Hesitant about investing in biotech startups? Founder Çağrı Savran and I discuss the unique opportunities and requirements of angel-scale life science startups. This is the first in a series of biotech angel bootcamps.
Click here to read episode transcript.
Highlights:
Podcast Sponsored by Purdue University Entrepreneurship and Peter Fasse, Patent Attorney
Sal Daher Introduces Founder, Çağrı Savran, PhD
Purdue University Now Evaluates Professors of Engineering on Translation of their Technology to Industry as Well as on Publications and Citations
Episode Created for Angel Investors Who Are Hesitant About Biotech
Savran’s First Round of Funding Was Very Easy, the Subsequent Three Rounds Took Great Effort
Several Walnut Members Had Invested in SQZ, Which Also Had a Fast Angel Round
“...they saw parallels between SQZ and Savran.”
” If somebody is taking too much time to think, they're probably not interested and that's okay. You don't need the whole world...”
“...it's similar to marriage... Sometimes it clicks, sometimes it doesn't click.”
There Are Many People Looking for Attractive Investment Alternatives – It’s About Finding Those People
Sal Asks About an Alternative Way to Fund Biotech Startups that Could Be More Efficient in the Long Run
Angels Should Consider Staging their Investment in Biotech Startups Over Four Years with Annual Drawdown Based on Milestones
Staged Funding Would Provide a Stable Financing Path So Founders Can Focus on the Business
Angel Investors Have Contributed Much More than Money to Savran Tech; Advice, Introductions and Encouragement
Çağrı Savran Wants Angels to Appreciate All the Trial & Error Involved in Building Life Science Companies
When Things Work Out, Life Science Companies Can Build a Lot of Value Due to Strong Barriers to New Competitors
Software Startups Face Stiff Competition Due to Low Barriers to Entry for Competitors
“...you need to worry about minimizing user-to-user variation, especially if you're making an instrument. It's not like a computer code where if you hit a couple of keystrokes, it doesn't matter who it is that's hitting the keystroke.”
Biotech Startups Have Different Metrics for Progress from Software Startups
Biotech Startups Tend to Collaborate with Big Players; Software Startups Usually Compete
Strong Patents Are Needed to Make Biotech Startup Valuable to Strategic Players
“If the startup is making progress, it will have built a prototype.”
Maturation of the Technology Is an Important Measure of Progress, It’s What Will Get the Company Acquired
Founder-Led Companies Are Special
Startups Can’t Afford Experienced People in Management but They Can Get Them on the Board
“...the lesson here for angels is, don't expect a professional CEO in a life science startup.”
We Are Living in a Time of Miracles; Biotech Miracles
There Are Promising Biotech Startups that Can Flourish with Just $5 Million in Funding – Angel-Scale Biotech Startups
ANGEL INVEST BOSTON IS SPONSORED BY:
Purdue University entrepreneurship
Peter Fasse, patent attorney at Fish & Richardson
Transcript of, “Biotech Angel Bootcamp I”
Guest: Founder ÇaGrı Savran
Podcast Sponsored by Purdue University Entrepreneurship and Peter Fasse, Patent Attorney
Sal Daher: This podcast is brought to you by Purdue University entrepreneurship and by Peter Fasse, patent attorney at Fish & Richardson.
Sal Daher Introduces Founder, Çağrı Savran, PhD
Welcome to Angel Invest Boston, conversations with Boston's most interesting angels and founders. I'm Sal Daher, an angel who is tremendously curious to find out how to build better startups, and in this particular case, how to build better biotech startups. Today, I'm very lucky to have with me Çağrı Savran, PhD, professor at Purdue University. Welcome, Çağrı.
Çağrı Savran: Thank you very much for having me, Sal.
Sal Daher: Çağrı [Chá-re] is the founder of Savran Technologies, an ultra-rare cell company. By the way, I should mention that this podcast is sponsored by Purdue Entrepreneurship, and by Peter Fasse, patent attorney at Fish & Richardson. Now, Çağrı is a professor at Purdue University and has been helped tremendously. I have seen this firsthand how much help professors at Purdue University have in taking technology they develop in the lab out into the market. Would you agree with that, Çağrı?
Çağrı Savran: Absolutely.
Purdue University Now Evaluates Professors of Engineering on Translation of their Technology to Industry as Well as on Publications and Citations
Sal Daher: As a matter of fact, I understand that in the school of engineering professors are evaluated in addition to the usual criteria of publications, citations, and so forth, on patents that you write and also startups that you found successfully.
Çağrı Savran: Exactly. That's becoming more and more a part of evaluation criteria. There's a big push for making that happen.
