I’m invested in, so I know a little bit about them later. Okay, so please continue.

Jeff Behrens: So, when you look at the same question 10 years before, 2007, 2008, it was a lot different. When you do the math on it, it’s something like 85 to 90% of those venture investments in biotech that you just talked about, we just talked about, are founding VC investments. They’re not funding someone else they’re founding, so huge number. But a decade ago, it was much lower, it was only in the order of about 22%. So, it was a much more rare occurrence. So, it’s dramatically increased in a decade.

Sal Daher: So low 20s to 80 something percent in a matter of how much time?

Jeff Behrens: In a decade.

Sal Daher: In a decade. So, basically, the VCs went for funding 20 something percent of companies they fund it being?

Jeff Behrens: They gave birth to 20% back then. They’re giving birth to 80% now.

Sal Daher: They’re rolling their own for 80%. Okay.

The Big Biotech VCs Don’t Take Pitches from Outside Companies Anymore

Jeff Behrens: Well, that’s important, because that means that there’s very few companies today that they’re funding that are coming from the outside. So, it doesn’t matter how good the pitch is, doesn’t matter how good the entrepreneur is, doesn’t matter how good the deck is. They’re just not doing it. That’s dramatic, because it was very supportive of the first paper that I wrote. This helps explain why it’s hard for companies like Siamab or ABB Pro, as I call it, to get these folks to invest, because that’s not what they do anymore. They’re not looking at business plans, they’re not making those investments. 

And then it gets even worse, because although 80% of those that we looked at, when we look at the full set of companies… This is from 2017 to 2018, so two-year period, a couple years ago. There were 60 companies that I looked at total, 59 to be exact. Of those, 35 are VC funds. There’s only 60%. Sorry, it wasn’t 80%. It’s only 60%. Still a big number, and more than twice what it was back a decade ago. But if you look at in terms of capital, where’s the dollar, because those companies put a lot of money in. Although 60% were what they founded, 70% of the capital went to them. That leaves about 30% of the capital. If not the VCs, who else starts these companies? 

Only 3% Funding Goes to the Scrappy Biotechs Who Were Not VC-Founded or Did Not Have Famous Founders

I looked at these other categories that are ringers, call it that, star academic, like Bob Langer, a name that you know, a serial entrepreneur who’s done it several times or a spin out from a big company. So, when you add those companies in, they’re not the scrappy startup out of the garage, that brings the number up to like 85% of the company. So, that’s only about 15% are scrappy, get founded by the grad students that are going out there. But those companies only get 3% of the capital. So, 90% of the dollars go to these either VC founded or star academic companies. Only 3% of the dollars go to the scrappies. It’s a brutal world if you’re a scrappy founded biotech. 

Let’s stop there. Because I think the third paper on institutional venture capital may be a little less relevant in this conversation. Let’s just talk about some of those implications that come out of this. Because if you just summarize paper number one, what I call the A to VC rate, the rate from Angel to VC is incredibly low. It’s 4.5% for biotechs and 8% for everybody else. The vast amount of capital today in biotech is not going to the scrappies, to companies that are being started in garages and funded in alternative ways. The vast majority is coming to venture-funded companies and particularly those that are being created born out of the venture firms itself. So, those are two things. 

If you think about some of the implications, they’re interesting. If you were a grad student coming out of a great lab at Harvard or MIT or Brandeis or wherever, and you want to start a company based on your work, what do you do? And then I got a bunch of these people coming to me every year asking for advice and networking as they should. That’s great. A lot of the advice they get is enter a business plan contest. Do the MIT $100K, go do Mass Challenge, go to Techstars, really spend months polishing your pitch. Then the VCs will listen to you. 

It’s an interesting and maybe not that helpful advice when you think about this data, because the worst thing that could happen to one of these folks may be is that they go ahead and start doing those things. They raise a little bit of seed capital, scrappy capital, angel capital. They enter business plan contests. They put together a phenomenal pitch. They work for a year at this. They even get data, they start to generate some positive experiments. But if they’re going to hit a roadblock that no venture firm is going to take it to the next step, they’re going to be stuck. So, it’s a really challenging situation for those potentially scrappy, entrepreneurial scientific founders. 

