"Secrets of Biotech Funding" with Paul Hartung

Paul Hartung returns to talk about how to fund promising biotech and life science companies. He continues his conversation from his previous episode discussing his past experience with angel investing.

Highlights:

  • Sal Daher Introduces Paul Hartung

  • "... Tell me the story of the first syndicated angel funding here in New England..."

  • "'... there's a bunch of guys like you and me who've been successful in business, who are starting to get together.' He said, 'I just joined a group called Launchpad...'"

  • "... I was CEO from the start and chairman, the president and secretary and [laughter] and all the offices..."

  • "... The story here is that technologies are coming out of labs that are amazing, that are just astonishing, that could do things that couldn't be done 10 years ago by any stretch of the imagination. It's not one-off, they're multiplying. The cost of developing this technology is a coming down..."

  • "... how do I support angels? Due diligence I think is part of it, creating due diligence, and I think part of it is also syndication..."

  • "... What is the end game? Who would be the strategic partners that might end up acquirers or might license the technology...?"

  • Pros and Cons of Grant Funding

  • ".. the timing of strategics is not the timing of startups..."

  • "... I think there's a lot of room for Angel-friendly venture funds that will work with Angels and will help bring Angels over from software investing into the life sciences, perhaps initially for digital health, but eventually, in wet lab..."

  • Advice to the Audience

  • "...Don't just have a purely science team. You need to have someone who's going to be your business representative if you will..."


Transcript of “Secrets of Biotech Funding”

Guest: Paul Hartung

Sal Daher: I'm really proud to say that the Angel Invest Boston podcast is sponsored by Purdue University Entrepreneurship and Peter Fasse, patent attorney at Fish & Richardson. Purdue is exceptional in its support of its faculty, faculty of its top five engineering school, in helping them get their technology from the lab out to the market, out to industry, out to the clinic.

Peter Fasse is also a great support to entrepreneurs. He is a patent attorney, specializing in microfluidics, and has been tremendously helpful to some of the startups which I'm involved, including a startup that came out of Purdue, Savran Technologies. I'm proud to have these two sponsors for my podcast.

Sal Daher Introduces Paul Hartung

Welcome to Angel Invest Boston, conversations of Boston's most interesting angels and founders. Today, we have back with us by popular demand. Paul Hartung. Say hello, Paul.

Paul Hartung: Hi. Nice to see you again. It's just been a couple of weeks. [laughs]

Sal Daher: Yes, I know. The thing is, this is a topic of burning interest for me: how to fund really promising biotech companies, life science companies? Paul has tremendous experience, tremendous depth in this as investor, as advisor, board member, he's seen it all. He did the first syndicated angel deal in New England. We'll get to talk about that and we'll talk about how best of fun, early-stage life science companies which are just massively, massively promising.

No matter about biotech winter in the stock market. No matter what's happening with Pfizer, with Moderna vaccine. We are living in an age of freaking miracles, and miracles that are coming a dime a dozen. They're accessible. It's the democratization of miracles in biotech. We need to create capacity to support all this stuff that's going on and they're not all moonshots. Reference to my rocket back there, you like the rocket, Paul?

Paul Hartung: [laughs] I do.

Sal Daher: My grandson, I just noticed, my grandson left his rocket back there. None of them are moonshots. They're more like drone flights now, very doable drone flights. Let's get going on this. Paul, we're back is at the end of the last interview that I had with Paul. By the way, Paul is also an MIT alum, so we geek out a little bit about MIT, so sorry, can't help it.

"... Tell me the story of the first syndicated angel funding here in New England..."

Anyway, so Paul offhandedly mentioned that he really liked to talk about life science funding because that's a bone he likes to chew on. That also happens to be a bone I like to chew on is a very large dinosaur bone that lots and lots of people like to chew on. Anyway, Paul, let's start here. Tell me the story of the first syndicated angel funding here in New England.

Paul Hartung: Sure. I had just come off a very successful tech startup. It was called Winphoria Networks that back in the day, this is early 2000s, had raised $50 million on a set of PowerPoint slides, hired 120 software engineers in three countries, and three years later, we sold the company to Motorola for $200 million. It's classic, right?

Sal Daher: Yes. Plot of curve of the size of startup rounds, initial rounds, and it's dropping. I remember that Beth Marcus-

Paul Hartung: Oh, yes.

Sal Daher: -back in the early '90s when she was going to shut down her company because the initial use case wasn't working out. She had $2 freaking million in the bank. Okay. Nowadays, a robotic glove startup with $2 freaking million [laughs] in the bank, so it has two years of runway-

Paul Hartung: Yes.

Sal Daher: -because everything is so much cheaper to do. By the way, Beth ended up pivoting thanks to a chance encounter with Bob Metcalfe at the strawberry chocolate dipping station at an event at MIT. She flew out to California. He put her on to Pierluigi Zappacosta, imbued her with the idea of a force feedback mouse, and she borrows the most powerful computer. The reason the original use case didn't work, everything kept crashing. She was trying to run it on a Mac, and they didn't have enough computers. She borrowed much more powerful, or was it -- they're called terminals? What was it named?

