Life in Beta

(This post originally appeared on the main True Ventures blog)

Recently, there have been a number of thoughtful blog posts on different models for funding emerging opportunities in human health and biology:

Biotech Researchers Venture Into the Wild
by Jorge Conde 

The $100 Trillion Opportunity
by Arvind Gupta

How Biotech Startup Funding Will Change in the Next 10 Years
by Jared Friedman

The Creation of Biotech Startups: Evolution Not Revolution
by Bruce Booth

All are excellent posts, and I recommend reading them if you’re interested in this market. I won’t rehash what they’ve already covered, but I would like to share True’s perspective and how we’ve approached investing in this emerging ecosystem.

Our focus at True has always been to fund the very best founders wherever they’re spending time. In 2005, many of these individuals were building new consumer products and media services on the web. These were enabled by new platforms, open-source software tools, and infrastructure services, which allowed for lower-cost tinkering and easier initial experimentation with new, bold ideas.

Over time, we’ve seen many of the same forces draw founders into other markets including infrastructure software, consumer hardware, human health, biology, and more.

In 2012, we made our first investment in this space when we funded Moleculo. The company was founded by Mickey Kertesz and Dmitry Pushkarev, two individuals with dual PhDs in biology and computation. As part of their research at Stanford University, they enabled long-read sequencing of DNA with a combination of tagging and algorithms using existing Illumina hardware.

When we met with them, we were unsure if Moleculo was the type of investment we’d make. Our firm didn’t have any direct experience with biology or DNA sequencing. However, we were captivated by several facets of the investment, which matched our sweet spot at True:

1. The founders had unique cross-discipline expertise which let them view the opportunity in a new way.

2. We were introduced to the founders by members of the True community whom we trust.

3. The founders had incredible ambition to reshape a big market by initially focusing on a small initial wedge.

As we spent more time with the team, we recognized that many of the same forces that enabled our earlier investments in software and media startups were in play here as well and could enable the company to reach meaningful milestones on fewer initial investment dollars.

These included:

• Combining software and automation to increase efficiency.
• A bottoms-up sales model where the company initially sells to individuals, rather than big enterprise, to build evangelism and lower the company’s initial capital needs.
• Building a product on top of an existing platform with a built-in customer base.

Mickey introduced us to the founders of our second and third investments in this space. We source more than 50 percent of our investments from True’s founder community and take these organic introductions very seriously.

Josh Hoffman, Zach Serber, and Jed Dean previously worked together at biotech company Amyris before leaving to start their own business, Zymergen. The Zymergen team showed us that biotechnology could create an incredible number of new products and propel biology beyond traditional markets in healthcare.

Colleen and her Co-founders Jim Bullard and John Eid worked together previously at PacBio. They started Whole Biome to leverage their skills in long-read sequencing to understand and develop therapies for the gut microbiome.

At Whole Biome, the company chose to bring its first product to market as a medical food, which has a different regulatory and commercialization path. By focusing on the medical food path, they could launch a product to market more quickly than a traditional therapeutics business.

Building on our experience with Moleculo, Zymergen, and Whole Biome, we’ve since made more than 26 investments in companies focused on human health or biology. We’ve also established a strong relationship with life sciences accelerator IndieBio, which has proved to be a great match.

Over time, we’ve gotten better at understanding the types of businesses that will and won’t work with our funding model. Here are a couple of thoughts that drive our decision making in this space:

Focus on founders.

This is our north star at True. We believe that by backing the best, ambitious founders early, we will generate the best returns for our limited partners over the long term.

An example is Deep Genomics, an AI-driven drug development platform focused on genetic medicine. Deep Genomics Founder Brendan Frey is a world leader in his research field, which lies at the intersection of deep learning and human genetics.

Even though he had never run a company, we believed Brendan’s background made him uniquely positioned to be a founder and build a team around him over time to support the company’s long-term goals.

Similar to Brendan, we believe there is a class of incredible scientists out there who have the capacity to grow into leaders of a next wave of biology and health-driven companies, and we want to meet more of them.

Maximize early product and market risk. 

We believe there are an incredible number of large industries that will be disrupted by startups initially focused on reinventing small segments of those markets.

While the last century was dominated by petroleum-based materials and products, we think the next few decades will be defined by a more natural approach that uses biology as a technology platform. Zymergen, for example, is exceptional in creating products based on biology that were traditionally made with harsh chemicals.

We’ve also invested in companies at the other end of the value chain that are building new types of brands on top of these innovations in biology. Prime Roots Co-founders Kim Le and Josh Nixon are creating an alternative protein using fungi. These founders see a path from here to there and need a small amount of capital, support, and encouragement to test their ideas.

