Listener Robert Nagle is a mathy software guy and an angel investor. We had a great chat which included his perceptions of the risks in biotech investing and also discussed some of the companies in his portfolio. This is an instructive conversation with a thoughtful angel investor.
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Highlight:
Sal Daher Introduces Listener Robert Nagle, Mathy Software Guy and Angel Investor
Robert Nagle Was Born in Ireland & Came to the US
Robert Nagle Knew Jon Hirschtick as a Brilliant Intern at Computervision. Listen to Jon Hirschtick episode.
“If you're nice to people, sometimes they remember, sometimes they don't. If you're a jerk, they always remember...”
Robert Nagle’s First Angel Check – Startup Making Bespoke Eyeglass Frames
Conversation About Virtual Angel Investing
“...many fascinating opportunities that spill out of the universities...”
“That model that serves virtually-based, tool-based, asynchronous doesn't depend on a meeting is one of the exciting innovations that I think TBD Angels has brought to fruition.”
“I think more than one model is good for angels. The aggregate sums as you point out can be comparable.”
Robert Nagle Belongs to Hub Angels, Sky Ventures and TBD Angels
Two Brothers in Law: How They Help Sal’s Angel Investing
Robert Nagle on His Portfolio Company Easyship
Robert Nagle on His Portfolio Company NODE40 – Pickaxe & Shovels for Crypto
Sal Daher on Portfolio Company Meenta – A COVID Rocketship
Rockstep Solutions – ERP for Pre-Clinical Trials
VistaPath Bio – Machine Vision Helping the Intake of Pathology Samples
“...what holds you back from investing in life science companies?”
Sal’s Mentor on Life Science Company Was a Life Science Skeptic Having Made His Money in the Space
“...life science companies...are taking over the value of the portfolio. That's where all the value creation is going on.”
Said of SQZ: “...I'm putting my money on the fact that they have a technology that helps other people produce their therapies faster, more efficiently.”
Said of Savran Technologies: “A few million dollars is enough to develop two use cases in a company like that.”
The Subset of Biotech Companies that Interests Sal Daher, CFA
How Sal Daher, CFA Made a Good Chunk of His Net Worth on a Scary Asset
“At one point I had my kid's tuition money in Nigerian promissory notes. You'll probably say, "Majnun," that’s Arabic for crazy.”
“That taught me a lesson that a particular area, a particular asset that people don't like at all, they turn their noses at it. There, I will find opportunity.”
Why Life Science Companies Are Paradoxically Accessible to Intelligent Lay People
“I don't think the challenge is people being unable to see the opportunity. I think the problem is...on the risk side.”
The Weird & Wonderful Story of Bacteria That Glow in the Dark
Robert Nagle on Marc Andreessen’s Thesis about Founder-Led Companies
“I'm always gratified when I talk to a listener. I have yet to be disappointed, and I'm also surprised at the number of people come up to me and say, "I started my startup because of listening to your podcast."”
ANGEL INVEST BOSTON IS SPONSORED BY:
Purdue University entrepreneurship
Peter Fasse, patent attorney at Fish & Richardson
Is Biotech Investing Risky?
Guest: Mathematician and Angel Investor Robert Nagle
Sal Daher: This podcast is brought to you by Purdue University Entrepreneurship and by Peter Fasse, pat attorney at Fish & Richardson. Welcome to Angel Invest Boston conversations. Boston's most interesting founders and angels. Today, we are delighted to have with us Robert Nagle, who is an angel investor. Welcome, Robert.
Robert Nagle: Thanks, Sal. I'm very happy to be here also. I listened to many, many of your episodes and surprised and delighted to be a guest on one.
Sal Daher Introduces Listener Robert Nagle, Mathy Software Guy and Angel Investor
Sal Daher: I'm even more pleased to be reminded that you are a listener to the podcast. I can tell you, I have yet to be disappointed meeting a listener; always impressed me. I'm always like, "Oh, gosh, people like this listen to my podcast. I better up my game." [laughs] It's always like that. Anyway, for the listeners who may not know Robert, Robert studied at University College Cork undergraduate and a master's degree in mathematics. He also has a mathematics degree from Carnegie Mellon University. He is on the algorithm side of things, the computational method side of things. He's worked in that area his whole life. For the past five years, he has been an angel investor. Robert is a member of Hub Angels and of TBD Angels. I saw him yesterday as a guest at Walnut, so he gets around a bit.
Robert Nagle: An interesting meeting, yes.
Robert Nagle Was Born in Ireland & Came to the US
Sal Daher: Tell us a little bit of your story. I assume you were born in Ireland and came to the States at some point.
Robert Nagle: I remember a few years ago, someone asked me to do what they called a river of life and all the major branches in your life. When I mapped mine out, it was so twisted and convoluted that it was hard to be consistent about it, but my life had definitely taken many twists and turns from what I originally envisaged. I really started studying medicine because that's what I wanted to be since I was knee-high to a grasshopper. In Ireland, I was studying some physics as well and just really totally enamored of physics, which led me to mathematics. That defined the next 10 years of my life really.
Came to Carnegie Mellon to do some work on continuum thermodynamics which was pretty exciting but it wasn't really what I had anticipated it would be in terms of a career. I felt that the learning that I was doing was coming to an end. I transitioned into software and began work with one of the CAD companies that was popular in Boston at the time. From that, I went from one heavy software, algorithmic innovation to another. First, with computer-aided design, interactive 3D graphics, molecular design, trying to do drug design on a computer into AI twice.