Sal Daher: Okay, it’s like someone who decides that he or she is going to have a career in Hollywood and doesn’t have a way to make any money. So, basically, they’re going to end up waiters or doing hourly work, trying to hit it big in Hollywood, where it’s one of these 99/1% thing. 99% of the people aren’t working very much and 1% are getting all the gravy. You’re like the parents telling the kid who wants to go to Hollywood, “Become an accountant instead or something,” almost like that.

Scrappy Biotech Startups Need to Draw a Credible Path that Does Not Include VC Funding

Jeff Behrens: Yeah, no, it’s a depressing… Look, I’ve been involved in many entrepreneurial companies, and I believe in it. Look, I think if a company could articulate a path to success that doesn’t require venture investors, that could say, “Look, we’re going to raise this round from angels, and then we’re going to raise some grants. So, we’re going to do a corporate deal. By then, we should be able to get to an exit.” If that becomes a credible story, that’s absolutely doable. It’s very different than raising a $50 million A Round, but it can be a credible way to build a great company and get to a good exit. Angels can participate heavily. 

But I think the key part is okay, let’s articulate the story, but don’t expect the white knight venture investors to come bail us out when we need the $25 million two years from now. That part of the story I don’t think is a credible storytelling for an investor.

Sal Daher: Maybe the experience that you had at Siamab, you might just explain your funding journey with Siamab.

Jeff Behrens: Sure, I was brought in by the first angel investors, four angels that put a couple million dollars in. I joined for a whole bunch of reasons, but one of the key reasons was that Momenta Pharmaceuticals wanted to invest alongside and wanted to get part of it, but they were looking for a more experienced management team. So, when I joined, Momenta put some money in. I knew some of the folks that the manager team at Momenta. That gave me a lot of credibility or give the company in my mind a lot of credibility around quality technology opportunity. 

And then that followed raising the first $2 million and then, as you said, $14 million total over the course of seven years. This was a couple million dollars at a time, every couple years. Also, $3 million in grant funding that we won over the course of that time. And then we did several pharma deals. All that together ended up being about $20 million in capital until our exit.

Sal Daher: How many angels did you bring in?

Jeff Behrens: Well, at the end of the day, the cap table had about 130 entries on it. Now, some of those were not angels. Some of those were some founders and some advisors that got equity, but it was around 100 plus or minus. It was a large number.

Sal Daher: I remember Bettina Hein complaining that her cap table at  Pixability had 45 angels on it. That is a stunning… so 100 angels.

Jeff Behrens: Yeah, it was a big number. What would happen is we’d go to a group like Boston Harbor or MassMEDIC or Launchpad. Early on, we got a bunch of folks involved from all of those. And then we go back, I said, a year later, two years later, and some of those people still would invest again. And then there’ll be new members that would step up or folks that had said no the first time. So, there was definitely this pattern of growing the investor base over the course of that time.

Sal Daher: You think that it might have been wise in conversations with angels originally to say, “Listen, this is not going to be the last race, okay? It is likely that we’re going to do several rounds. Think at least three rounds and plan accordingly. So, that you’ll be around for the second and third round if we’re heading in the right direction. So, getting the angels to stage the capital a little bit.”

Jeff Behrens: It what happened, but I don’t think we had it as well articulated. I’m not sure I would do a Siamab-style deal again, because it was classic drug development, huge capital requirements, big opportunity. The thing that motivated me to join at the time, among other things, quality of the science, the people, and all that, the founder was this Momenta Pharmaceuticals. I think, in retrospect, I don’t think I do that, again, unless a venture investor was investing alongside the angels as part me coming in and catalyzing that. I think, you know I’m involved in a new startup called GelMEDIX. 