Look for outliers along the edge of emerging markets. 

We’ve focused on areas with product or market risk that we don’t believe fit the traditional biotechnology model. Our goal hasn’t been to compete directly with the existing firms in this space, but to follow founders into other emerging areas where we may have a different perspective.

One example is our investment in Vital Labs, which is taking a ‘software-centric’ approach to cardiac care for patients. Its initial product is a mobile application that uses the camera on smartphones to measure blood pressure. In the short-term, it lets the company get the product to market faster by not needing to ship a hardware device. Long term, we believe it gives the company the opportunity to provide better care by being able to more easily layer on additional services and biomarkers.

Another example is our investment in Filtricine, which is developing a non-drug treatment for cancer by using targeted nutrient deprivation. The founders at Filtricine developed their product as researchers studying metabolic disease at Stanford. This experience, combined with their previous work in developing traditional therapeutics, led to Filtricine’s differentiated go-to-market plan.

Both in the True portfolio and through spending time with IndieBio, we’ve been amazed at the large number of markets founders have attacked. These include food, beverage, packaging, materials, medical devices, consumer products, and more.

If testing a new idea requires meaningful amounts of capital, investors can become gatekeepers to innovation. But as the initial capital needs decline, that power balance shifts. Now, we see founders experimenting more frequently. We also see more founders with technical backgrounds in this space starting companies as full-time operational leaders.

Going forward, we think we’ll see even more convergence – not less. The book Complexity: The Emerging Science at the Edge of Order and Chaos by M. Mitchell Waldrop examines the magic of new ideas lying at the intersection of two or more fields of study, which we believe will continue here. Ultimately, that innovation is driven by the best founders who see the world in new ways, are curious, and want to try something new.

We remain active investors in great founders who are solving big and important problems in human health with biology. If you’re working on a solution at the intersection of multiple spaces and envision using biology to improve lives, we’d love to talk.

As a follow-up to a conversation at a recent team offsite, I was curious to compare how the geographic focus of our investments has evolved from True Fund I compared to our initial investment data for True Fund VI.

Fund I (Vintage 2006)
34 Total Investments
25 Bay Area Investments (74%)

Other Geographies:

Colorado
Texas
Utah
Nevada
Maryland
UK
North Carolina
New York

Fund VI (Vintage 2018)
25 Initial Investments (including investments in process, but not yet closed)
5 Bay Area Investments (20%)

Select Other Geographies:

Toronto (3x)
NYC (3x)
LA (2x)
Boston (2x)
Fully Distributed (2x)
Portland
Israel
Argentina

Also interesting, of our 5 Bay Area investments in Fund VI – 3 are companies building platforms at the intersection of AI, robotic automation, and biology for discovery or delivery of new potential therapies in healthcare.

(To compare, the total portfolio of Fund VI has a similar market mix to our previous funds – 20% consumer web + media, 40% enterprise + infrastructure software, and 40% other – which includes categories like consumer hardware, enterprise robotics, CPG, and computational biology)

This is an interesting shift for our portfolio over the past 12 years and one we believe will continue as the current emerging technology ecosystems continue to mature and new ones start to form across the globe.  (See our recent post on Toronto or our initial post on the topic related to Montana for more detail)

A core belief of True from the beginning is that great Founders are everywhere – our early investments from Fund I showcase that belief and we’re starting to see that early commitment to other geographies pay off in our performance data – both in terms of cash returns to our LPs and our large ownership stakes in high growth, high performance, scaling private companies outside of the Bay Area.

To add some additional context, two of our largest investments returns to date were based outside of the Bay Area – Ring in Los Angeles + Duo Security in Ann Arbor.  Looking at our portfolio today, many of our high potential private holdings are spread across the United States, Canada, and Europe including Peloton in NYC, Tray.io in the UK, Deep Genomics in Toronto.

This trend is probably best seen with where we’re allocating our investment dollars for our Select Funds.  We raised our first Select Fund in 2016 with the strategy of investing in the later stage rounds of our best performing portfolio companies.  Our most recent Select Fund (True Select III) was raised in 2018 and over 70% of the dollars deployed from this fund to date have been into companies based outside of the Bay Area.

In closing, I want to emphasize that we’re excited about this continued trend and want to work with the best Founders working on the most ambitious ideas – and believe they can be found anywhere in the world.

We’re very excited about the number of new ecosystems that are emerging across the United States (and the world) and we will continue to work to discover the best Founders to where ever  they are located.

With that context, if you’re looking for a strong lead for your pre-seed or seed round and you think we could be a good fit – please reach out – we’d be excited to hear from you.