Paul Hartung: I think they call them terminals, yes.

Sal Daher: Yes. She flew a borrowed terminal out to Pierluigi Zappacosta's Logitech office. Pierluigi Zappacosta said, "Tsk, tsk, tsk. Force feedback mouse doesn't work, but force feedback game controller, that could be. Go talk to the people up in Microsoft." She backs up and goes up to Microsoft and sells the company. We have a very nice exit, and gosh, I was hooked on startups. That was in the early '90s. The point is, I think she had $2 million in the bank. She's going to shut down the company because the first use case hadn't worked. To try to rework something was going to be just too costly. She managed to do it. Anyway, Winphoria, you guys had 50 million, you sold for 200 million.

Paul Hartung: Yes and this, by the way, was something called push to talk on your cell phone. It was a walkie-talkie feature before texting really took off. People were actually talking on the phone back then. [laughs] Anyway, so I was a Motorola executive and I was ready to get back into life sciences. I deviated into tech Internet of things for a few years. I had this exciting opportunity where I met two founding scientists, basically.

One out of Brigham and Women's and one out of MGH and it was the idea of an eye scan for Alzheimer's disease. This was Cognoptix. The early days was called Neuroptix. Anyway, I thought since I'd just come from venture-backed startups, that I would just go to the VCs and it was a huge opportunity. It's Alzheimer's disease, huge problem.

Sal Daher: How innocent we were in those days. [laughs]

Paul Hartung: A breakthrough in this disease area. I thought, oh--

Sal Daher: 20 years ago we, oh, it's just to be on the horizon. We're going to do it.

Paul Hartung: What did I get back from the VCs? One thing had happened, basically, the Dot-com bubble crashed, imploded.

Sal Daher: April of 2000. That's one of the few times where I called something in the market. I was ready for that one.

Paul Hartung: Tough disease area. There are number of factors. The VC said, "We're not ready for this." I thought, "What am I going to do?" I started doing business networking. What ended up happening is we got a deal with Pfizer because Pfizer was developing Alzheimer's drugs. Then I got a second bigger deal with Merck, who was developing Alzheimer's drugs. Both of these deals end up going in the record books because there was zero equity involved. They were looking at it as enabling technology for their drug development and potentially being able to bring in patients to the drugs that they hoped would be successful in development.

Sal Daher: Basically, they were providing non-dilutive funding?

Paul Hartung: It was projects.

Sal Daher: Projects, okay.

Paul Hartung: They were getting deliverables. In a way, you could look at it as early revenues.

Sal Daher: It matures your technology. This is in Cognoptix?

Paul Hartung: Yes. That was right early validation, there were people who cared, corporations who cared about what we were doing. Through my business networking, I ended up meeting a guy named Richard Gill, rest in peace. He passed away in the last couple years. He ended up being a great investor and a mentor and board member of mine and friend over years. I'd never met the guy before, but through another business contact guy named Mike Henry, who worked at what was called Athena Diagnostics. It was in the diagnostic space. I was working in the diagnostic space. I said, you got to meet this guy. He's a successful serial entrepreneur in space. We sat down outside the wayside Inn beers in hand.

Sal Daher: Longfellow's Wayside Inn, right?

Paul Hartung: This guy was in shorts.

Sal Daher: Love that place.

Paul Hartung: A Brit, very strong accent. He said, "Have you heard of Angel Investing?" I said, "Oh, well, you mean like Bill Gates and--"

"'... there's a bunch of guys like you and me who've been successful in business, who are starting to get together.' He said, 'I just joined a group called Launchpad...'"

[laughter]

He said, ''No, there's a bunch of guys like you and me who've been successful in business, who are starting to get together.'' He said, ''I just joined a group called Launchpad.''

Sal Daher: Launchpad. Awesome.

Paul Hartung: This was in the early days of Launchpad Ventures, which--

Sal Daher: Ham Lord.

Paul Hartung: Ham Lord.

Sal Daher: He's been on the podcast and later, Christopher Mirabile, my buddy Raza Shaikh, hello Raza.

Paul Hartung: He said there's 40 of us now. It's like 150 or something in that group. They merged with another group. I was looking to raise a half a million dollars. Well, actually, I was looking to raise $400,000, to be clear. They put together a diligence team. He was able to introduce me to Launchpad, went through about three months of deal negotiations and lo and behold, I got a call from Ham Lord, and he says good news. We've got some interest, we've soft circled, we have $100,000.

[laughter]

Sal Daher: No. Wow.

Paul Hartung: I said, "Oh, my goodness, that's not what I'm looking for." This was coming up on Thanksgiving.

Sal Daher: You met all the mighty and power of Launchpad that's all the rocket power you could manage, 100K. They're a powerhouse today-

Paul Hartung: Oh, yes.

Sal Daher: -with different times. Yes.

Paul Hartung: Yes. I know at one point they were the third most active angel group in the United States, but anyway, so I rose to action. In the next week, I doubled the money by doing friends and family. I just opened--

Sal Daher: Launched is in, are you going to come in? That's a good strong argument because Launchpad does their homework.