First, many decades ago with expert systems, more recently with machine learning, also spent quite a bit of time on big data problems and analytics. I've worked on many different aspects that are computationally intensive that are-- With each passing year, the world gets better and better at solving those problems. That led me to a point where I had transitioned from the algorithmic side to being more of a product manager, to being more of a general manager, and worked at companies ranging in sizes from 5 people to 500. Eventually, decided that I was able to maintain that stimulation and excitement by engaging with some of the smartest people who are founders today.
That's really what got me involved in the startup ecosystem was just going around and listening to pitches and talking to founders just was absolutely fascinating. Originally, I had a very firm thesis in mind, but I quickly discovered that many people were doing interesting things in other areas and so I spent time with them and to my first investment and then my next and my next, my next. In conjunction with that, I've been on a giving-back kick for about a decade. I started volunteering as a mentor with many entrepreneurial ventures which led to some advisory roles as well. That led to more opportunities to hear exciting pitches as friends of CEOs that I was supporting or mentoring introduced me to other interesting opportunities.
Sal Daher: Excellent. Excellent. By the way, have you run across Jon Hirschtick-
Robert Nagle: Yes.
Sal Daher: -of SolidWorks fame and Onshape fame?
Robert Nagle: Absolutely.
Sal Daher: He's been a guest on the podcast.
Robert Nagle Knew Jon Hirschtick as a Brilliant Intern at Computervision
Robert Nagle: That was an episode released a few weeks ago. I listened to it keenly because Jon was actually an intern at Computervision, while I was working on some of the challenging graphical problems that later were commonplace, and he was able to use as part of his 3D thrust. Jon was always an impressive character and stayed in touch with them as he went through Premise, and SolidWorks, and then Onshape.
Sal Daher: That's tremendous. It's great. You talked about mapping the rivers of your life, and so forth, these branches intertwine with the branches of other people's rivers, and then go away again. I find that in my investing that I run across unlikely people in the capitalization tables of companies that I'm invested in. It renews a friendship that we might have had two or three years ago, and we start interacting more. It's a wonderful thing.
Robert Nagle: The world is, I think, surprisingly small. I think that there are frequent reencounters with people that you had positive interactions with a decade or more ago.
“If you're nice to people, sometimes they remember, sometimes they don't. If you're a jerk, they always remember...”
Sal Daher: That's right. The world is small, don't be a jerk because [laughs] you're right, the people can, and the people remember. If you're nice to people, sometimes they remember, sometimes they don't. If you're a jerk, they always remember, and they'll always try to trip you up somehow. Anyway, Robert, let's do a little bit of this angel biography thing. Tell me about the first check that you wrote to a startup.
Robert Nagle: The first check that I wrote I was going around to various pitch events in Boston and listening to founders and soliciting opportunities pretty much on my own. Someone was doing a very intriguing proposition that if you generalize it to the ultimate extreme, it was personalized manufacturing. Specifically, what they were doing was making sunglasses that were customized to the shape of people's heads.
Robert Nagle’s First Angel Check – Startup Making Bespoke Eyeglass Frames
It's a relatively expensive investment, and they don't always fit very well. Being able to custom manufacture a frame that fits the shape of someone's head was an interesting proposition. That was the very first check that I wrote.
Sal Daher: Excellent, excellent. What was the company called?
Robert Nagle: The company, unfortunately, is no longer in existence. It's morphed. The founders went their separate ways. One investor stays on a consulting role. It formed into-- from a product company into a consulting company.
Sal Daher: You came by these people via pitch events and just meeting people one-on-one?
Robert Nagle: That's how I started out. Then I started getting involved with some of the angel groups and through some of the universities with even broader reach. Then as you mentioned, you start to meet people that you knew in a former life, and they introduce you to more opportunities, and it just spilled on from there.
Sal Daher: Yes. I'm curious. Does Carnegie Mellon have a virtual angel group?
Robert Nagle: It does.
Sal Daher: In Pittsburgh, there's a lot of entrepreneurship stuff going on.
Conversation About Virtual Angel Investing
Robert Nagle: Yes, there's a pretty active collaboration between Carnegie Mellon and the University of Pittsburgh's right next door. There is an ad hoc angel group that has come out of Carnegie Mellon, called 99 Tartans. Tartan being the emblem of Carnegie Mellon. Its activity comes and goes in spurts, but I do try to stay in touch with the entrepreneurial activities that are shared between Carnegie Mellon and the University of Pittsburgh.
Sal Daher: Very good. This question comes to mind because recently the podcast has become sponsored by Purdue University, the entrepreneurship activities at Purdue. Purdue has a top-five school of engineering, nearly 500 professors. They have this attitude of-- The usual way that the professors are evaluated, look at publications and citations, how often a paper is cited, that kind of stuff, but they're also evaluating them on patents that they're writing, and also on startups that they're creating.
Purdue has a lot of interesting startups. They have a lot of-- particularly the school of engineering people inventing cool things. I'm an investor in Savran Technologies, for example. They came out of Purdue. There are a bunch of other really interesting companies. Purdue's trying to scratching its head, how do we connect because they don't have an angel network or very much of an angel network out there. How do we connect with angel networks across? One of the things that occurred to me was to connect them with TBD Angels. I also want to connect them with Walnut. I think there's an opportunity to mix between the virtual angel groups and the in-life angel groups. Any thoughts on that?