Sal Daher: I think Purdue is really breaking ground in this. I'm thankful to Purdue for sponsoring the podcast. My connection with Purdue, I had absolutely no connection with Purdue, came through Çağrı. I'm on the board of Savran Technologies and I'm very, very grateful to Çağrı for making time because this episode is really dedicated to help train, it's going to be part of a boot camp that I'm developing for angels who are investing in software companies who are generalist angels or these days, generalist means basically investing in software companies because all the stuff that's happening in software, and to try to make investing in biotech accessible to them.
I thought it would be a great idea if I could have just a very, very dynamic founder who has taken his company in four years from a very early stage to a point where it's in discussion of five strategic players, they have two possible use cases for this groundbreaking technology. If you want to learn more about this, go look at the episode, A Cell in a Billion, which is the whole story of Savran and you can learn everything there.
Episode Created for Angel Investors Who Are Hesitant About Biotech
Now, Çağrı's here for you, angel investor, to tell you that come on in, the water's fine.
Çağrı, let's start by telling us a little bit about your fundraising experience and what it has taught you?
Savran’s First Round of Funding Was Very Easy, the Subsequent Three Rounds Took Great Effort
Çağrı Savran: Of course, of course, yes. I've learned tremendously. It was a huge, huge learning experience. Now, I do believe that I was spoiled by our first raise. It was amazing how easy it was and I was told by a number of people, including yourself at that time, that don't be spoiled by this, this is unusual. It's not supposed to be this easy.
Sal Daher: It basically came together in like 10 days.
Çağrı Savran: Yes, with hardly much of an effort. [chuckles] Of course, a lot of people warned me. They said, "Look, it's unusual that it happens that easily and don't think that that's going to continue like that. Fundraising is very time-consuming," and they were right.
[laughter]
Çağrı Savran: I learned my lesson.
Several Walnut Members Had Invested in SQZ, Which Also Had a Fast Angel Round
Sal Daher: Part of the reason why the fundraiser was so easy is that a lot of my Walnut colleagues had been investors and SQZ Biotech, which also had a very fast raise, not as fast as yours but also they had their first million very quickly.
Çağrı Savran: Tremendous company.
“...they saw parallels between SQZ and Savran.”
Sal Daher: Tremendous company and they saw parallels between SQZ and Savran. Between introductions, people that Peter Fasse knew and some of the people that I knew, we were able to get- and also presentation, Patrick Rivelli was very helpful in presenting very well, we were able to bring the deal to a conclusion. Anyway, so please, continue.
On Investors: ”If somebody is taking too much time to think, they're probably not interested and that's okay. You don't need the whole world...”
Çağrı Savran: Sure. Yes, that certainly, in the beginning, gave me the impression that all rounds were similar, but they're not. Financing now is very time-consuming. For example, one thing I learned is that for an early-stage company, at least in my experience, potential investors usually make their decisions rather quickly. If somebody is taking too much time to think, they're probably not interested and that's okay. You don't need the whole world, then I learned that it's best to move on to the next person that you can talk to rather than spending most of your effort trying to convince her.
Sal Daher: Well, the reality is that if someone doesn't connect with you right away, you're not going to convince them.
“...it's similar to marriage... Sometimes it clicks, sometimes it doesn't click.”
Çağrı Savran: Probably not, probably not, it's maybe not completely like marriage, but it's similar to marriage, especially early-stage companies. Sometimes it clicks, sometimes it doesn't click.
Sal Daher: Yes, I remember when I first saw my wife across the room, I looked at her I was like, "Ah, wow." I knew I was eventually going to marry her. I was struck. It was just like, bingo, completely irrational.
Çağrı Savran: [laughs] Same thing with me.
[laughter]
Sal Daher: We both lucked out because it could have gone very badly, right?
There Are Many People Looking for Attractive Investment Alternatives – It’s About Finding Those People
Çağrı Savran: [laughs] Yes. Sometimes investor sees you and your companies, you're also very important. They see it as a fit, sometimes they don't. I learned that that's just a part of the process and that is just important to move on. That was very important, never to give up. Have perseverance never to give up. I also learned that when there's money available, that somebody has money to invest and they have an interest to invest, then it's good to take that money rather than worry about having too much money. If you've planned to raise X amount and it looks like you're going to raise a little more than X amount, it's okay. Go ahead, if there's an interest somebody--
Sal Daher: Excellent advice for founders, you will always need more money than you think.
Çağrı Savran: Always. [chuckles] Yes, always. I also learned that there are a lot of people that are wanting to put their money to work. There are a lot of people that are willing to take the risk and potentially multiply their money rather than keeping it in a bank and keeping it completely safe but not earning much on it. There's a lot of people that are willing to go down that route. I can probably talk about this till the morning. It was a huge experience. Here's what I experienced, but all of this is summarizing the bulk of it.