Paul Hartung: Right. What we ended up doing, strategized, Ham again said, "there's a meeting coming up. It's the first-ever meeting of a group that's become the Angel Capital Association, and it's going to be in Portsmouth. They want some presenters of entrepreneurs who are raising money who've already gotten some commitments but are looking to raise more money." I was one of four invited speakers and it was perfect, because basically what we did is we had half the deal lined up 200,000. Ham convinced me to open it up to 500,000, make it bigger.

Sal Daher: Stretch a little bit, 25%. [laughs]

Paul Hartung: Yes. I presented and literally at the bar, I had one older guy talk to me who founded the Breakfast Club. Do you remember the Breakfast Club? The Breakfast Club used to meet with entrepreneurs over breakfast, if they liked the entrepreneur they would write checks at the table.

Sal Daher: There's even a version now of Angel investors that ride around in motorcycles. [laughs] My buddy Arrigo Bodda who, among other things, is a motorcyclist. They go from tavern to tavern in New England listening to pitches in their motorcycles, [laughs] I don't know what they're called, Hell's Angels or whatever. [laughs]

Paul Hartung: Anyway, there's this Breakfast Club representative said send me your stuff, and I said, "You want to give me an email address?" He says, "Oh, I don't do email, just mail me something." I mailed him something and a week later a check for 50,000 showed up-

Sal Daher: Oh, wow.

Paul Hartung: -from him. Over the next three weeks, keep in mind, this is between Thanksgiving and Christmas, over a three-week period, I oversubscribed the round and basically, after my talk, I had people lining up and I ended up having Granite State Angels from New Hampshire. Maine Angels ended up coming in at the last minute. Here's a story in being flexible. Again, I was raising $500,000. I did not want to raise more than that, but I was up to 485. There was 15,000 left, and three guys from Maine Angels approached me.

Sal Daher: FOMO, fear of missing out.

Paul Hartung: I had a minimum investment of 10,000 in the round. I lowered it to 5,000 for these guys, so I got these three guys in.

Sal Daher: Sure, in the Maine, yes.

Paul Hartung: The provisions of the deal, this was a convertible debt financing, was that it would convert at a terrible valuation in a year if I didn't raise an additional $1,000,000, so I had to raise an additional million dollars at a good valuation. That next year, Maine Angels was one of the biggest Angel groups investing I had.

Sal Daher: Awesome.

Paul Hartung: I had individual investors in that group investing $50,000.

Sal Daher: I love Maine Angels. They're a great group. My experience with them is that, every company for Maine Angels that I invest in just goes off the charts.

[laughter]

They do really well. Not every Maine Angel company, but every Maine Angel company that invested in it's done really well. Small sample, but still.

Paul Hartung: Yes, but I even got international investors.

Sal Daher: Well, Paul, I think what you're describing here a little bit is almost like pent-up demand. The market needed this formula and you happened to come along with something that fit the formula and you were one of the early players. You had immediate adoption and it's first-mover advantage. If you had done this a year later, the miracle might have been a lot smaller.

Paul Hartung: Right.

Sal Daher: I've seen this on so many levels.

"... I was CEO from the start and chairman, the president and secretary and [laughter] and all the offices..."

Paul Hartung: I'm very thankful to all of my angel investors for one. Launchpad played a key role, that a hundred thousand dollars initial investment. Really, they provided the diligence, they provided essentially the function of the lead. They ended up providing the individual to occupy board seat.

Sal Daher: You cannot argue with their seriousness. They're not the fastest money around, but they are the soundest and surest money around. They back up the companies. They do a tremendous job.

Paul Hartung: The next chapter in the story is end of 2007, I was ready for my B round because again, that following year, that conversion was an A round. We converted the convertible debt as part of the A round. We're ready for B round. I ended up having a new VC from New York come and put a term sheet on the table. Then I found myself syndicating the round. I had a circle of investors who had been showing interests so, I got a term sheet.

Sal Daher: At this point were you CEO or?

Paul Hartung: I was CEO, yes. I was CEO from the start and chairman, the president and secretary and [laughter] and all the offices.

Sal Daher: Everything. Yes. Typical startup situation.

Paul Hartung: Yes. Anyway, I had a little bit of a lesson in that there I have syndicate of three VCs, but the lead VC wasn't putting in the most money for one, and they had the least experience. What I found is it became a dysfunctional syndicate. We thought we had a deal ready to close, for instance, and I was getting last-minute calls wanting to change deal terms. I made a big decision to walk away and what ended up happening, here's where the angels come in again. My loyal and angel investors supported the idea, came in with a $300,000 bridge, and gave me time to be able to then find another lead investor. Now, this is 2008. What happened in 2008? The whole economy crashed.

Sal Daher: Crashed. Yes. The subprime crisis.

Paul Hartung: What I ended up doing was going international and guess what? There was a delay in the crash in Europe, it crashed first in the United States.

Sal Daher: Tsunamis take time to get to far shores.