One of the things that I’m doing there is exactly that. I was particularly intrigued. The founder’s great. The science is great. But also, there is strong interest in the venture community right up front. The Seed Round, we’re doing both a combination of traditional venture investors and angels. I think it’s a great way for angel investors to play. But the assumption is this is a venture deal led by the venture group. The full A Round after the seed is going to be co-led. We already know who the two venture firms. We’re going to co-lead it. That was one of my key criteria in choosing the opportunity.

Sal Daher: Jeff, send me the pitch deck.

Jeff Behrens: Sure. Absolutely.

Sal Daher: So, did you want to touch on paper three at all or…

Corporate Venture Groups Created to Allow Big Players to Look at New Technologies

Jeff Behrens: The third paper, I was really just trying to understand a little bit more around corporate venture capital. This is an interesting phenomenon, because in the biotech world and outside too, so Intel and Microsoft and other seven venture groups, but in biotech, it’s a big opportunity. There are Novartis and Pfizer and all of the big and even midsize pharma companies have venture arms. Some of those venture arms are really distinct from and separated from the parent. Some of them are pretty close. I was involved with one. When I started in biotech 15 years ago, I was working at Biogen’s venture group. The theory I think, the literature, the corporate thinking is that this is another way to access external innovation. That pharma needs external innovation. 

By doing venture investing, you can touch some of the early stage companies. You can bring back ideas. You can learn about things that you may want to feed to your BD (business development) group to acquire down the road. It’s putting more capital into the field. So, that we all like it, right? I have found it equally frustrating to raise money from those groups. I did end up getting an investment from Novartis at Siamab and from Momenta, I mentioned. So, neither was from their venture group formerly. So, I was looking at that question, “Can you somehow see if it works? Does corporate venture capital lead to more M&A?” You’d think that companies that receive it, maybe more than will be acquired by those investors than not.

Sal Daher: Is it a signal to have an investment from a corporate venture capital?

Jeff Behrens: Yeah. 

Sal Daher: What were the results-

Being Funded by a Corporate VC Does Not Seem to Increase the Chances of a Venture Being Acquired

Jeff Behrens: You’ll see a difference in outcomes. Unfortunately, the data was unsatisfying. I did not see any difference in companies in biotech. I was only looking at biotech. The biotech firms that raised corporate venture capital alongside regular venture capital didn’t seem to have much different outcomes than those who just raised regular venture. It didn’t seem to change the game very much. So, that was sort of, I would say, so maybe surprising finding, because you’re supposed to believe that’s happening. It made me question a little bit the independent or autonomy of the corporate venture folks. 

The fact is they almost never invest alone anyway. It’s very rare to see a biotech firm that’s raised money from CVC, corporate venture capital investors, unless there is top tier institutional venture capital there too. So, it’s a little hard to see these guys as independent actors basically.

Sal Daher: Okay. Yeah, actually, it’s funny. I have an opinion on this, which is from just anecdotal experience. I’ve invested in about 60 companies. Along the way, some of those had corporate VCs in them. One of the things that sticks out to me is the corporate VCs don’t seem to be very particular about valuations. They accept valuations that are not necessarily… They don’t spend a lot of time figuring out the valuation. And then known cases where they were like the only VCs in. It set expectations for the company, which the company was not ready for. The product was not sufficiently developed. 

In one particular case, it was very innovative, very new. It had potential for being just really groundbreaking. But the company wasn’t ready, management wasn’t ready, the product itself wasn’t fully developed, it wasn’t fully implemented. There were mathematical models, but there weren’t the chips to actually perform all the calculations that are needed and so forth. So, it was a struggle. I think the company ended up not realizing, falling short, very far short of its potential. It merged with someone else, and it did okay. But I think that the corporate VC there raised expectations too much in the beginning. 

Trends Among Life-Science VCs Vary Geographically: Boston, NY vs. West Coast

But anyway, there seems to be geographic difference on this roll your own versus look at outside. It seems like VCs in Massachusetts, biotech VCs of Massachusetts are particularly prone to creating their own ventures. Whereas in other places, not so much. 