“...many fascinating opportunities that spill out of the universities...”
Robert Nagle: Yes, I think you're raising a very interesting point. I think, first of all, there are so many fascinating opportunities that spill out of the universities because the research that some professors are doing is truly mind-blowing and it crosses many, many domains. It's not just in software fields. It could be in applied materials. It could be in better encapsulation for drugs. It could be in all kinds of things, and so that's a constant font of innovation. Universities that have made an investment in entrepreneurship and have good programs around that, sometimes those go as far as they need to go, sometimes those only help the budding entrepreneur thus so far.
One of the things that we've seen in the last 12 to 18 months, and you alluded to TBD Angels, is the emergence of virtual angel networks which are a strong step away from the model where traditionally you know somebody who introduced you to [unintelligible 00:11:36] like an investing club that you were part of, and it operated very much on a handshake and people being homologous in many respects.
I think that 21st century might have enabled new models. I think that's what TBD Angels is trying to do, is trying to give people access to deal flow and insight to opportunities and give the entrepreneurs access to active operators who may not be able to write the same checks the folks at Walnut or others can do but who can help them substantially as angels have traditionally done with deal structure and introduction to prospective customers or prospective employees or support services of various kinds like patent attorneys or smart accountants or whatever it is that that people need.
“That model that serves virtually-based, tool-based, asynchronous doesn't depend on a meeting is one of the exciting innovations that I think TBD Angels has brought to fruition.”
That model that serves virtually-based, tool-based, asynchronous doesn't depend on a meeting is one of the exciting innovations that I think TBD Angels has brought to fruition. Not the only people in the country doing it, but you can see by the growth rate of membership and the deal flow that's going through there that it's an attractive model to many people.
Sal Daher: I think they're doing it really well. I knew David Chang before he started that. I interviewed him some years ago and I interviewed him more recently with Yael deCapo and some of the people who are very active there. It's interesting because individually people don't write the size of checks that people at Walnut will write. They're Walnut members who will write $100,000 checks sometimes even more, but at TBD sometimes if enough members join in a company, it'll be more than around at Walnut because there's so many of them.
If you have 50 people writing $10,000 checks it'll get to get you to $500,000. Walnut somebody may come out with three or four people writing $25,000 checks. It's a different relationship, it's a different connection, and so forth, but I think there's room for both. This is the reason why I belong to both. I belong to TBD and I also belong to Walnut. I see the value of both of these. I'm not the only member of Walnut who belongs to TBD now. There are quite a few because I think people perceive, I'm thinking of Ben Littauer, for example. At some point, I want to catch up with Ben on this as well. You know Ben Littauer, right? You've met him.
“I think more than one model is good for angels. The aggregate sums as you point out can be comparable.”
Robert Nagle: Yes, I do. I think you're right. I think more than one model is good for angels. The aggregate sums as you point out can be comparable. I think one of the things that is potentially beneficial for TBD Angels is that the decision-making process is asynchronous. It's not bound by a calendar. It happens when enough people say yes, not when a certain day on the calendar comes around. That can be beneficial to the entrepreneurs. On the flip side, however, that means that there's not as much time for diligence, so that there's a certain reliance on external diligence. That's what groups like Walnut and others in the Boston area have done a great job on is developing a good process around diligence.
Sal Daher: Right. There's a deal that I'm leading right now that is also at TBD. I'm impressed with the founder. I'm impressed with the business. There are a couple of aspects of it that I have to understand better. I'm experiencing this right now. I'm working on something digital health-related, but it's both on the TBD side and the Walnut side. Angel Investing has very many directions. Tell me, you belong to Hub Angels, you said?
Robert Nagle Belongs to Hub Angels, Sky Ventures and TBD Angels
Robert Nagle: I belong to Hub Angels and I also belong with Sky Ventures, which tends to focus on life science.
Sal Daher: Oh, Sky Ventures. Can you tell me a little bit about each one of them? What attracts you to them?
Robert Nagle: Well, the attraction at Hub, paradoxically, is not having to do as much work, even though I'm quite happy to do work, and I enjoy--
Sal Daher: How are they organized?
Robert Nagle: Well, that's organized as almost like a fund where there are two designated fund managers who do the screening, and who do the majority of the work around diligence, and we make investments. We contribute to a fund. We're almost like LPs, contribute to a fund, and the investments are made out of the fund.
Sal Daher: You're making an investment in a pool of startup assets, or are you investing as a group in a bunch of people investing in one startup at a time?
Robert Nagle: Well, it's neither. It's like a fund. We write checks to the fund, and investments are made out of the fund, but diligence is overseen by the fund managers, but it's really done as well by many of the members. We do end up going pretty deep on each opportunity. Oftentimes, if there's a board observer role, a member who's not one of the managers will take that role because he or she has special expertise that binds them to that. That role is kind of a very hybrid model.
Sky Ventures is a more typical club model, whereby there's a screening committee. Diligence is conducted by members and reported to the entire membership, and then each person makes an individual decision to write a check to it. With Hub, you end up with a single entry on the cap table. With Sky Ventures, you end up with as many as people wrote checks.
Sal Daher: That's like Walnut. It's known among founders, I think, as herding cats. What are check sizes like at Sky Ventures?
Robert Nagle: Individuals write checks between $25,000 to $100,000 or $150,000.
Sal Daher: It's more like Walnut.
Robert Nagle: The aggregator to the founder could be anywhere from $100,000 up to $500,000. You end up with multiple people on the cap table.
Sal Daher: They are focused on life sciences, Sky Ventures?
Robert Nagle: Correct. Life sciences writ large, though. Everything from software to therapeutics, to diagnostics, to medical devices. It's a broad range of things under the general rubric of life sciences.
Two Brothers in Law: How They Help Sal’s Angel Investing
Sal Daher: My angel investing in the life sciences is very significantly influenced by my two brothers-in-law. One of them is Peter Fasse, who was also a sponsor of this podcast. He's a partner at Fish & Richardson. He's a top pat attorney. He's regarded by some very, very knowledgeable people. This is a founder who's had multiple patents in the field that I met at MIT Angels. The guy is saying, "Gosh, you're at Fish & Richardson. Who is it that writes these very subtle microfluidics patents?" He says, "I do." It was like, "Wow, they're really clever."
Peter has pulled me in the direction of microfluidics companies, among which are SQZ Biotech, which is now public, and Savran Technologies, and some other ones. My other brother-in-law, Martin, who's not a sponsor of this podcast. Martin, do you hear that? Peter is a sponsor, you're not a sponsor. You're giving me a hard time.
Robert Nagle: I can just imagine what Thanksgiving dinners are like at your house.
Sal Daher: [laughs] I can tell you, there's a lot of wine. Sometimes voices are raised. Sometimes voices have been raised. Martin is in the digital health space. I ended up writing checks in digital health because he helps me understand the companies and all that. Sometimes I do venture out on my own, I find other people that can help me get to know a company better. I'm focusing on wet-lab biology, particularly with a microfluidics orientation, although I'm an investor in Gelesis. This is because I battled with weight my whole life. That's something that I know something about. [laughs] It goes from there.
It's funny, you create your portfolio around companies that you can get information on and do due diligence on. Anyway, you're at Sky Ventures, you're at Hub Angels, you're at TBD Angels. Are there any companies that you really, really like that exemplifies the kind of company that you like to write checks for?
Robert Nagle on His Portfolio Company Easyship
Robert Nagle: That's an interesting question. There's one company that I want to mention, it's called Easyship. It's part of a larger trend, Easyship. If you think about the waves that we've been through with small startups creating storefronts on the internet, the first problem that everybody had to solve was payments. That got solved with the built-in stuff from Shopify, with Stripe, with others.
Once that problem became more mundane, what's the next big problem? The next big problem is shipping. If I'm either having goods assembled in Vietnam, or I'm having raw materials shipped from the Philippines to here, for me to do the assembly and fulfill things on Etsy or on Shopify, there's a world of headaches between finding a good manufacturer and actually getting the goods into the hands of the people that need them. That's what Easyship is trying to do.
Sal Daher: They're doing the shipping and connecting you with manufacturers as well, or just the shipping?
Robert Nagle: No, they're doing all of the logistics and shipping and customs. You don't care that the customs rules just changed in Taiwan, right? They take care of that for you. You need 100 knee braces shipped; they get shipped. You don't care how they got from the factory to the container. You don't care how they got from the container, offloaded here in the US to you.
Easyship has been a very interesting venture. It was surprising, unfortunately, in hindsight, to see how the slowdown of trade in Asia because of the pandemic affected them first. The recovery was evident in their business recovery first too, and now the logistics backlog that we have in the US is evident in their business. The way in which they've been flying high for the last year has stalled a little bit, but they're very interesting. For me, it's part of, as I said, part of the trends of thousands or tens of thousands of people opening storefronts on Shopify and needing simplified solutions.
Robert Nagle on His Portfolio Company NODE40 – Pickaxe & Shovels for Crypto
Give you another example which is in a space that people are very much enamored of or where frankly there's a lot of hype these days is cryptocurrency, right? What should one do about crypto writ large and NFTs and all these things? I had an opportunity to invest in a firm that is not a pure crypto play, but it's more of a pickaxes and shovels kind of model. Because everybody has to pay taxes, right? In order to file your taxes, somebody has got to help you figure it out what does all this crypto stuff mean when I get to report my taxes? There's a firm called NODE40.
Sal Daher: Crypto accountants.
Robert Nagle: I'd say accounting for crypto, let's put it that way.
Sal Daher: Accounting for crypto, yes.
Robert Nagle: That's what they do. They help accountants and CPAs figure out what needs to be done, what forms need to be filed, what data needs to be provided to the IRS to help keep people out of jail who are trying to do legitimate best they can in a highly volatile environment.
Sal Daher: Right. I am not a fan of crypto. I've had a few people on and so forth. I'm a crypto skeptic. I have yet to see anything that compels me as a use case that couldn't be done otherwise except for, I don't know, paying blackmail, ransom, something like that, ransomware payments, that kind of stuff, but other than that, it seems that if there's a little bit of trust on your side, there's probably a much simpler way to do it and so crypto is always going to be more complex. Its architecture for having a trustless system. It has a lot of dead weight built into it. Also, it is still not perfected because every once in a while, there continues to be money just disappearing, people grabbing hold of people's, the codes that they have, and money disappears.
Robert Nagle: I'm with you for sure. I'm a crypto skeptic as well, both as a technologist.
Sal Daher: Yes, but you can make money because it's such a huge trend. It's kind of like providing support for people who have Beanie Babies collections when Beanie Babies are big. Provider of Beanie Baby shelves or something like that.
Robert Nagle: Exactly. That's why if it's classic pickaxe and shovels, you don't have to believe in the hype of the gold rush to make a lot of money. As I said, every crypto millionaire has to pay taxes or ought to pay taxes and certainly has to put some filings together, so how is he or she going to do that?
Sal Daher: I applaud you. I think that's a smart move but the problem is that if there's an implosion in crypto, it's so volatile. Some major event happens that there is just people rush out of crypto in large numbers, the company will suffer.
Sal Daher on Portfolio Company Meenta – A COVID Rocketship
I'm an investor in a company called Meenta. Have you ever run across those guys?
Robert Nagle: I have not. No.
Sal Daher: They've been on the podcast, Gabor Bethlendy and Stephan Smith. I connected with Gabor. He was a co-founder in a wet-lab biology startup in which I invested. It didn't work out. It was a noble effort but it didn't work out. Within four or five months of their winding down the company, he's saying, "Sal, let's meet for coffee. I got an idea." His idea was to create a software platform to make it easy for labs to share high-end scientific equipment. He built that. He recruited Stephan as a co-founder. Their kids knew each other. The kids used to fight at school, got into fisticuffs.
The fathers became friends even though the kids used to get into fisticuffs. The kids have friends now, but at some point, they must have ticked each other off. Anyway, so Gabor and Steven had Meenta going, and then COVID hit, and all of a sudden, there was not a lot of demand for the work that was being done in scientific labs, but they had all these connections with scientific labs. They became like a lab testing company, and their business exploded. They're now very worried about diversifying like 12X growth in a year, and they're still growing fast, and basically, satisfying the demand that there is for various types of specialized tests and so forth. I must say they had to scramble at the beginning of COVID because things were looking really bleak with their old model but then they've had a good COVID.
Robert Nagle: It sounds like a very successful business.
Sal Daher: Yes, [laughs] [unintelligible 00:28:36] it's like, woohoo, sales are up even more. It's like going through the roof. They must be running themselves ragged because they had to ramp up staff and all that. Those guys are doing really well. This is a software intersection of software and the life sciences that I like as well. It allows me to reach out to people at Walnut and so forth to get a read on “does it work?” Then on the life science side, there's nobody doing this. It's like a virgin field.
Rockstep Solutions – ERP for Pre-Clinical Trials
I'm an investor in another company that helps preclinical trials. It's basically like an ERP system for preclinical trials. It allows people to just manage preclinical trials. Competition is spreadsheets.
VistaPath Bio – Machine Vision Helping the Intake of Pathology Samples
I'm an investor in a company called VistaPath, which is a workflow for pathology samples, prostate samples, things like that. The competitors are very distant from what they're doing. There's a lot of stuff in the life sciences, the intersection of life sciences and software.
That's interesting, but also this is a persistent question that I keep asking people. I've asked this of Tom Eisenmann, a professor at Harvard Business School. I've asked some of the angels that I talk to, I've created a website called labcoatventures.com, and what Labcoat is about is supporting life science founders, particularly academic founders with angel investments. In order to do that, I have to help angel investors become life science angel investors, overcome that fear that people have. Robert, let me ask you what holds you back from investing in life science companies?
“...what holds you back from investing in life science companies?”
Robert Nagle: I think it's pretty easy to answer that, for most people there's a long-time and a lot of money required for them to be successful, which means that the opportunities for failure magnify a lot. If you're investing at a very early stage where people may be pre-product, if they have some valuable IP, that is not an assurance that even if they execute really, really well, they're going to have a successful business. The odds, at least naively seems to me, of success in those spaces just goes up a lot.
For me, trying to assess risk and how one can de-risk the mounds and mounds, and buckets and buckets of risk that abound in every good business idea, there seems to be a large reservoir in the life sciences space. That's very hard for me at least to account for. I agree with you, some of it is knowledge and expertise. Some of it is reluctance of people to shift their spending habits from where they are today. A better answer doesn't always result in a stronger business, because it's not just enough to build a great product, solve a problem, build awareness of it, get some customers. Sometimes you have to also shift the dynamic very profoundly, and the forces of resistance can be quite high.
Sal’s Mentor on Life Science Company Was a Life Science Skeptic Having Made His Money in the Space
Sal Daher: Funny. What you're telling me is a little bit of what my mentor in life science investing was telling me when I first started investing. He's a very experienced life science investor also from Ireland, he was telling me, "Oh, life sciences," he made his money in the space, "The problem is the capital requirements are so massive." It's exactly what you're saying. The uncertainties are so great that you get diluted. By the time the thing gets off the ground, they've raised so much money that your share in it is nothing, and they don't build value very often and so forth.
I understood that and I was very worried about it, but over time, eventually, I've invested in about 70 companies. 29, 30 of them are life science companies. I think six of them, there have been complete losses. The non-life science company side of my portfolio, the losses are half, complete losses. I was like, "Hmm, interesting." I'm finding that the life science companies in my portfolio are taking over the value of the portfolio. That's where all the value creation is going on.
“...life science companies...are taking over the value of the portfolio. That's where all the value creation is going on.”
A little bit by accident, I can't say specifically, I liked the companies when I invested in them, but companies like SQZ Biotech, companies like Gelesis, companies like Akili Interactive, some of them have raised a lot of money, but the valuations have gone up a lot. Some of them haven't raised that much, like SQZ, they went public, but before they went public, the biggest money that they got was from a collaboration with Roche Pharmaceuticals. They got $125 million from Roche. They didn't raise anywhere near, I think they may be raised $40, $50 million in dilutive funding.
The interesting thing about SQZ, and it is now a public company, you’re welcome to buy the stock. I bought the stock since it went public. A friend of mine go back and forth, he doesn't think they have anything special. I do. I say, "Roche poured $125 million into it. They must have known enough about the process that it was valuable to them." What the SQZ does, and this is one of the companies that Peter Fasse got me into, because of his knowledge in the field, I'm not putting my money on SQZ's therapies necessarily, I'm putting my money on the fact that they have a technology that helps other people produce the therapies faster, more efficiently.
In the case of Roche, it was a therapy that took three weeks to produce, cell therapy for cancer. SQZ is producing it in a day, in 24 hours. In the case of SQZ, took a lot of money to develop, but in the case of a company like Savran; Savran has rare cell technology, which has two use cases that are very interesting. A few million dollars is enough to develop two use cases in a company like that.
Once again, it's a microfluidics play, it doesn't take $50 million of VC money to develop a microfluidic process to the point where a strategic player will take an interest and say, "Oh, this use case could be really useful for me, for an existing business. It could 10X an existing business. It could save the margins of a business that we have right now. We have lots of customers who are interested in this, but the process we use right now is not patented, it's a commodity, the prices are going down."
What I see is that there is a subset of life science companies that either on the software life science, where they can build a very strong moat, such as Meenta, because they just grew fast, or on the wet lab side because it doesn't take a lot of money to develop something that strategic players will come in and take an interest in. I'm developing a thesis that there is a growing number of these life science companies coming online because the technologies compel it. Academics are looking at it and saying, "Hmm, I'm going to take this company's technology that I've developed and make it commercial." I want to help angels support academic founders, retooling themselves as founders. I don't know, have you run across a venture capitalist called Tony Kulesa?
Robert Nagle: I have not.
Sal Daher: Petri.vc.
Robert Nagle: What you've been saying resonates I think in the following way, that if one understands enough about a particular subcategory, that you see the risk differently and you're more prepared to take that on. I think for many of us it's much more amorphous than that, and maybe we need to take the first step, and/or get a little bit of education about why the risk that we perceive in one category or the path to an exit in a particular category might be different than what we naively believe.
Sal Daher: Robert, I made a good chunk of my net worth on something called Nigerian Promissory Notes. You hear name like that, people head for the hills, "Nigerian Promissory Notes? Oh my gosh, scams and so forth." The Nigerian Promissory Notes that I owned, they paid 100%. The sad thing is that they paid out the last payments in 2010, but I made returns on those notes that were massive because people were like "Nigerian Promissory Notes, for the hill." Nobody wanted to own them. I happen to know that Nigeria had a very serious commitment to meet, to pay the notes, they were derived from trade credits and so forth. It was real. I understood this, I knew them, I'd owned the notes. At one point I had my kid's tuition money in Nigerian promissory notes. You'll probably say, "Majnun," that’s Arabic for crazy.
Robert Nagle: Did they know that?
Sal Daher: From the Odyssey, I told them nothing for they could do nothing. When Odysseus wants to listen to the song of the sirens, he stuffs the ears of his sailors with wax and wool, so they can't hear the siren song and therefore drive the ship onto the rocks, has himself tied to the mast so he can listen to the song of the sirens. I was listening to the song of the sirens and it paid off.
The thing is, my partner and I, the late Robert B. Smith, my business partner, we knew a lot of people in Nigeria who were very high up in the government and so forth. They owned it and it was known at the time that Nigeria was very serious about it. They’ve honored...if you owned any of the Nigerian debt after restructuring, you've done well, but all people, terrible name, the Nigerian Oil Warrants, we also own those and we did very well with those. That taught me a lesson that a particular area, a particular asset that people don't like at all, they turn their nose at it. There, I will find opportunity.
Robert Nagle: That's the thing about risk, isn't it, Sal? Risk really is in the eye of the beholder. A lot of things that I've done throughout my life, people have said, "That's so risky," and yet I've never viewed it that way. Clearly, in spite of the negative branding of Nigerian Promissory Notes, you view the risk in a very different way than people who just heard Nigeria and promissory in the same sentence and ran away.
Sal Daher: Exactly. My business partner introduced me to some of these things. Guatemalan Stabilization Bonds, or as they used to say, Guat stab bonds. Bond talk. The Central Bank of Guatemala, very serious. The Guatemalans were embarrassed that because of oil shock, they couldn't meet their obligations, they restructured, and they paid those bonds to a cent, and they were gorgeous. El Salvador Dollar Bonds were also great. My business partner made so much money on those, because I didn't have enough capital to buy them at the time. He had more capital than I did.
What it taught me is that if there's a backwater, something where everybody is running away from it, but there's some potential there, as was the case with Guatemala, as was the case with Russia, as was the case with Nigeria, with El Salvador, then I was willing to be an intrepid investor. For me, it did make sense. It wasn't a crazy thing. It wasn't something that didn't make sense. It made perfect sense.
When I look at the life sciences, I detect that there is an interesting phenomenon, and that is, it is not as hard to understand, as people think it is. The reason is, that it is so massively complex, that if you are an expert in a particular discipline in the life sciences, that doesn't buy you much in a discipline that's two steps over. It's not like kinetics, physics, that everything works out perfectly and there's a general theory of bodies in motion and so forth, everything works. Biology has evolved, everything is so complex, over-determined, crazy, that it's experimental, and you tend to develop. Every time that you're looking at a startup, you have to start from scratch to a certain extent. Basic biology is important but...
What that does is it says that the expert and the intelligent amateur are not too far apart, and not as far apart as they would be, for example, in the software field, where if you've been in the software area for 10, 15 years, someone who's a newbie, you understand stuff about these things that you could never hope to understand.
Robert Nagle: I'm not sure if you're asking me for advice or not, but I'm happy to offer some. It seems as though if--
Sal Daher: Yes, this is what I wanted to get to. I'm serving angels. How do I get angel investors to come over to the life science angel investing side? Because the vineyards are just heavy with grape, and there're not enough hands, not enough workers. What are your thoughts?
Robert Nagle: I don't think the challenge is people being unable to see the opportunity. I think the problem is, at least for me, and I'm extrapolating to others, is on the risk side. Not being in a position to understand and evaluate the risk. If you can help put the risk in the proper perspective, say, what you perceive as super high-risk is actually de-risked in the following ways. What you perceive as something that is super unlikely to happen is not the pathway that they're on, it's quite a different pathway, and therefore the risks are quite different. I think that's the kind of help that might get more angels to join you on this quest. Shift in the perspective on risks.
Sal Daher: Okay. From my view on risk with these startups is that even with tremendous due diligence, there's still a significant risk of total loss. 6 out of 30 is still a very high percentage for total loss, it may not be as high as other. I think I attribute to the fact that the founders are usually older and more experienced, and the failures that we've had, one of the failures had to do with just the founders not having their act together, but the other five, basically, having to do with things just not working. The science didn't work out, but when the science works out, things seem to go in a very interesting way.
This is one data point that I have, but admittedly, it's a small sample. It's hard to extrapolate from that, but still, we should always be thinking that any individual investment that we're making in angel investing is going to go zero. [crosstalk]
Robert Nagle: I think most angels accept that. The question with some of these life science startups is, is that a near certainty or are some of the things that I'm seeing as super high-risk, just not likely to come to pass? I can de-risk it in some way. Someone else has done a similar process, or this founder actually has some very special technology. It's not just a defensible IP, but actually, a technique or a technology around which they can build a business. It's for me, some or other reduce the risk.
Obviously, in a portfolio of investments, some number of them are going to go to zero, you just have to accept that as a fact. You hope that some will pay off to compensate for it. I think if you can have some angels stay long enough, to not throw their hands up and say, "Oh, Nigerian Promissory Notes, I'm out of here." Just understand a little bit more deeply why that's not the same risk that they perceive, so that they hear the founder, the founding team, they understand the moat, they understand the strategics position on this, the value of solving this problem. I think that's the issue. I think a lot of people have already left by the time that conversation takes place.
Sal Daher: Have you listened to my interview with Ed Goluch of QSM Diagnostics?
Robert Nagle: I have not, no. That's one of the episodes I've not heard.
Sal Daher: Give it a listen. He was a professor at Northeastern University, and he is an area called quorum-sensing molecules. It's a funny story, circa 1970, a scientist observed that when he put a culture of certain type of bacterium, called Aliivibrio fischeri, a few of them in the culture jar, nothing happened, but when he came back a few days later, the population had grown and they were glowing in the dark. It's a light-emitting bacteria. Then he began to wonder why had these bacteria glowing in the dark when there are a lot of them, and when there are just a few, they don't glow in the dark.
Then he started studying the chemistry. It turns out that they had to signal to each other to say that there are more of them around. It turns out that the evolutionary pressure for bacteria to grow this way is that the Aliivibrio fischeri likes to live in the gut of fish that live in the dark places. Living in the gut is very precarious existence because you periodically get flushed out. You have to solve the problem how to get back in.
How do they solve that? They figured out that if there are enough of them in an environment, if they all of a sudden glow in the dark together, they attract very yummy animals, the little animals that fish like to eat, and then the fish eat the animals together with the Aliivibrio fischeri who then probably stop glowing immediately when they get into the preferred environment, and then they're all happy in the fish gut for a while. Then they get expelled again.
Robert Nagle: [laughs] This is really fascinating conversation, Sal, Nigerian Promissory Notes and fish that glow in the dark in order to be consumed!
Sal Daher: No, bacteria that glow in the dark. Anyway, this guy started researching it, eventually, he discovered this whole area of quorum-sensing molecules. The bacteria tell each other that there are other of their type present in an environment with these electro-chemical signals that they send to each other, and they're instantaneous, they're very fast. This professor, Ed Goluch, was using this fascinating aspect of nature to sense bacteria to create an immediate sensor for the presence of bacteria.
Oh, you're going to like this. His initial idea was to create a diagnostic for urinary tract infections, but since they don't want to raise a lot of money, they were going to go the veterinary route and they needed six sensors for that. They were going to create a test for cat and dog UTIs, urinary tract infections. There's a 95% commonality between dog and human UTIs. I can well imagine human patients instead of waiting 24 hours for a culture, taking a sample, going down to the vet and saying, "This is from Fido. Could you check this thing and see?"
Anyway, they never ended up doing that because they figured out that the low-hanging fruit for them was doing a one-sensor diagnostic for ear infection. They're looking for these bacterium called something-aeruginosa [Pseudomonas aeruginosa]. It's a bacterium that differentiates. Either there's this bacterium present or it's a fungal infection. Now they have a business, with not a lot of money.
Robert Nagle: The key to their technology is to somehow or another embed a signaling mechanism between different microbes and to embed a detector so that something can pick that up as well, and then the response is a separate issue?
Sal Daher: Exactly. The QSM, the signaling molecule that the bacteria use, they're using that as a sensor in their diagnostic, and in two minutes they know if this bacterium is present or not. Pseudomonas aeruginosa is the name of the bacterium. They detect that. If it's present, then it has to be treated with antibiotics. If it's not present, it's treated with antifungal, and Fido will have a healthy ear after that. They're off to the races and with not tremendous amounts of capital. This is a professor who retooled himself as a founder.
This is what I was saying, I mentioned Tony Kulesa at Petri.vc. He's talking about founder-led companies. In this case, academic founder-led companies. This is going to be the way forward with life sciences. These guys are going to have to retool, these women are going to have to retool from being professors to being founders and leaders of companies, as is the case with Cagri Savran, as is the case with Ed Goluch, the case of several other people that I've invested in, the case with Armon Sharei at SQZ Biotech. These are all academic founders that have--
Robert Nagle: If one was to generalize Marc Andreessen's thesis around software where a consequence of his passion for software-led change is that great software founders are the best founders because they best understand the product direction. The generalization of that is to really dominate in the technological space. Yes, someone may not have people skills when they start out, they may not have the business skills, they may not have the marketing skills, but they understand the domain and they understand the product. If they hit an obstacle in the product reaching its target, its mission, they know what the best path would be. They're the best person in the company to identify the path forward and that qualifies them to lead the venture. I think there's a certain logic there that's consonant with what Marc Andreessen's been saying for a while.
Sal Daher: Yes. It is definitely a case of biotech eating the world now. In this situation, exclude in most cases marketing, because a lot of these biotech companies, what they're going to end up doing, is doing a collaboration with a strategic player that is going to be very good at marketing, or really understand the markets. What they need to understand is, what interests the strategic players. That's the marketing they need to do. The market research is to that extent. I like academic founders who are working on stuff that's going to be attractive to strategic players.
I have a screen at labcoatventures.com which lays out the criteria that I have for this.
Anyway, Robert let's think about wrapping up the interview, and I'm going to do that with an open-ended question to you. Feel free to get across to our audience of founders, angels, people who work at startups, people who are thinking of founding startups, what would you like to communicate to them?
Robert Nagle: I think today's obviously a very good day, or this is a very good time to be a founder. There's lots of support infrastructure around for people, and getting access to the capital that you need to get a business off the ground is probably easier today than it has been in the past. My plea would be for more people to become angels and to help those who are trying to change our world, take the first few steps in that direction. To me, that's a lot of what motivates my desire is to see people succeed.
I'm not doing this out of charity. I'd like to make money at it, but I do feel that the world is better if the really smart people are trying to change the world, not succeed in the world as we know it. To me, that's the definition of entrepreneurship, and to the extent that people can rally around and provide assistance as a strong advisor or provide financial assistance or provide [a] blend of those two things. Let's do that and let's get entrepreneurs up and running and be as successful as possible, because today's a good day for entrepreneurs to practice entrepreneurship. Let's continue to make it easy for them and reduce the obstacles that they face and help them overcome those obstacles.
Sal Daher: I applaud that enthusiastically, I applaud your sentiment, well-expressed. Robert Nagle, I'm very grateful to you for making the time to have this really wonderfully productive and enlightening conversation. I've learned some things from this. I'll focus more on this risk assessment control, understanding the risk in life science companies. You've directed me in that direction, I'm very grateful for that. Thanks for being on.
Robert Nagle: Thanks a million, Sal. I feel privileged to be invited on here because you're doing great work on behalf of the startup ecosystem in the Boston area and because things are so virtual these days, way beyond that. You talked earlier about the impacts that your podcast is having and you shouldn't underestimate how much reach you have and how much influence you have. Keep it up.
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Sal Daher: I'm always gratified when I talk to a listener. I have yet to be disappointed, and I'm also surprised that the number of people come up to me and say, "I started my startup because of listening to your podcast." I've had several cases of that happening and I'm just so gratified. One of which is Raul Rosa, my sound engineer who started PodSpot because he's editing all the recordings, listening to the recordings, and all this stuff. He just got inspired to do it, so great.
Robert Nagle: That's great.
Sal Daher: We'll sign off now and I thank you again. This is Angel Invest Boston, I'm Sal Daher.
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Sal Daher: I'm glad you were able to join us. Our engineer is Raul Rosa. Our theme was composed by John McKusick. Our graphic design is by Katharine Woodman-Maynard. Our host is coached by Grace Daher.