Paul Hartung: I closed a multimillion-dollar, B round with Inventages was the lead investor. They were Swiss German. It was Nestle's money to a large extent. We ended up hitting the record books again as one of the bigger deals to close in that year because nothing was closing. I do send a message to folks to look internationally, you can't depend on the big-name VCs or big-name firms when you're starting to raise more money.

Sal Daher: How Would you encapsulate what you learned from that experience?

Paul Hartung: Go where the money is to a certain extent in terms of being flexible. Don't rely on traditional sources. Don't get discouraged when you're rejected by the big-name traditional sources that you think might be a great fit. The line that actually give to all entrepreneurs is you're going to have to kiss a lot of frogs. [laughs]There's going to be a lot more "nos" than "Yeses"

Sal Daher: Yes. Susan Conover certainly kissed a lot of frogs. Carlos Castro-Gonzalez certainly has, boy, Laura Indolphi of Panther Therapeutics. Oh boy. She's a champion kisser of frogs. She got $14 million in non-dilutive funding. Really hats off to her.

"... The story here is that technologies are coming out of labs that are amazing, that are just astonishing, that could do things that couldn't be done 10 years ago by any stretch of the imagination. It's not one-off, they're multiplying. The cost of developing this technology is a coming down..."

Paul Hartung: I mean, that to a large extent was that story. Then late stage, I became aware of big family offices. I know one fellow who's been extremely successful with that. A company called Mobius that was funded by Strategic Investments throughout and really avoided VCs. They were then eventually acquired by Stryker for a huge multiple. That's something where Gene Gregerson is the founding CEO. He is done this more than once. Basically, he would find smart family money. Physicians who understood what he was doing and really avoided VCs.

Sal Daher: Oh, yes. There's a lot to be said for that. Now, we sit at a time right now, Paul, that if we've had the wave of people being ooh'd and aah'd with Pfizer and Moderna, we should say Moderna and Pfizer because Moderna's really the groundbreaker there with the mRNA vaccine. It's getting a little over the hump now, but it's tremendously promising.

The story here is that technologies are coming out of labs that are amazing, that are just astonishing, that could do things that couldn't be done 10 years ago by any stretch of the imagination. It's not one-off, they're multiplying. The cost of developing this technology is a coming down. For me, the great challenge is how to create capacity to fund not the moonshot projects like Moderna. I think they had raised like $2.7 million before they actually cottoned onto the first use case of the mRNA vaccine.

Paul Hartung: Yes. A lot.

Sal Daher: More than 2.7 billion.

Paul Hartung: Oh, 2.7 billion. Okay.

Sal Daher: Yes. I think that's what they'd raised.

Paul Hartung: Yes. Let me just step in there. Sure. I think what you're talking about is this venture creation model that flagship and others have initiated. Basically, there's no opportunity to invest in good ideas outside of their companies. It's investing in ideas that they want to invest in.

Sal Daher: They are doing moonshots. Their created entities are doing moonshots and good for them, God bless them. I'm talking about the rest of the stuff, the other 99.9% startups that are not going to be the Modernas of the world.

Paul Hartung: Not to say the one-size-fits-all. I think, first of all, a lot of these things are coming out of academic labs. One thing I believe pretty strongly is that they should incubate really as far as they can in the academic setting where they have all the resources.

Sal Daher: Definitely, true.

Paul Hartung: I understand the desire to get out and form a real company, but if they're still sorting out basic science, they can do it at much lower cost under the umbrella of university. You're still going to have to end up paying royalties, they're going to have to do a license.

Sal Daher: Accept that. One of the most dangerous flaws that I see in academic founders is that they just don't get the distance. The person who pointed this out to me really well is Jeff Arnold, fellow MIT guy, a really great investor in life science companies. He said to me when I interviewed him, these guys are scientists. They don't know what it is to actually get something to work in real life. They're in the edge of the outer edges of the galaxy and doing stuff that's just unbelievably rarefied, but they don't know what it is to get something to work every day reliably in a large population.

It's not in their understanding. They can't under get wrap their minds around that because that's not how they're set up. They're set up to chase novelty perpetually. When you create a company, yes, you're doing something novel, but you're doing something novel in a reliable way. You're going to be dealing with human beings. It has to be reliable. It has to work. You can't do minimal viable products with human beings. People's lives. It has to be sound and so forth. They don't get that distance. They're really eager to get out and they don't realize that their projects are just not ready for primetime.

Paul Hartung: I think that the whole educational system has changed dramatically around that. At MIT there's now, The Martin Trust Center.

Sal Daher: Tremendous, yes.

Paul Hartung: Each of the schools there's the Visa Institute at Harvard.

"... how do I support angels? Due diligence I think is part of it, creating due diligence, and I think part of it is also syndication..."

Sal Daher: Harvard Medical School's working on this right now. I'm in touch with Wei Tao over there, and I hope to have them on the podcast. In Harvard Medical School, particularly, not just Harvard, but they're working on this Purdue is doing something really interesting. They sponsor the podcast, but I would be saying this, even if they were not a sponsor of the podcast because they have 500 engineering professors stuck in the middle of nowhere, west Lafayette, Indiana.