“We never take pitches” – Dave Berry – Partner – Flagship Pioneering

Jeff Behrens: You’ll definitely see an increase in the, you say, roll your own, giving birth to companies. That’s definitely an East Coast phenomenon much more than West Coast. The West Coast is starting to catch up for sure. You see those more than in Europe. I also took a look at that. So, that was interesting. I guess the fundamental thing I think I conclude with is that I think I ended my presentation with a quote from Dave Berry, who was a partner at Flagship Pioneering. Dave’s a friend, and I invited him to teach one of the classes that I teach at MIT. He talked about this whole phenomenon, he said, “Look, we don’t take pitches.” He basically said, “Don’t even send me your business plans.” 

Accelerators, Business Schools, Advisors Need to Revise their Ideas about Funding of Biotech Startups

I think that it led me to think to I want to be careful, because if we’re preaching this whole mantra, startup incubators and university business plan contest to focus on these pitches and these business plans, that that may be missing, at least in biotech, the mark for how things really happen. That may not be the right thing to focus people on, winning contests and free lab space, things. As opposed to getting out there, either to the venture community or the pharma community and getting that engagement upfront or recognizing it may not come for a very long time, if at all.

Sal Daher: Okay, let me talk to you about some particular cases that I’m familiar with, okay?

Jeff Behrens: Sure. 

Sal Daher: The reason I was looking at Polaris was that they had-

Jeff Behrens: It was six out of nine [crosstalk 00:28:29].

Sal Daher: Six out of nine were like internally created ventures, but they funded three ventures from the outside. Now, I’m thinking of 2015, SQZ Biotech got funded by Polaris. Polaris has done follow-on investments in them. I’m wondering if today SQZ might have been funded by Polaris, maybe they would not. Maybe they’ve progressed so much that now, they might have done a deal originally with the founders and say, “Guys, you want to come be part of our stable. This person will get you that person and so forth. You’re Chief Scientific Officer, but we’ll get you a CEO. We’ll get you somebody, and so on.”

“So, it is true that Polaris is probably… Of these companies that are doing venture creation, they’re probably more balanced than the others.”

Jeff Behrens: I think that’s quite possible, right? It’s obviously hard to be sure about these kinds of things. So, it is true that Polaris is probably… Of these companies that are doing venture creation, they’re probably more balanced than the others. I think, Third Rock, Atlas and Flagship are very heavily on this model of creating their own things. Polaris definitely does that, but also will work with… They know the Langer universe where they’ve been very engaged.

Sal Daher: Yes, SQZ is a Langer company. So, I think it puts it in a separate category.

Jeff Behrens: So, I think they’ve been a little more broad in their mechanisms or their business models, with their investment models, I guess, is the way to say it. I think historically, at least. 

Sal Daher: Okay. And then we have the phenomenon of PureTech, used to be PureTech Ventures and is now PureTech Health, which looked like early proponent of roll your own, creating your own ventures. They were a venture company, but they never invested. They only created their own, exclusively, 100%.

Jeff Behrens: They were a mirror of it. Yeah, exactly.

Sal Daher: They’re a mirror. Now, strictly, they are a pharmaceutical company, publicly held. Where do you put PureTech Health’s strategy in that universe?

Jeff Behrens: I don’t know PureTech well, I know a few of their portfolio companies. I think in some ways, they were very prescient, right? I think they were early on saying, “Look, these are complicated companies to create. If we can amass scientific talent and HR talent, legal talent, we can create a bunch of these things.” I think my understanding is they struggled for a while earlier in their life before they went public on UK Stock Exchange. 

I think before they had a lot of capital, I think they struggled with the idea… They were coming with phenomenal ideas, cool companies, really giving birth to some interesting… But I think they have trouble getting them funded. So, I think a lot of those companies suffered from those challenges. When they did get funded, PureTech couldn’t always play along on a pro rata basis. So, they could get in trouble that way too.

Sal Daher: It provided me an opportunity, because I was an investor alongside the early days when they’re trying to get people to come in, alongside what they call their founded companies. Yeah, their internal companies. They had the idea of having founded company that other people could invest in, including VCs and so forth. Some of the best companies in my portfolio came from that universe, from the PureTech universe, Akili Interactive.

Jeff Behrens: I think they’re very smart people, but I think the model works best when you not only can assemble the talent and the idea and the science, but have some capital to play, because otherwise-

Sal Daher: There’s capital behind it. Yeah, Daphne Zohar’s talent. See, that’s the interesting thing. I think if she had enormous piles of money behind her, she would not been able to cut the deals with the advisors that were so important to bring them in.

Jeff Behrens: Interesting. 

Sal Daher: Yeah, I suspect that if she had massive amounts of funding, she would have been more constrained in the kind of deals she could have done to bring in the tremendous vatiety… Because she has like stars. She has Bob Langer companies in there. She has all sorts of disciplines. She has like the top people in the discipline bought in to her projects. I’m saying, Daphne Zohar, because she’s the mastermind of the company. I really think it’s outstanding, and they are coming out. They’re going to do a lot better in the future, because their things are proving out. I mean, Follica is one of their companies that’s getting excellent results. If you have thinning hair, good news. 

Jeff Behrens: Akili is another one that was a really-

Sal Daher: Akili.

Jeff Behrens: … digital health. Yeah.

Path Dependency of Funding

Sal Daher: Exactly. So, that’s a different model, which is like extreme of what the VCs are doing. Oh, here’s another comment, okay? I have two investments in similar technologies. One company comes from one of these rockstar environments, and the other company perhaps has better technology. They’re doing similar things, except that the one that has the rockstar backing is doing extremely well. The one that doesn’t have the rockstar backing is really struggling to develop a technology that’s probably better. So, this path dependency, this funding path dependency to me is extremely important. Because if you have the right funding, you attract the right talent. If you have the right talent, then you attract more funding.

Jeff Behrens: Now, so you said that word earlier, signaling. I mean, I think we’d all like to believe that investors, whether VCs or corporate VCs or pharma, are really just looking at data, looking at science and making rational decisions. I think we have to say, “Wait a minute, that’s part of what’s happening, but because of the uncertainty and the risk in these long timeframes, that’s not all that happens.” A lot of what happens is they look for those signals. Well, is there another top tier investor in there? It’s much easier to make the case to invest once IBM’s already invested or whatever, or Third Rock has invested. 

“…unfortunately, great science can languish unfunded.”

I think, it goes back to this puzzle, unfortunately, great science can languish unfunded. That’s scary in a time when in COVID world, we need great science to be moving forward to solve these problems. We better hope that the great science is getting the great funding. But I think there’s market inefficiencies. That means is some good science, it’s not getting funded. Some bad science, it is getting funded. That means there’s opportunities, right? There’s opportunities to correct that markets, solve really important problems and make money.

Sal Daher: I think there is. Your work has inspired my approach to investing. Also, as I observe what’s happening with my portfolio, what’s left in my portfolio are these biotech companies which by luck, I have in there. They have some of the features that have allowed them to be attractive, despite the difficulty of angel funding, early stage funding and so forth. So, I value your work tremendously on this. 

Jeff Behrens: Thank you. 

Sal Daher: What do you think can be done? I mean, how does one address this?

Parting Thoughts from Jeff Behrens, PhD

Jeff Behrens: I mean, one is I think teaching. When we’re doing our business school lectures, when we’re doing pitch camps, and this is playing competitions, what I’m starting to tell young biotech entrepreneurs is, “Look, you may have some really great science. But if you can’t attract top tier capital, because it needs a lot of capital.” It like the advice to the kid who wants to go to Hollywood. You can go and try to be an actor, but boy, maybe what you want to do is go work for the studio for a while. Learn how the business works. And then, even with a few years of network and experience, then you can join an entrepreneurial film company that’s doing really cool, innovative stuff. It’s not just the raw science that’s going to make it work. It doesn’t mean don’t be entrepreneurial, because we both are huge fans. 

Sal Daher: Sure. 

Jeff Behrens: But recognizing that matching up, particularly in life sciences, the sources and amounts of capital that you need is just so critical. Look, there may be opportunities for funds. If there’s something that bridges between angel funding and venture that said, “Okay, there’s all these things that aren’t starting life in venture, but could be interesting, but for really good capital access.” Maybe there’s opportunities to create pools of capital that go after those kinds of opportunities in particular.

Sal Daher: Yeah. So, my thought of this is the idea of creating a fund that is angel friendly, a fund that plays with angels. So, you identify opportunities that are capital efficient, that have a potential of creating significant value, but which somehow has not caught the attention of the VCs who are creating their own bespoke startups. And then you also look very, very closely at the talent of the founding team. That they have the most important just the will to run this gauntlet of very, very tough fundraising and hiring people and convincing people to stay on and getting stuff done and getting resources. 

It’s a constant battle but being friendly to the angels and helping bulk up what angels do. I’ve always thought that there should be something like that. That’s something that’s always been in the back of my mind. Yup. It’s a little bit of what I try to do with my syndicates is to try to add bulk to existing angel investments. Anything else come to mind that you wanted to mention here?

Jeff Behrens: No, I just think that it’s a scary time on one hand, but it’s still a time when we’re in a place where there’s huge innovation happening in so many areas. I just read, there’s over 100 different vaccine trials going on with COVID right now.

Sal Daher: It’s phenomenal.

Jeff Behrens: No, 100 different vaccines being developed for COVID. Over 10 are already in human trials. That kind of innovation, I think we have lots of problems to solve in this world. Thankfully, we’ve got a lot of smart people innovating phenomenal things. I think we’re just going to find ways to get them capital to keep that going.

Sal Daher: Yeah, the thing about the life sciences, Jeff, compared to driving around in the fog. In the fog, you can’t see very far, and you try to turn on your lights to see even less. With life science, it’s the same thing. It is such a vast field. If you look a little bit outside of your specialty, you cannot understand really what’s going on. The biological systems are so complex, because they’re evolved systems and they’re not efficient. It’s not physics. It’s not kinetics, which is very clear. So, I think, we have to have very humble approach to these things. At the same time, I think there’s just massive potential.

Jeff Behrens: Absolutely, absolutely. 

Sal Daher: Okay. Well, I think this has been a masterclass in how to fund your biotech startup. If you’re a postdoc, if you’re a young faculty member who wants to go out and do this, listen to Jeff’s advice. Go over to the other side, spend some time in pharma, get to know some of the VCs, because maybe they’ll bring you into their stable. You might be someone that they will hire into their own internally created firms. Get out of the lab, get out of your cocoon, and meet some people.

Jeff Behrens: I think that’s right. Another thing I’d add to that is there are ideas that don’t need hundreds of millions of dollars. There are ideas for repurposing drugs, for doing certain kinds of diagnostics, products that may get a lot more interest from pharma earlier on. So, if you’re either going to go to the other side, get to know that world well, part of that is okay. See what kinds of things can be done with less capital, what kinds of things can be done with early transactions and look at those two.

Sal Daher: Yes, yes. Really, tremendously valuable. Jeff, I thank you for taking the time to do this. As I said before, the deck with all this information will be available on the website. There’ll be a link on the episode notes, so you can refer to that. Thank you very much for making the time.

Jeff Behrens: It’s always a pleasure. I’m sure we’ll talk again soon. Thanks.

Sal Daher: Excellent. This is Angel Invest Boston. I’m Sal Daher. 

I’m glad you were able to join us. Our theme was composed by John McKusick. Our graphic design is by Katharine Woodman-Maynard. Our host is coached by Grace Daher.