To super angel Jeff Arnold the way to make money in biotech is to make few but highly researched bets and then back them to the hilt. His remarkable record is hard to argue with. The interview takes us from his student days at MIT through his various startups and investments; a tour de force. His approach has much to teach angels and founders.
Episode highlights:
Sal opens by talking about how he delights in the promising companies that come from Boston’s unrivalled concentrations of universities. He mentions his investment in Gelesis which recently got FDA approval to market a new weight loss treatment.
Sal introduces engineer, founder and super angel Jeff Arnold who studied electrical engineering at MIT and then spent the next seven years building and marketing medical devices at Becton Dickinson.
Jeff Arnold describes his experience at Cambridge Heart which he headed through an IPO.
The most salient lesson is that technologies that work in the lab do not necessarily translate to the real world.
Incentives differ greatly from business to the academy. In business, the goal is to fail fast so that you can find the ultimate solution. In academia, the goal is to discover new things so that reliability of the technology is not such a big issue.
To Jeff Arnold, the CEO’s job is to raise the money needed to execute the plan, not to execute the plan that can be afforded by the money available.
Jeff gives a vivid example of trying to do without an expensive study and permanently limiting the value of the company’s technology. It was profound and painful experience.
Jeff advises to raise as much money as you can when the money is available.
Another vivid example is given. Led to Jeff being Entrepreneur of the Year at Goldman Sachs.
Entrepreneurs are optimistic and tend to raise just enough to get them to the next round. This leaves no room for miscalculations, which are common with new technologies. Miscalculating the raise could be company-ending.
Companies fail because the CEO allowed a bad thing to happen when the company was out of money.
Common sense advice: don’t schedule outcomes that can make or break the company during raises.
You can get very far with a compelling pitch. Hear the pitch that got Goldman Sachs to take Cambridge Heart public.
Being CEO is all about selling; selling to your investors, selling to your hires, selling your vision to your employees and selling to customers. If a founder can’t sell, she/he needs to get a CEO who can.
For a CEO, an IPO is merely a funding event. When a CEO sells some of his shares a lot of alarms go off. They have to stay all in.
Jeff started angel investing after his last job as a CEO. He hired his replacement and became chairman. That gave him time to be a mentor at MIT’s Venture Mentoring Service (VMS).
He discovered that the companies in which he invested and advised did better than the companies in which he was only an investor. He decided to invest only in companies he could advise.
He invested in 17 life science companies, advised 15 of them, about half of which had exits, two failed and the rest are doing well. A very impressive record.
Jeff’s style of investing resembles that of Elon Musk and Walnut colleague Frank Ferguson. Take few bets but work with them intensively and invest in every round that looks promising.
Jeff Arnold looks for companies that are addressing problems big enough for a nice exit to be possible and yet will not take too much money to get off the ground.
In deciding whether or not to get involved with a company, Jeff does not place so much emphasis on the team because he helps build the team. He looks for a CEO or founder who is coachable.
Jeff looks at all the risks to the success of the startup and expects all to have 90 percent chance o success except one, that might be fifty-fifty. If there are two 50 % risks, that’s too much risk for him.
Sal asks for you to leave a review on iTunes. Super angel Jeff Arnold gracefully offers to leave a review himself.
Some of Jeff’s favorite startups: JB Therapeutics, now public as Corbus Pharmaceuticals. JB/Corbus was developing a treatment for fibrosis based on a non-psychotropic derivative of THC (the active ingredient in marijuana) which is a powerful anti-fibrotic; i.e. prevents the growth of fibrous tissue that shows up in scars after injury. Targeted systemic scleroderma which affects mostly women in middle age and has a 50 percent ten-year mortality.
Corbus is now valued at half a billion dollars. Jeff thinks it’s undervalued because he thinks it’s going to get FDA approval for its systemic scleroderma therapy.
What made Corbus a great investment was that the drug was already in use in humans so it was not so expensive to re-purpose it to this orphan disease.
Xeno Biosciences founded by Hasan Celiker, Ph.D. aims to achieve the weight loss of Roux-en-Y Gastric Bypass surgery by introducing oxygen into the small intestine via specially designed capsules that the patient ingests thus altering the biome of the gut.
The significant benefits in terms of weight loss and control of Type 2 diabetes caused by gastric bypass surgery is not replicated by any other treatment. It was originally believed that bypass surgery worked by reducing the absorption of food due to a reduction of the size of the digestive tract. There is now growing evidence that bypass surgery works by altering the biome in the intestine to include aerobic bacteria made possible by the presence of air that bypass surgery lets in. Xeno Biosciences seeks to make a similar change to the micro-biome by introducing oxygen via a pill, thus avoiding the need for surgery.
It is believed that oxygen in the gut changes brain signaling to produce weight loss. Xeno is going to start patient trials in Australia soon.
The recurring mistake Jeff sees in startups is over confidence by CEOs and founders.
Bob Langer companies succeed in part because they attract a lot of money and a lot of smart people. This allows them to succeed when things don’t go well. They have money in the bank which allows them to pivot. I saw this in the case of SQZ Biotech.
Life science companies usually have nothing to sell but shares in the first few years. This leads to a conflict with the boards desire for transparency. Too much truth can dry up funding. Jeff sees value in a strong advisor who is not on the board and can support the CEO.
Jeff’s value to companies is in helping them avoid company-ending mistakes.
Never apply to angel groups via the website, go to LinkedIn and look for someone you know to introduce you. Then apply.
You are ready to pitch to angel group when you can provide validation that most of the risks to your startup are low. There are a lot of competitors from well-funded labs who have a lot of data to backup their likelihood of success.
There should be at most one area in which the angels have to do due diligence; beyond that is too much friction and your raise will go nowhere.
Jeff was inspired to build a product from watching the heart monitor at his mother’s bedside in the hospital and wondering if the data could be captured digitally. This led to eventually creating such a device at Becton Dickinson.
In summation, Jeff advises company founders to be honest and straightforward with their boards and investors. He provides a cogent example.
Being willing to help people pays off eventually, and in surprising ways. That’s the approach of Keith Ferrazzi of “Never Eat Alone” fame.