 

Interesting NBER working paper on persistence in venture capital returns over time

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3226837

From the abstract:

We use investment-level data to study performance persistence in venture capital (VC). Consistent with prior studies, we find that each additional IPO among a VC firm’s first ten investments predicts as much as an 8% higher IPO rate on its subsequent investments, though this effect erodes with time. In exploring its sources, we document several additional facts: successful outcomes stem in large part from investing in the right places at the right times; VC firms do not persist in their ability to choose the right places and times to invest; but early success does lead to investing in later rounds and in larger syndicates. This pattern of results seems most consistent with the idea that initial success improves access to deal flow. That preferential access raises the quality of subsequent investments, perpetuating performance differences in initial investments.

It is interesting to read their analysis with the context of an earlier paper titled “Is a VC Partnership Greater than the Sum of its Partners?”

https://www.nber.org/papers/w19120

From the abstract:

This paper investigates whether individual venture capitalists have repeatable investment skill and to what extent their skill is impacted by the VC firm where they work. We examine a unique dataset that tracks the performance of individual venture capitalists’ investments across time and as they move between firms. We find evidence of skill and exit style differences even among venture partners investing at the same VC firm at the same time. Furthermore, our estimates suggest the partner’s human capital is two to five times more important than the VC firm’s organizational capital in explaining performance.

If you agree with the conclusion of the second paper (which is that VC returns are driven by individual partners not firms) – the first paper’s conclusions make sense – there is a short-term advantage to a firm by having a particular manager as part of the firm – but when that individual partner leaves – the skill + value leaves with them.

In general, I think this is true of traditional venture capital – but I think two sets of activities that are more natural to emerging firms may start to change this for them

1.

Focus on Firm Brand versus Partner Brand

Many traditional venture capital firms have had a focus on individual partners and their performance versus the firm’s performance.

This could lead to better deal flow for the individual (as well as better access to cheaper capital to downstream capital for his or her investment portfolio) – but the performance of a particular portfolio company is attributed to an individual versus the broader team or firm brand.

Examples of how this manifests is inclusion of investments by partner on a firm’s website or the annual enthusiasm around the Midas List.  (There are definitely counter examples to this – one example being Benchmark Capital)

In the emerging groups, such as Y-Combinator and Indie Bio – I think this is one of the most powerful parts of their model. Companies are highly associated with the investment firm – not an individual partner – and the downstream effect is that the firm gets to keep the “equity” value of its investments versus attribution being given to an individual partner

For YC – this is how they showcase their best performing portfolio companies (which includes only batch information – no information on who worked with any specific team)

https://www.ycombinator.com/topcompanies/

Similarly – Indie Bio (as an example of a vertical within SOSV) has done an amazing job positioning itself as the first call for the best scientists who want to become entrepreneurs and building a system that can screen thousands of companies to end up with 14 or 15 per batch

Having invested in a small fund by SOSV to invest in every company in Batch 2 and Batch 3 – we have been fortunate to have a close relationship with their team and have been able to watch watch how their brand has driven amazing top of the funnel demand (thousands of applications per batch) while the number of companies they select has remained the same (and has increased the quality of each batch over time)

For both YC + Indie Bio – they have built firm brands that will last beyond their individual team members and portfolio company outcomes will have a positive effect on sourcing of future opportunities and will enable existing + future portfolio companies to access more + cheaper capital

2.

Network Effects

The ability to cross pollinate learnings from within a portfolio is powerful – but requires a culture of trust (and probably non-attribution of individual partner performance) to work

For True – we saw this in our consumer hardware portfolio – where our early investment in Fitbit led to a number of other consumer hardware investments.

Initially, we were one of the few seed investors in the space – but as the market matured – the ability to access other Founders or teams who had scaled or faced similar challenges was a powerful tool in being able to win investments with the best new companies.

Some of this we did in formal events – but the goal was to get out of the way and normalize cross company collaboration within the portfolio – initially at the Founder level, but over time – we’ve seen it within functional senior leadership groups (ie in marketing, product, or engineering)

These are some of the events we hosted to start the conversation in specific markets – but we’ve seen this flywheel work in other markets including CPG, Computational Biology, Open Source Software, Insurance, Cryptocurrencies, and more.

https://trueventures.com/true-atoms/

https://trueventures.com/true-healthcare/

https://trueventures.com/true-infrastructure-summit-2015-wrap-up/

 

As a specific example of how this can work in the portfolio, the initial Ring Video Doorbell used the same Wifi Chip as the Fitbit Aria scale.