Okay. Eli Lilly's out there, but there's nothing else. They have a lot of stuff going on in the life sciences at Purdue. They're creating a support system for helping their faculty translate their technology, their science into the market, that is really impressive to see. I can tell you the case of Cagri Savran that Purdue has been unbelievably supportive of Savran's efforts. As a result, he's done really well with funding, he's making progress with the strategic collaboration, and let me tell you, he could not have done that with the garden variety technology transfer office attitude that I see in other places.

Purdue has been just phenomenally helpful, and they're going to go a next step, they have a new incoming president who has ideas for the next step, so there's exciting stuff happening in the universities in really unlikely places. I think Columbia does a lot of stuff that's interesting that deserves to be looked at, but what I'm talking about here is even with the university's doing all this stuff, when the academic founder is ready to step out, I'd like to have a large contingent of angels who may have cut their teeth on software startups, because angel investing has grown up around software startups.

Let me tell you, the opportunities are so huge in the early life science companies and these academic founders are phenomenally capable people. When you see that combination, really promising tech, a really phenomenal high functioning academic who has the [speaking Portuguese] as they say in Brazilian soccer, the waste play, flexibility the ability to move one direction or the other and so forth to be a good soccer player who has that ability to switch directions quickly, then you could have a winning startup very early on that may not require $50 billion of funding, like your previous startup Winphoria, it's the different era, but anyway, four, five, $6 million can get them to a very interesting collaboration with a strategic or two.

That's what I'm working on to try to create capacity for this, how do I support angels? Due diligence I think is part of it, creating due diligence, and I think part of it is also syndication, so imitating what you did back 20 years ago with Cognoptix, but with a lot more specialized due diligence, putting together due diligence team that is focused on that technology, and so life science is so siloed because you need to go out and find somebody who understand you go one molecule over one [laughs] you have to go, it's like in the woods.

Paul Hartung: Actually, I don't think there would be the digital health industry that exists today if it weren't for the software industry, people who made the transition.

Sal Daher: Yes, becoming life science, slightly life science curious, minimally [laughs] life science curious. Let's you see that can be their gateway drug, because I do digital health. The reality is all my angel investing is driven by my two brothers-in-law, okay? One brother-in-law is the brother of my wife, and he is an unbelievable founder and he's in the digital health space, and he got me into digital health startup that's doing really well, the most unlikely thing, the only thing that told me that they would succeed is that this is the most determined character I've ever met, Martin Aboitiz, my brother-in-law.

Sometimes people say it's stubborn, but other times, most of the time it's said, determined, it's a family trait, they're very determined people, they don't give up easily. My other brother-in-law is the husband of my sister Peter Fasse, who's also sponsor of this podcast, saying this of him anyway. He got me involved with Savran, he got me involved with SQZ because he is like superb patent attorney, and the guy, he just like lives breathes, he's a patent whisperer, he understands how to do these unbelievably subtle patents that are just like perfectly designed.

Between these two guys I've been investing, one has gotten me into wet lab stuff, the other one gets me into digital health, that's the history of my life science investing to my two brothers-in-law.

Paul Hartung: I think the wealth of technology right now has led to some fantastic solutions, but they're complicated, right? I'm a great believer in the idea of convergence when it comes to technologies and you've mentioned some startups, I'll pick on PanTher, for instance, treatment for pancreatic cancer, it's the idea of--

Sal Daher: What are the technologies converging there?

Paul Hartung: In her case, it's advanced materials technologies.

Sal Daher: Her is Laura Indolfi PhD. Stellar Founder, Laura Indolfi PhD.

Paul Hartung: Right. This is Langer Lab. Everybody's heard of Bob Langer.

Sal Daher: Material science for drug delivery. It's a drug-alluding material that the grades slowly and releases a cancer-killing agent directly on the tumor encapsulated inside another bit of material that degrades more slowly. It keeps the highly toxic anti-cancer agent on the tumor and doesn't create toxicity on the liver and accompanying that. They're going after pancreatic cancer. They're in clinical trials in Australia right now. They're just keep my fingers crossed.

Paul Hartung: Another area that people can understand is diabetes.

Sal Daher: No. Let's go back a little bit about the convergence of technologies.

Paul Hartung: Well, that's where I'm going with it. I'm giving you another example. That's one that combines drug with a material. You can think of it as a device. There are always debates about, this is a combination product or what is it. Then you have other products like glucose monitoring systems that then also do controlled delivery. The artificial pancreas idea, which is the panacea for diabetes patients who could just be monitored continually, not have to worry about.

Sal Daher: Yes, instantaneous control of glucose.

Paul Hartung: What's under the hood it's got software and hardware and drugs and it's complicated. It takes a village that the siloed industries no longer completely work.

Sal Daher: That's right.

Paul Hartung: On the educational front, these new biomedical degrees, and bioengineering degrees are starting to do this crossover disciplines. It gets tough when it comes to the acquiring companies and potential exits.

Sal Daher: That's right.

Paul Hartung: It's like who's going to buy you and who's-

Sal Daher: They're still in silos because the business lines are very siloed.

Paul Hartung: It's not like you can divide the product into two or three pieces or one company is a drug company and others the device company.

Sal Daher: Well, the thing is that a lot of these platforms, I think if you do it right, you have the chance to salami slice it and to license off different aspects of the technology to different strategic players who have very different dynamics, very different interests. This is my hope for Savran, is that they will do a series of strategic partnerships. Maybe they will develop a core business as well, but I could see entirely a future where it is just a whole bunch of licensing arrangements with different strategics, but done in an intelligent way. It's going somewhere.

"... What is the end game? Who would be the strategic partners that might end up acquirers or might license the technology...?"

Paul Hartung: I do think, getting back to the initial topic that we're on of funding strategies, it's important to sort that out. What is the end game? Who would be the strategic partners that might end up acquirers or might license the technology? Then getting early interest in the form of money either through the VC arm or I like the idea of doing projects and you can do it like a $500,000 project that has deliverables where--

Sal Daher: A proof of concept project.

Paul Hartung: It'd be based on the de-risking interests of the sponsor. They want to see certain things that gives them an opportunity to kick the tires on the company, see what the people are like to work with, see if they can actually get a positive outcome and that ends up helping later on when they are looking at putting a much bigger investment and say, acquiring the company, they can check off, well, we did this project very effectively.

Sal Daher: For the founder, usually there's no dilution in those crucial concept.

Paul Hartung: Right. I did a couple of those the first time I was a CEO.

Sal Daher: Might be a few strings related to licensing of the technology and a case of works out and so forth, but you should be so lucky as to have a licensing arrangement in that technology. Please continue.

Paul Hartung: That's something for companies to be looking at very early on is how can they get some initial tangible interest from future acquirer, being realistic that a medical device company, typically, doesn't get bought until they have a product on the market, some level of pilot adoption.

Sal Daher: Jeff Behrens who's also on the board of Savran is always at board meetings. I hope I'm not talking out of turn here, but he's always saying, yes, talk to potential acquirers and all this stuff, but keep maturing the technology because these strategics, their timeframes it's like elves and we're humans. Their timeframe is 3000 years and we're like three months we got to get stuff done. In the meantime, you have to keep moving your ball forward. You have to build your technology by doing more cycle and so forth, matures.

Paul Hartung: Absolutely.

Sal Daher: Because the next batch of strategics is going to look and say, oh, this thing is really ready. It really works. They can multiplex. Your chances of doing a deal is going to go up. Number one, keep moving the ball forward with your technology. Keep maturing your technology. Get it closer and closer and closer to something viable to market. Not for particular use case, but just doing a lot of cycles. It makes a technology more robust.

Paul Hartung: Right.

Sal Daher: Yes, do entertain these, particularly if they're self-funding.

Pros and Cons of Grant Funding

Paul Hartung: An area that we can kind of debate is benefits and drawbacks of grant funding.

Sal Daher: Let's talk about that, okay? Let me just give you the cartoon version of grant funding. [laughs] Cartoon version, free money. [screams] Okay? The next panel is, "What do you mean? You expect me to do this stuff and jump through hoops?" Third panel, "No, non-diluted funding is terrible, bad." Give me a more complex, less cartoonish interpretation of this.

Paul Hartung: Yes, I don't recommend that any company depend on grant funding for survival. You're not a company, you're really doing funded research if you're just purely dependent.

Sal Daher: Academics find that hard to resist. Getting grants perhaps second only to the ability to get published. [laughs]

Paul Hartung: That said, I've seen a number of cases and we keep mentioning Leuko, it's one where the founders have been very effective in parallel getting grants that augment the equity financing in ways that are helpful to the company. Looking at sizable grants, multimillion-dollar SBIR grants that are not a distraction.

Sal Daher: That's right because they're-

Paul Hartung: That's one thing you have to be careful of because you may have what you consider a platform and you might want to dabble in a bunch of different areas with small amounts of grant funding, but-

Sal Daher: In the case of Leuko, I think Leuko's particularly fits this model really well because there's basic science going on. There is a tremendous interest in the ability to measure how many white blood cells there are in the blood easily so that it makes it easier for people to be treated for cancer, chemotherapy for Alzheimer's treatments for all sorts of things. I think the NIH is really interested in this because it could save a lot of lives and save a lot of costs and avoid a lot of suffering.

A combination, I think of the fact that there's still a lot of science to be done, plus the fact that it's very high value has made that something that is fundable with a lot of non-dilutive funding. You know what? Jeff Behrens and Siamab, are you familiar with Siamab?

Paul Hartung: No.

".. the timing of strategics is not the timing of startups..."

Sal Daher: They were developing therapies for a particular type of cancer based on certain types of sugars that are expressed in the outside of the tumor. There were at least two programs that they had. They were very promising and they managed to get those programs taken over. They had nice exit and progress payments. The whole thing was very attractive, very well done. Jeff Behrens was the CEO, he was not a founder.

He came in as a hired CEO and he ended up bringing in 45 angel investors to fund the deal. He couldn't get VCs interested, but what he did get is he got strategic players to come in, and eventually, the strategics took over. It was one of these acquisition things and he well knows that the timing of strategics is not the timing of startups. It's like elves and humans. They have different lifespans.

Paul Hartung: Yes.

Sal Daher: He was able to negotiate that to a very successful exit. It happens. Now, I do have another example. I'm not going to mention the startup, but this is a very interesting startup also in the life science field. They foresaw non-dilutive funding. This is kind of a digital health. It's a crossover between healthcare. It came with a lot of strings tied that required them to build capabilities that were just not germane to the immediate problem in front of them.

They would've been working on all this other stuff that was distracting just because it's built into the funding. For them, it would've been a distraction. I think a hint is if you're doing stuff that's close to basic science and is tremendously high value. Has a potential of saving people from, well, stage four ovarian cancer, making chemotherapy much more tolerable and manageable and increasing survival rates tremendously, and so on. If you're playing in that space, you are more likely to get non-dilutive funding, and that's where you should go.

Paul Hartung: You can be opportunistic about it. I'll give you an example. When I was working on the Alzheimer's diagnostic, there was a government initiative around Alzheimer's disease where grants were being given to a lot of companies that were just working in the space, and there weren't many strings attached. They were just trying to support the field.

It was honestly, pretty easy money at the time. Yet, it didn't make a huge difference in running my operations in that I was already VC funded, I had a significant amount of funding, but it was helpful. I think there's a difference between being dependent on it. That's the other thing. When you're doing your budgets don't depend on the grant funding that may come in in six months or a year. Do it based on what you know you can raise. I think we were talking about the changing landscape. I remember a time when it was very important to VCs to be the first money in.

Sal Daher: Oh, okay.

Paul Hartung: Because they were concerned about complex cap tables, and they had a fundamental problem with Angel investors being in first. Likewise, I think to this day, there may be to a certain extent Angel investors who would really prefer that VCs never come in.

Sal Daher: Yes. There's some of that too.

Paul Hartung: The cram-down fears. Looking at things more positively for one, I think in placing bets, you've got to bet on success. That the idea is that value will increase over time. As long as the value of your shares is going up over time.

Sal Daher: Nothing succeeds like success because don't worry about dilution. If the value of your company is going up and you're building your technology, you're building the use cases, it's okay. You're going to own less of the company, but you're going to be richer.

Paul Hartung: I won't name the firm, but a VC firm that I knew pretty well in the tech space admitted to me a number of years ago when I was starting a new company that they'd really changed their policy, that they no longer cared, who invested first. They really wanted someone else to de-risk technology to a certain point.

Sal Daher: Very wise, instead of holding your nose about Angels being on the cap table. They're saying, oh, these Angels may be onto something they might help de-risk.

Paul Hartung: Honestly, something I never forgot, and some entrepreneurs do forget and they piss a lot of people off is how important the early investors are.

Sal Daher: Amen, brother.

Paul Hartung: I got to know each and every Angel investor. There were times when I picked up checks in driveways at their homes or whatever, I got to know people personally. I ended up having families invest in my company.

"... I think there's a lot of room for Angel-friendly venture funds that will work with Angels and will help bring Angels over from software investing into the life sciences, perhaps initially for digital health, but eventually, in wet lab..."

Sal Daher: Absolutely true. The thing is, these VCs that are having these realizations, they are in a situation where they cannot even follow up on the deals that are coming at them. They're so swamped. There is a lack of capacity for early-stage life science VCs. There are some very good ones, very capable ones, but in my experience, they're so overwhelmed with opportunities.

They can't give you the time of day, the large players like the Flagship Pioneering, Third Rock, these guys, they're off into their own created entities venture creation, and they're in another space. There's a lot of room here. I think there's a lot of room for Angel-friendly venture funds that will work with Angels and will help bring Angels over from software investing into the life sciences, perhaps initially for digital health, but eventually, in wet lab. Because I think wet lab stuff is where you can have some real home runs.

Paul Hartung: I think, also, the other dynamic is Angel deals are getting bigger. There was a huge gap a number of years ago, Angels would put in hundreds of thousands of dollars or maybe up to a couple of million and then they would tap out and that just wasn't enough for startups to get farther far enough along so it's nice to see multimillion-dollar angel deals.

Sal Daher: Paul, in the interest of our listeners and founders who are thinking about funding their life science companies, let's brainstorm some valuable tips here as we wrap up. What are things that come to mind for you?

Advice to the Audience

Paul Hartung: Well, first, make sure that your science is really solid because no one wants to invest in a science moonshot that has no good evidence that it's going to work.

Sal Daher: Make sure it's not what Michael Mark, my mentor. Friend, you know Michael, right?

Paul Hartung: No, I don't.

Sal Daher: MIT guy. He’s invested in like hundreds. He's in the software world but he looks at all this life science and goes, "Sal, that's a science project". Make sure that Michael Mark doesn't look at it and say, that's a science project. Make him look like, "Oh, maybe that's a technology that could be translated to the market."

Paul Hartung: It comes down to the basic question is does it work and why do you have confidence that it's going to work? Recognizing that with life science’s validation, if you will, you have to go through a whole series of steps ultimately testing in humans and that costs a lot of money.

Sal Daher: The stakes are much higher.

Paul Hartung: There's some early things you can do to ensure that you've got the best shot possible at success in having it fundamentally work but you also need to answer the question of who cares and I suppose we talked about that earlier.

Sal Daher: Very valuable.

Paul Hartung: It’s like can you think of potential acquirers in the future who would care, what patient and patient groups and health centers might really care about what you're doing? There's a process there of reaching out to potential stakeholders that can be done very early.

Sal Daher: In your technology, if you can prove that it works, could it 10x the business of an incumbent strategic in a particular area? Does it have the potential? Could you come up to them and say, "Look, you add this thing, it will be proprietary and you're going to have a much, much better product to offer the market that is already pretty big and is shrinking because margins are being reduced and so forth." That is gold. The strategic will say, "Oh yes, I need to have this." You've got to map out.

Now it may be early, I've seen cases where a technology is developed because there was a guess that this is a use case that's going to work. The founder goes around and talks to a lot of people and so forth and they come back and say, "You know what, we don't care about that use case. That's too far into the future but there is this other use case that if we can get this thing to work for this use case, man, that could be life-changing for us. We'll back you in that." That's the kind of stuff you're looking for. That's the kind of discovery, market discovery that I think you're looking for in conversations with strategics. Please continue, Paul.

"...Don't just have a purely science team. You need to have someone who's going to be your business representative if you will..."

Paul Hartung: I think in constructing your team, don't just have a purely science team. You need to have someone who's going to be your business representative if you will. Recognizing founding teams it gets complex because everyone on some level needs to contribute equally and be recognized and not have a complex organization with a lot of hierarchy but ultimately, someone needs to be designated CEO.

There's someone in the founding team that can take that role or whether you need to bring in someone with more experience or want to bring in someone with more experience. That's something you need to go through before trying to pitch and sell your team and your technology at the same time.

Sal Daher: I have Ed Roberts and Chuck Easly banging in my ear right now and my memory. More founder is better, more co-founder is better. The complement, it is the single most well-established result in the study of entrepreneurship. Having a co-founder who complements your skills and abilities but is consonant with you in terms of values and goals is hugely, hugely helpful in increasing the likelihood of success of your venture. Founding a company is lonely, it requires a lot of different skills and two co-founders working together, complementing each other is unbelievably more powerful than just one founder alone.

Paul Hartung: Then I think that there's a very robust support system out there of mentors and accelerator programs --

Sal Daher: It's really impressive, very thickly tangled with support systems.

Paul Hartung: Take advantage of that and putting together an advisory team and get involved in mentorship programs. Ultimately, I think that certain contests is a way of getting validation of your pitch can be used-

Sal Daher: Yes.

Paul Hartung: Not so much for the money that you might win, the 25, 35, $50,000 but more the validation.

Sal Daher: Just the number of cycles of having your pitch going out there. The cycles of your technology, but also the pitch. Your pitches develop. That brings to mind my buddy, Richard Meiklejohn of M2D2, they run these competitions out there. There's actually some money on the table a lot of times. Do those, because, believe me, your pitch deck improves. You think you're giving the same pitch three months but you're not.

Okay. I've seen founders pitch in April, and then pitch in June, the improvement that they make from April 1st to June 30th is astonishing, and they don't realize it. They think it'd be pitching the same company but they've made a lot of headway.

Paul Hartung: Then ultimately, I think probably the most important entree to getting funding is finding a champion.

Sal Daher: Yes, the lead investor.

Paul Hartung: We're coming down to it's like we talked about law firms, talked about investment firms, you really need to find an individual who can hold your hand and introduce you and in closed session, after you leave, after you do your pitch, can vouch for you, your champion. You may find that through these other mechanisms, through presenting a number of times, and-

Sal Daher: There are no shortcuts, it just a lot of cycles. You got to-

Paul Hartung: You just got to find the right match.

Sal Daher: You got to do the homework.

Paul Hartung: That may take the form of someone who has a personal connection. They might have a family member affected by the disease area you're working in. You never know but important to find that kind of person.

[music]

Sal Daher: Paul Hartung, I am delighted that you made time to come in and talk to us about funding of life science companies. Your rich experience, hard-earned experience, over 20 years of investing in the space of putting deals together in this space, heading up companies in the space. Very, very rich, and I wish we could have continuing conversations. We just got an idea for something we're going to do. We're going to do the summation of this podcast for the conversation we just had, is going to be available as a video version, which Paul and I are going to record in just a few minutes after we wrap up this podcast. Be on the lookout for that and I think it could be really valuable to founders. Okay. Paul Hartung, thanks a lot for taking time to be on.

Paul Hartung: Well, thank you for having me.

Sal Daher: Awesome. This is Angel Invest Boston. Thanks for listening. I'm Sal Daher.

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.