Sal Asks About an Alternative Way to Fund Biotech Startups that Could Be More Efficient in the Long Run
Sal Daher: Right. Great, I have a follow-up question for you. You did the three rounds that you raised and that got you to the point of basically having two use cases, one fully developed. The one that was fully developed when you started the startup had found a potential use case because of a publication of a paper that validated it. The other use case, you'd done a lot of work on it and it was much more mature. Right now, you're in a situation where you have one pretty clear use case and the other one you've made a lot of progress on it.
It would have been I think much better if all the money that you've raised in this period if you had been able to raise it all in one round in the beginning but have it staged over the next four years with four drawdowns based on progress that you were making. That would have saved you countless, countless hours of chasing people and running around and connecting with people and bringing in new investors, and so forth.
Çağrı Savran: That's probably right.
Sal Daher: Because I've participated in every round, but not every investor-- I think on average, investors maybe participate in like 2.1 rounds. You're just completing your fourth round which is a priced round and so you have substantially expanded your investor base, which is another lesson for founders, and also for angels who are involved with this.
Angels Should Consider Staging their Investment in Biotech Startups Over Four Years with Annual Drawdown Based on Milestones
The lesson from your experience that I see is that we as angels need to think in terms of when we see a promising company such as Savran. If I'm giving advice to myself back at the end of 2017, I should have been saying, let's have a bigger chunk of money, let's say 4x what we're raising right now, and let's commit to that and stage it over the next four years in equal drawdowns, every year, depending on what kind of progress you're making. Then you would have been spending all your time in the lab or talking to strategics and a whole lot less time talking to investors.
Staged Funding Would Provide a Stable Financing Path So Founders Can Focus on the Business
Çağrı Savran: Absolutely. That in itself was a learning experience in itself.
Sal Daher: Right. I think that from an investor point of view, I think we have to think in terms of not doing these highly contingent software startup rounds, where the reality is with software, $700,000 will get you all the market discovery that's necessary, and will get you to a point where they can get VCs interested in them. The reality with biotech companies is that the big VCs are not interested, they're not taking pitches from biotech companies, they're creating their own, so getting VC money is very, very hard. I think it opens up a great opportunity for angels to start acting a little bit more professionally, a little bit more like the VCs in staging their funding. Do you have anything else to add on that, Çağrı?
Çağrı Savran: No, I think you've summarized it perfectly well, Sal.
Sal Daher: Okay. What would you like to see from angel investors in your startup? How could angel investors have helped? Maybe we can illustrate a little bit how angel investors helped, and also additional help that you might have wanted.
Angel Investors Have Contributed Much More than Money to Savran Tech; Advice, Introductions and Encouragement
Çağrı Savran: Sure. Our investors, and we're really grateful to every single one, them, they've all been very helpful, not only in terms of checks that they were writing but also in terms of giving free advice, and also in terms of introducing us to strategic players. Some of the strategic players that we've been talking to, those introductions were made by some of our investors. They've been incredibly helpful and they're very pleasant people to hang out with, so that's very good. They've been also very helpful to me in my journey of starting the company and coming to the CEO level.
Çağrı Savran Wants Angels to Appreciate All the Trial & Error Involved in Building Life Science Companies
The other part of your question is what I would like to see from our angel investors is continued support and patience. Biotech is challenging. Healthcare is challenging, it takes a lot of time, takes a lot of effort, it takes a lot of trial and error, it takes a lot of optimization, where you're doing a lot of experiments. Many of them fail because you're trying new recipes. You're optimizing around the uncertainties of biology. It's not too dissimilar from a soccer coach trying different squads, or even swapping players' positions, even in the same squad to see what's best.
When Things Work Out Life Science Companies Can Build a Lot of Value Due to Strong Barriers to New Competitors
At the same time, the potential reward is very big. In a biotech or healthcare kind of company, once a product is adopted, it can stay there and make money for a very long time, as opposed to in many other fields.
Sal Daher: There are very strong barriers to entry.
Çağrı Savran: Yes.
Sal Daher: Since we're on the topic, talk a little bit about what you think are the differences. Because your brother works in software, and you know quite a few people who are the software world. Tell us how a biotech startup differs from a software startup in your view.
Çağrı Savran: Yes. Each has its own unique traits and unique difficulties, unique challenges. In a software startup, one needs to worry about being overtaken by somebody else. I believe that that would be a worry because the threshold of becoming operational is often lower than that in biotech. In many cases, all you need is a laptop.
Software Startups Face Stiff Competition Due to Low Barriers to Entry for Competitors
Sal Daher: Barriers to entry are very low.
Çağrı Savran: Yes, whereas in a biotech company, let's see what you need. You need a wet lab, you need equipment, you need reagents. You need to worry about those reagents going bad or even if they don't cope that need to worry about batch-to-batch variations when you purchase them, even if they're good. You often need to develop hardware.
Sal Daher: You need a discovery, to begin with.
Çağrı Savran: Exactly.
Sal Daher: A technology that's new. What they call innovation in software, it's just like a variation on a theme. They're building slightly different types of software and so forth, but in the end of the day, there isn't basic science involved. You're not dealing with nature there.
Çağrı Savran: That's exactly right, and on top of all this, you also need, in a biotech company, in many cases, you also need to develop hardware in many cases, and in many cases, you also need to develop software on top of all this, right?
Sal Daher: Right. In a biotech company, even in a biotech company, you have software because you have software running the processes.
Çağrı Savran: Exactly. Sooner or later, you're going to need to do that yourself. You need to also train your staff not only to develop technology but also to handle human samples. There's a lot of practical things that often get overlooked by people that look at the whole thing from outside but all of these need to be handled. You need to procure samples, you have to wait for them to arrive, you need to consent people.
Sal Daher: Minimum viable product is much harder in the biotech.
Çağrı Savran: Exactly.
Sal Daher: You can't just have concierge..., you're dealing with human samples a lot of the time. There's a lot of protocols, rightly, around the use of that.
Çağrı Savran: Yes, and you need to deal with the uncertainties of biology. You're not dealing with something that's completely man-made, only that the things that you are making are, but the domains that they're probing are not man-made. You're dealing with the human body which even to this date is not completely understood.
Sal Daher: Can you believe it that it was only last year that they discovered another salivary gland in the head. They thought they knew where all the salivary glands were and they discovered a new one in 2020. It wasn't until decades ago that they figured out how peptic ulcers worked. When I was a kid, people thought peptic ulcers were just from, they didn't know it was bacterial. There's so much we don't know about the human body still.
“...you need to worry about minimizing user-to-user variation, especially if you're making an instrument. It's not like a computer code where if you hit a couple of keystrokes, it doesn't matter who it is that's hitting the keystroke.”
Çağrı Savran: You're working around that and you need to worry about minimizing user-to-user variation, especially if you're making an instrument. It's not like a computer code where if you hit a couple of keystrokes, it doesn't matter who it is that's hitting the keystroke. Whereas if you're operating an instrument that's still in development, that's important. It makes biotech very costly both in terms of time and also cash. Now on the flip side, there's a flip side to this.
Sal Daher: Before we get to the flip side, let's also talk about the training of scientists. Someone who is going to be working in a company like Savran, everybody's a PhD, and they have to be because you're developing this new technology. A PhD means four or five years after graduating from college, which means that the person is in their late 20s at the earliest, most likely in their early 30s. As you mentioned before, it requires these lab reagents and so forth but also the staffing.
The people who are populating biotech companies are older. They have families. They're not 22-year-old programmers. My daughter retooled as a software engineer. She used to be a wet lab biologist and retooled as a software engineer. It took her two years, three years. The biology side of things takes the better part of a decade to learn or the engineering part of it.
Çağrı Savran: Exactly.
Biotech Startups Have Different Metrics for Progress from Software Startups
Sal Daher: It's a very, very different tempo. Another thing that I found is people don't understand progress in a biotech. Because in a software startup, it's adoption of the software. How many subscribers you have, that are using it, that sort of thing, There's a very clear metrics. In a biotech startup, it's very hard to detect the change. In an update that we did, we talked about the progress that Savran made over the last four years. A lot of people look at that and they say it's the same thing. They're still running around with this chip and they're running-- Exactly, but it's doing a whole lot more stuff.
I guess the proof of the pudding is, if you have five strategic players that are looking at your technology and discussing collaboration when there were none before, that's a big step. That's something that took four years to happen. It's not something that you're going to have a strategic collaboration in six months, it doesn't happen that way. It happens in big steps.
Like when you had a paper published, that put you on the map, so the stakes are higher. We talked about the need for sustained funding, more money. You're talking about a biotech startup that is capital efficient. Let's say a biotech startup raises $5 million, $6 million, to get to the point where it has a couple of few collaborations with strategics and then it gets bought out. It doesn't have to get bought out at a billion dollars for the investors who participated in the $5 million, $6 million to make a ton of money.
If it gets bought out for $100 billion, those people are going to make very nice money. If it gets bought out at $500 million, Nirvana. Even though it requires a lot more capital than a software startup at the beginning. In my experience, what I've seen in my portfolio of like 29 life science-related companies, they build value faster, they can build value. A lot of my software companies, they're up but not up that much. The biggest multiples I see are with the life science companies.
Okay, so now let's talk about another important aspect of this, which is intellectual property. What contributes to the ability of life science companies to build substantial value is the patent protection that you have or your trade secrets that you can develop.
When I interviewed this entrepreneurship professor at Stanford University, we got into this because he had done an original study at MIT talking about having more founders and so forth. They took that study in a direction of trying to understand the different strategies. If you're a software start-up, a strategy you have is you seek to go to market, to get to the consumer as fast as possible. The consumer can be a business, it can be a B2B, software start-up, it can be B2C.
The reason for that is that you cannot collaborate with the strategic players, because there's no reason for them to collaborate, they'll just copy your business and there's no protection. If you patent software, it doesn't protect you, because they can write software around it. However, in the life sciences, if you have a patent, and it's a strong patent, the strategic players are not going to just say, "Oh, yes, we can do that ourselves. They have a very strong incentive to work with you, not only because you could create a lot of trouble for them, but that because of that patent, your technology could be very valuable in their hands, they could take that and make that huge.
Biotech Startups Tend to Collaborate with Big Players; Software Startups Usually Compete
The mode of development of software companies is to compete early on with the big strategic players, the Googles of the world, Microsoft, and so forth. The standard pattern for software [biotech] companies is because of patents, because of this intellectual property, is to collaborate with the big players who also have a lot of knowledge about going to markets, and they understand what can be approved with the FDA and what the approval process is like. It's a much more collaborative environment so the strategies for developing the company is collaborative, whereas, in software, it's competitive. That's a big reason and what causes that distinction is what we're going to talk about. Tell me a little bit about your thoughts on patents and intellectual property.
Strong Patents Are Needed to Make Biotech Startup Valuable to Strategic Players
Çağrı Savran: Sure, you've already touched up on it. In biotech, your patents can really help you and because of that, you need a good patent attorney. That's very important because it's not just about writing a patent. That relationship should not just be viewed as transactional. Here's what you're writing because you can find many patent attorneys that can write a patent for you, but you need a really good one that will not only write and prosecute your patents but also will help you in formulating the right patenting strategy, because, over time, you're only going to have more patents.
In biotech, it's very important, IP is very important adding value to the company in protecting its products and also even at exit situations. The company wants to acquire you, they're going to be looking at your patents because for all the reasons that you mentioned, it's very important. We have learned that it's important to have patents in multiple countries, not only in the United States but also countries in Europe, and China, and Japan, because these are all important markets, and a potential collaborator or a potential acquirer might be doing business in these in these countries, or they might even be originating from these countries.
I've also learned that patenting can get to very costly levels. You should not be blindly patenting everything. You do not want to be patenting every single invention but focus only on those that are immediately related to the commercialization efforts. In that regard, it's sometimes okay to abandon a patent, if you believe that you already have enough and that that particular one is no longer adding significant value, it's only going to boost the cost, then you might abandon that.
Sal Daher: This is where a good patent attorney--
Çağrı Savran: Exactly. I was gonna say that.
Sal Daher: Look, I'm sponsored by Peter Fasse who's my brother-in-law, who is a tremendous patent attorney, I know this independently, independent from you. I've had people come up to me and say, oh, who wrote this patent in microfluidics? Who writes the microfluidics patents of Fish & Richardson? This somebody at the MIT Angels, and it's oh, it's Peter Fasse. Oh, geez, very subtle, very clever. If you have a good patent attorney, they'll tell you, don't waste your money on this. Focus on this and don't put all the billable hours, because patent attorneys are expensive-
Çağrı Savran: Exactly.
Sal Daher: -on this aspect, because it's not going to get you much. If you can patent this, then you can really broaden your claim.
Çağrı Savran: Exactly, and a good patent attorney will also educate you. I learn tremendously about this process, tremendously over the past few years. For example, there's a misconception that once a patent issues, then you're done, it will protect you forever. That may not necessarily be true. Somebody might look at what you're doing and they might also look at your patent, and then try to find ways to go around your patent. If they do, if they successfully do that, then your patent is not really protecting you.
If you can afford it, it's generally important to keep the patent alive by filing a continuation or a divisional right before the patent issues. That way, you can protect yourself against potential workarounds after your patent issues, because now you have a live patent that's still in prosecution, still pending. If you feel that somebody's trying to go around you, you can go back and readjust claims. There are all these like subtle little things that if you're not a patent attorney, you just may not know. A good patent attorney will educate you about all this. At the same time, they'll help you in optimizing your patent costs. It's very, very important to find a good one and pay them, whatever the fee is.
[laughter]
Sal Daher: Pace Michael Singer who likes to be his own patent attorney, he's a friend of ours who's a founder, "Being your own patent attorney is like being your own brain surgeon, not recommended."
[laughter]
Sal Daher: It's a highly specialized area and you could spend a lot of time trying to become a proficient patent attorney. You're not going to be a top patent attorney. Remember, this is where the value is stored in a startup. You develop the technology so that that patent becomes valuable, and when you get acquired or you do a licensing arrangement, it's all around that patent. That's the crown jewels of a biotech startup is in the patents. The crown jewels of a software startup is in the code and how that code is implemented with consumers, how they reach out to consumers, and so forth. It's execution and creation of the code but also execution of the business plan.
In life sciences, yes, a business plan is important and all that stuff but your patents are really, really important. That's one of the things that as an angel investor, I look very closely. I try to understand how closely the founder has looked at her or his patent portfolio.
Çağrı, how can an angel investor tell if a biotech startup is making progress?
“If the startup is making progress, it will have built a prototype.”
Çağrı Savran: This can happen on multiple fronts. You kind of touched upon it a little bit, so let me elaborate a little bit more. The investor needs to look at the whole picture. One aspect is obviously technical. If the startup is making progress, it will have built a prototype. If there's a prototype, then the company has definitely made a progress because there's a lot of startups they started, there's no prototype, there's just an idea.
Sal Daher: They're raising money for a prototype.
Çağrı Savran: Exactly. Once that prototype is built, that's very important progress. Now, there's even more progress if that prototype is improved. Even more so, if the company can procure key components from contractors because you're getting one step closer to scalability if you can do that. Because if you come to a point where things have to be made in thousands or tens of thousands, or hundreds of thousands or millions, you have to rely on subcontractors that will mass manufacture things for you, so that's really important.
Sal Daher: Keep in mind that these are devices that are brand new, completely new technologies, so manufacturing them is not trivial. I know that Savran had experience with vendors who couldn't produce workable devices. It wasn't the first vendor that you went to that was able to produce the device within the specifications that you that you required.
Çağrı Savran: Yes, that's absolutely right and there are many other things related to hardware. A company is making progress if the device operation is becoming more and more streamlined and more automated because it's very important that you end up in a streamlined and automated way. Because for medical, that you do not want something that relies 100% on manual intervention because then you're going to have user-to-user variations. That's very, very important.
Sal Daher: Çağrı, when he was saying manual intervention, he was like his pressing a pipette.
[laughter]
Sal Daher: You want to take out the human element because the human element is expensive, unpredictable, contaminates samples, and so forth. If you have a more automated process, it's shrink-wrapped, you're going to have greater consistency from one procedure to another.
Maturation of the Technology Is an Important Measure of Progress, It’s What Will Get the Company Acquired
Çağrı Savran: Exactly, and you don't get to that point immediately, so you get there step-by-step. First, we got semi-automated and so all of those is very important progress. If the company has developed new know-how, new techniques, okay, this also includes identification of new reagents, for example, to help...it's assay development, then it's making progress. If the underlying technology is getting validated by any clinically important application, then it's making very important progress, right?
Sal Daher: I'll give you an example of another startup that I'm involved with, the original tests that they did, they applied the therapy by gavaging. Gavaging means they have the experimental animal and they put a hose into their intestines and they apply it there. Why, because they didn't have a pill and then they had to spend hundreds of thousands of dollars to get someone to produce the pill that could deliver the medication. Weird things like that. You're going from gavage to actually being able to administer a pill, which eventually is going to be administered in humans.
Any other thoughts on the technical progress? How about staffing? How about a board?
Çağrı Savran: Those are given. That just has to happen. You obviously need to staffing of companies, hiring people, building a sport that is making progress. If the company has identified a potential customers or even partners that have expressed interest in collaboration, then it's making progress, at least in the biotech space. Even more so if the company has gotten paid for a service or for an instrument.
Sal Daher: [laughs] The companies don't have revenue, okay. Even a company that's public and biotech, the revenues that they have, they're being paid for development, and so forth. It's not revenue in a sense that they're selling a product to someone in a commercial way. It is important in a biotech that you sort of prove out interest in your product if people are buying your device, they're buying the consumables.
Çağrı Savran: Or if they buy a service from you, or they basically send you a blood sample and you perform the test so that's important.
Its IP portfolio. We talked about that already, but the company's IP portfolio is getting bigger and stronger, that's progress. It happens on multiple fronts. If a company's doing all of that, then, in my opinion, it's making really good progress.
Sal Daher: It's much more abstract, much more heterogeneous, harder to measure than for a software company, where you're looking at the number of subscribers, annual recurring revenue for a SaaS company, the metrics are very tangible, very clear, but in a life science company, you have to create bespoke tailored metrics for understanding what's happening in a life science company.
Çağrı Savran: Exactly.
Sal Daher: There's progress going on. I have the experience of having fellow investors in life science companies. The company's made tons of progress and they say, "Oh, it's still doing the same thing. It doesn't look like it's changed anything. It doesn't have any customers yet." [chuckles] Well, I got news for you, they're not going to have end customers. They're going to do licensing deals, they're going to sell particular aspects of the company and so forth that might get acquired completely, but they're never going to have necessarily a huge number of commercial customers. They might have a few scientific customers doing experiments and so forth, but that's not the expected course.
Founder-Led Companies Are Special
Now, let's talk a little bit about management. Marc Andreessen, the venture capitalist who wrote that famous Wall Street Journal article, Why Software is Eating the World, he is a big believer in companies being led by their founders or founder-led companies. There's a venture capitalist here in Boston named Tony Kulesa who's a scientist-turned-venture capitalist. He is also pushing that the future of biotech is founder-led.
As a founder / CEO, Çağrı, and still a full-time professor and so forth, tell me what your perspectives are on that. What does a founder leader bring to the equation?
Çağrı Savran: Sure. The CEO matter is a very delicate matter because the CEO of any company, not just a startup, is one of the most important factors in its success. It's even more true for a startup... a very small company. Was it Warren Buffett who said that the biggest risk in a company is a bad CEO? I think that's him who said that.
Sal Daher: Yes, that sounds like Warren Buffett.
Çağrı Savran: It's hard to be 100% accurate in advance whether a particular person will be a good CEO for a particular company because technically, you just don't know that until the person starts and spends a significant amount of time. You can try and recruit a highly experienced CEO with successful exit histories and that sort of thing. That'd be wonderful but that usually requires a lot of cash compensation.
Sal Daher: There are very few. There are very, very few and they are all working for the VCs. [laughs] The VCs have snapped them up. I saw the case of one guy who's very capable. There was a startup that I was thinking of investing in and he's saying, "Look, we're raising, if we get this amount, I'll come in as full-time CEO." In the end, they never got to that amount. They ended up with like a quarter of what they were raising. The CEO ended up investing in the company and he's working as a highly compensated biotech executive somewhere.
There's such a dearth of executive talent in the life science space that it is not possible, unless you're a very deep-pocketed venture capitalist, to recruit someone like that for a startup. If you could, you might get the wrong person. You might get a person that is too specialized, understands how large companies work but not necessarily small companies. Now, that's not to say that you don't need experience with these large companies. Someone like Jeff Behrens being on the board advisors and board members with experience, very important.
Çağrı Savran: Yes, like Nadia Altomare, for example.
Startups Can’t Afford Experienced People in Management But They Can Get Them on the Board
Sal Daher: Nadia Altomare or Jeff. It's very important to have people like that but we can't afford to have them as executives because they've got so much going on. It is way more than software. The dearth of executive talent in the life sciences is astonishing because of all the stuff that's happening. Look at what's happening in Moderna. There's no way... it's going to be founder-led. However, there are people who have the anticipation, people who've been in the software world like, "Well, no, you need to get a professional CEO." It's not going to happen. Savran opened my eyes to this in the last four years. I used to think very differently on this.
Çağrı Savran: So did I, actually.
Sal Daher: Yes, but the thing is that it's not every professor who can retool as a CEO, a founding CEO of a startup. I've seen it happen but it's not every professor who can do it.
Çağrı Savran: I appreciate that comment. Based on what we've just said, both of us, often it's a natural path for the founder to be the CEO. The most important thing there, in my opinion, is to ensure that the CEO is committed to the success of the company. That's the most important thing. I make this analogy all the time to my other friends who are new founders that they need to view their startup like their child. There's no such thing as abandoning your child. Under no circumstances should they leave the child. That should be their mentality.
In most cases, nobody can care about the child better than the child's own parents. In most cases. Building a startup, it's a difficult process and the company needs someone that will be there no matter what. That has to be the mentality and oftentimes, the founder is the answer. In fact, I should tell you this. A number of my investors, some of the newer investors must be thinking similarly to Marc Andreessen and Tony Kulesa because they told me for a fact that one of the most important factors in their deciding to invest was that I, not because I am me but I as the founder was also the CEO.
Sal Daher: I can tell you that Çağrı is a guy who will walk through a brick wall for his startup. He’ll walk through a brick wall for his family, he’ll walk through a brick wall for his startup. This is the kind of guy that you're dealing with. He's not somebody who's going to give up. He would never give up. Okay, this is like the terminator. He doesn't give up.
Çağrı Savran: [laughs] Thank you.
Sal Daher: Four successful raises under your belt, it qualifies. That's like your T-four level, terminator four level that you're able to go through four raises. The first one was very easy. The subsequent ones were very tough and you managed to do it. I see this with you, Çağrı. I see this with Ed Goluch at QSM Diagnostics in which I'm an investor. I see this with Nancy Briefs, I see this with-- she's a founder, CEO. I see this with a lot of the other founders that I'm invested in, and this sense of commitment. This is my baby, I burned all my boats, I can't go back. I'm on the beach, I can only go forward, I can't go back over the ocean.
Çağrı Savran: That's the mentality. [laughs]
“...the lesson here for angels is, don't expect a professional CEO in a life science startup.”
Sal Daher: Yes. I think the lesson here for angels is, don't expect a professional CEO in a life science startup. It's rare that that's going to be a possibility, very rare.
Let's touch on the last topic which is basically wildcard. Is there anything that you want to bring up that we haven't discussed so far?
Çağrı Savran: One additional thing is that now is the time. COVID really opened new doors. The fact that COVID came didn't just influence vaccine production or antiviral medication, but it really made people understand the importance of human life. That that's the most important thing. [crosstalk]
Sal Daher: How it can be improved with biotechnology.
Çağrı Savran: Yes. Exactly. We're seeing a tremendous increase in the interest both from investors and big companies, as well as consumers in the way they pay attention to biotech, and healthcare technologies.
We Are Living in a Time of Miracles; Biotech Miracles
Sal Daher: Yes, we're living in a time when we're all having the vaccine, thanks to two startups. The most groundbreaking vaccines, the mRNA vaccines came to us thanks to BioNTech and Moderna. BioNTech, which Çağrı jokingly calls the inventor of the Turkish vaccine because it's founded by a couple of Turkish physicians in a startup, and Moderna, founded by a Canadian and American, but backed by an Armenian, Noubar Afeyan. Anyway, these two sterling startups had technologies that three years ago, they were in the wilderness and now they're crucial to the world's economy, these two vaccines, and they've opened up for the next decade.
I think the next decade is going to be the decade of biotech because it's not just the mRNA technology. The technology that you work with, microfluidics, has huge potential. SQZ is a microfluidics company. There's a lot of stuff happening in microfluidics but there are dozens and dozens of other currents. At least in my portfolio, I look at the microbiome, I'm an investor in Vedanta Biosciences which just last week had Phase II results that are very promising in preventing the recurrence of C. difficile infections in people who are hospitalized and so forth.
I am an investor in a company, QSM I mentioned before, which is using quorum sensing molecules. It was a weird thing... bioluminescence is-- They discovered that bioluminescence was tied to quorum sensing back in the '70s and now they're using that as a sensor for the presence of bacteria, an immediate sensor, so they can tell if there's a certain bacterium present in a sample within two minutes, and there are dozens and dozens of technologies like that.
I think that it makes sense for angel investors to pay very close attention to the life sciences and to, in a way, retool as biotech investors. I don't think you're going to write as many checks as it used to write every year. If you're used to writing 12, 15 checks every year, you're going to think more in terms of writing three or four or five checks a year, but maybe those checks would be divided by four and you writing those over four years in. If you're making a commitment to a company, you should be making longer-term commitments and so forth.
There Are Promising Biotech Startups that Can Flourish with Just $5 Million in Funding – Angel-Scale Biotech Startups
One of the things I wanted to bring up, it came up with a conversation with an angel investor who happens to be a mathematician, his name is Robert Nagle. He brought up the question of risk. He thinks that the biggest obstacle for angel investors in biotech is that they perceive this huge risk of the-- I mean they think of biotech, they think Moderna. They raised, what is it, $2.7 billion in funding before they had a product that could make money.
I think one of the important answers to Robert's question about funding is just the average biotech is not Moderna. There are biotechs that are VC-scale like Moderna, and then there are angel-scale biotechs, such as Savran, such as QSM, such as AltrixBio, such as dozens that I can name, that with $2 million to $6 million in funding and a lot of support, a lot of connections, you can develop a technology to the point where strategic players are going to take an interest.
You're not going to go-- Look, SQZ is unusual in the sense that they had the collaboration with Roche which basically put them on the map in a lot of ways, and this is-- Armon Sharei will say this publicly, that was very important to have the collaboration with Roche but they were unusual in the sense that they're able to do an IPO, but most of the life science companies I'm investing in, I do not expect them to have an IPO and I will be very glad because they're going to do very well without an IPO because they haven't had to raise $50 billion or $500 million in funding.
Çağrı Savran: Absolutely.
Sal Daher: If there are no other thoughts, Çağri, I will thank you very much for making time. You've been so generous. Very busy person, with juggling being a professor and being a founding CEO of a very, very dynamic biotech startup. Thanks a lot.
Çağrı Savran: Thank you for, Sal, for having me, and thank you for all your questions and all your insight. It's very kind of you.
Sal Daher: I'm Sal Daher. This is Angel Invest Boston.
I'm glad you were able to join us. Our engineer is Raul Rosa. Our theme is composed by John McKusick. Our graphic design is by Katharine Woodman-Maynard. Our host is coached by Grace Daher.