During our investment process with Ring, the Fitbit team shared what they had learned about the wifi chip + helped work with the Ring team to use those learnings to help them best place the chip in the device.

This knowledge sharing helped our firm win the investment and then ultimately drove better performance of the company (and the on going relationship between the companies ultimately helped as technical learnings could flow back + forth between their groups)

First Round Capital + other firms have other programs that look to drive similar coordination – and I think the firms that do this well – will be stronger and ultimately have more predictable outsized returns over time.

Below is my current working pre-new investment checklist.

Most of these questions are answered early through conversations with the Founder or others at the company – so this is mainly a final reminder of what qualities I’ve found to be important in potential investments over my time at True (either through others or learning directly the hard way)

Would love any feedback on any potential new qualities to add (or questions about attributes on the list that you’d disagree with)

New Investment Check List

Founder Questions:

1. Who is the main protagonist Founder that you’re backing?

a. Are there any potential trust issues?
b. Would you want to work with this person for the next 12+ years?
c. How do they treat other individuals? (Lawyers, employees, etc)
d. Do they have the ability to be a long-term leader for the company?

2. What do they understand about the market that other don’t?

a. What experience led to that unique insight?
b. Why would others think they’re wrong?

3. Do they have the ability to recruit great talent?

a. Who are their co-Founders and how is equity split?
b. Who are early advisors and why are they excited?
c. Can they identity the people they will hire for their first 10 roles?

Business Questions:

1. Does the company’s mission matter?

a. Will you be proud to talk about this investment?
b. Can it inspire employees, future investors, etc

2. What is the company’s long-term sustainable competitive advantage?

a. Network effects are ideal
b. Are there features that increase customer lock-in or switching costs?
c. Is this a company that could exist for 100+ years?

3. Are you swimming with the tide long-term?

a. What are the major macro market forces in your favor?

4. Why is this possible now?

a. Why would have previous attempts failed?
b. Either technology or capital efficiency story
c. Why would others say this business won’t work now?

5. Is there significant innovation around product?

a. 10x better than alternative products
b. Are there any alternatives that could be indirect competitors?

6. How often do customers interact with the product?

a. Ideally more than once per day

7. What is the quality of the company’s future revenue?

a. Visibility or predictability of revenue matter
b. Recurring or Re-occuring revenue is ideal
c. Arbitrage doesn’t usually lead to long-term enterprise value
d. Any customer concentration issues?
e. Any partner dependencies?

8. Is there a path to $100m in Annual Revenue? $1 Billion in Annual Revenue?

a. At scale, what is the customer + margin profile of the business?
b. What is the profile + challenges of similar businesses at scale?

9. Is there significant innovation around early go-to market strategy?

a. Organic marketing is best
b. Are there channels to effectively reach your target customers at scale?

10. How much equity capital is required to scale the business?

a. Are there alternatives financing sources if more capital intensive?
b. Can you make money as a seed investor?

Most Important Question:

1. If you could only make one investment this year, would this be it?

Presentation from our Annual Team Offsite at Stinson Beach in July 2017 included below.

This shares some of our internal discussions on how we’re starting to think about evaluating new types of crypto projects + assets.

As an active investor in startups built around open source software, we’re increasingly excited about new + interesting business models to support community activity and have been participating in the cryptocurrency space since WordPress.com started accepting Bitcoin in November 2012.

As a firm focused on pre-seed and seed investing, we believe there will continue to be opportunities for venture capital firms to invest the initial startup capital into new crypto projects (as part of an initial equity financing or as part of an agreement in exchange for future protocol tokens.)

We’re interested in potential opportunities in:

• Decentralized applications (ie projects like FunFair for Decentralized Gaming)
• Enabling infrastructure (ie projects like 0x (Decentralized for Trading Tokens) or zCash (Blockchain + technology focused on privacy + selective transparency)

In particular, in potential crypto investments we’re looking for:

1. Applications that truly need to be distributed (“Need to be built on a blockchain”)
2. Solid technical team (with expertise across Internet infrastructure and crypto)
3. Utilization Token tied to business model
4. Potential for Strong Network Effects

If you think you’d be a fit with our portfolio based on the above information, please reach out – it’d be great to learn more.

Presentation from our Annual Team Offsite at Stinson Beach in July 2017 included below.

This shares some of the lessons from our investments involving life sciences (starting with Ginger.io in 2011 + Moleculo in 2012) as well as some of the evaluation criteria we think about for potential future opportunities.

As a firm, our focus is leading the first institutional round (usually pre-seed or seed) with investments of $500k to $3m. We often invest with angels and love research work coming out of universities or other labs.

For companies based in core science or research – we like to see: