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Yearly Archives: 2009
Dr. Druker is Chief Scientific Officer with Ballast Point Ventures portfolio company MolecularMD. One of the best things about the venture capital business is working with people like Brian and the team at MolecularMD, who are not only building a great company but also helping to save lives.
The man who developed Gleevec could have said ‘wait.‘
Last Friday, a molecular biologist named Brian Druker shared the 2009 Lasker-DeBakey Clinical Medical Research Award for his part in “converting a fatal cancer into a manageable chronic condition.”
A scientist willing to risk so much for one patient is a doctor in full.
The cancer is chronic myeloid leukemia (CML). The drug Dr. Druker developed, Gleevec, manufactured by Novartis, has saved thousands of lives.
My wife Priscilla and I have a rooting interest. Dr. Druker, a scientist, never had a child as a patient until he met our son John. John’s cancer, CML, killed almost all its victims until Gleevec was developed. Ninety percent of CML patients, whose blood stem-cells go haywire, now lead normal lives.
John was diagnosed with accelerated CML in 1998 at age 4 and all treatment had failed. His bone-marrow transplant meant seven weeks in a sterile hospital unit on a dangerous assortment of drugs. Hell on earth.
I still remember the desperation felt deep in my chest when we learned his transplant had failed. I took John to a big East Coast cancer center. A specialist there put it bluntly: “He is a time bomb.”
Later I revealed that we wanted an experimental drug. I had spoken to an oncologist, Dr. Carlo Gambacorti, doing stunning early Gleevec research in Europe—and to its chief investigator, Dr. Brian Druker.
“Couldn’t this be a cure?” I asked gingerly for support. The specialist fixed her gaze upon me: “Brian who?”
Dr. Druker was willing to help but cautioned, “This is in the hands of Novartis.” And Novartis had its strict protocols.
So we approached Novartis through Congressman Richard Gephardt and an intrigued Newt Gingrich, and through friends Pat Buchanan and Congressman Bob Schaffer. Novartis consented—but only if Dr. Druker quarterbacked.
“If John dies while he is on this drug,” said a doctor, “the FDA will shut the whole program down.”
Delays ensued. Novartis had FDA paperwork to deal with. Our “time bomb” was ticking away. But Dr. Druker hung in with us. He had nothing to gain. In fact, he risked his reputation.
Life has its vindications. Ultimately, in July 1999, John and I flew across the country to Portland, Ore., for the kind of treatment most patients only dream of, under Dr. Druker and his colleagues at Oregon Health & Science University and the Doernbecher Children’s Hospital. We used empty seats in corporate jets that the Corporate Angel Network, a nonprofit out of White Plains, N.Y., found for John. No cost.
On the Gulfstreams, flight attendants pampered John with his favorites—Beefaroni and hot dogs. Gleevec rapidly transformed his life. Fevers vanished, blood counts normalized—and miraculously, so did his bone marrow.
I looked forward to those cross-country flights. One featured an eye-level pass by Mount Rushmore.
But the flights did come to an end. A corporate jet flew John’s body back home to Connecticut in October 2001, on a bitterly bleak evening.
For all our early exultation, John did “die while he was on Gleevec.” My notes show that Dr. Druker worried this might happen. There was going to be no glory on John’s account. For anyone who touched our beloved son, there was only risk.
Fear of making a “mistake,” despite our assurances and confidence in the doctors, caused hesitation, and lower dosing of Gleevec at one stage. I asked a physician, “What is everyone afraid of?” His response was: “Lawyers.”
John’s life and death, and the manner in which his doctors in Portland dealt early on with the dilemmas, taught my wife and me that obstacles can be conquered when faced with courage and—the great unseen force in this entire saga—prayer. After all, we did get what we had prayed for: a miraculous drug that cured or managed this stem-cell cancer. But it was too late for John.
Dr. Druker’s agreement to treat John in 1999 was a large moral act—a triumph of the Golden Rule—that took more courage than his pursuit of a cure through years of fruitless lab work. He could have said “no,” or “wait.” Instead, he said, “I think I can help him.”
UPDATE: (01/19/10) The New York Times reports:
Before 2000, fewer than half of C.M.L. patients survived seven years; now nearly 90 percent are alive seven years after diagnosis and, like Barry, lead relatively normal lives. (The basketball star Kareem Abdul-Jabbar announced in November that he had been living with the disease for nearly a year.)
“C.M.L. has become a chronic disease leading to a normal life span in the majority of patients,” Dr. Elias Jabbour of the University of Texas M.D. Anderson Cancer Center said last month in a teleconference workshop sponsored by CancerCare. “As for quality of life, among more than 3,000 patients who have been followed now for almost 10 years, there’s been no significant increase in the incidence of infection, other cancers or other causes of death when compared to the normal population.”
What led to this turnaround was identification of the genetic marker of the disease and development of a drug called Gleevec (imatinib), which attacks the leukemia-promoting protein, tyrosine kinase, found in 95 percent of C.M.L. patients.
…overstatement and shrillness‘
No big surprises here. The valuations of venture-backed companies held steady in the third quarter, as the prices set in first funding rounds dropped to a six-year quarterly low while later-stage valuations continued to climb.
According to Dow Jones VentureSource, the median valuation of U.S. companies raising money in the third quarter was $18 million, the same price as in the second quarter, after falling from $24 million in the first quarter. For the first nine months of the year, the median price sat at $19 million, a bit below the 2008 level of $20 million, which was a decade high.
For first rounds, the median valuation was cut in half to $4 million after rising to $8 million in the second quarter. Although it’s just a three-month slice, this could signal that venture capital firms are putting less money to work in younger companies. With the average investment holding period for early stage venture investments climbing above 7 years, it’s no surprise that venture firms are tending to invest more in companies with proven business models and validated markets.
A recent joint study conducted by NVCA and Dow Jones VentureSource outlines several factors that contribute to a good alignment between VCs and the companies they back.
Among the findings were several areas in which there was natural alignment and agreement between VCs and CEOs. Other findings point to not-too-surprising challenges in making the relationship work:
Do you respect me or my money?
- 54% of VCs cite mentoring the CEO as a critical value-add; only 27% of CEOs see the value.
- 64% and 34% of CEOs see the ability to complete follow-on financings and facilitate exits as top value adds; VC numbers were 48% and 22% respectively.
The money will always be important. After all, entrepreneurs should pick a financial partner who can provide additional capital as needed as their companies grow. But the best (sadly, not all) venture partners provide much more than money – valuable contacts, “been there, done that” experience when facing tough business issues and a sympathetic sounding board for entrepreneurs working under great pressure.
Interesting stuff. In our experience, the natural conflict over valuation can be addressed creatively with investment structure and fades quickly after the close. We also typically don’t have control in our investments, so “management changes” need the approval of the entrepreneur and the exit strategy really has to be a consensus decision. When we do experience conflict, it typically revolves around the company not performing up to expectations and how to get the company back on a growth path. But that kind of “conflict” is both healthy and productive, and everybody has the same goal, so it really doesn’t need to be acrimonious and fortunately rarely is.
The study was completed in October 2009 & includes responses from more than 300 VCs and 200 CEOs.
Jim Collins, coauthor of “Good to Great” and “Built to Last: Successful Habits of Visionary Companies” (two of our favorite books in The Library in St. Pete), tells a story in Fast Company of a former student’s experience with a venture capital firm. This former student was told to “come back with an idea that you can do quickly and that you can take public or get acquired within 12-18 months.”
This was in December of 2007 – what seems like eons ago – but hasn’t lost its ability to shock. Mr. Collins doesn’t mention the firm by name (we wonder if they’re still in business…) but he compares this ‘built-to-flip’ mindset with amusing alternate histories of a well-known pioneers:
The built-to-flip mind-set views entrepreneurs like Bill Hewlett and Dave Packard, cofounders of Hewlett-Packard, and Sam Walton, founder of Wal-Mart, as if they were ancient history, artifacts of a bygone era: They were well-meaning and right for their times, but today they look like total anachronisms. Imagine Hewlett and Packard sitting in their garage, sipping lattes, and saying to each other, “If we do this right, we can sell this thing off and cash out in 12 months.” Now that’s an altogether different version of the HP Way! Or picture Walton collecting a wheelbarrow full of cash from flipping his first store after 18 months, rather than building a company whose annual revenues now exceed $130 billion. These entrepreneurs and others like them — Walt Disney, Henry Ford, George Merck, William Boeing, Paul Galvin of Motorola, Gordon Moore of Intel — were pedestrian plodders by today’s built-to-flip standards. They worked hard to create a superb management team, to develop a sustainable economic engine, to cultivate a culture that could withstand adversity and change, and to be the best in the world at what they did. But not to worry! In the built-to-flip economy, you can get rich without any of those mundane fundamentals.
That’s a stark contrast and a clever use of humor. It turns an old saying on its head: it’s funny because it couldn’t possibly be true. Even after discounting for the warm nostalgia felt for that list of names and that bygone era, we all know the type, and it’s impossible to imagine them leaving their ‘garage’ for any but the most important of reasons. BPV works with (and partners with) that type, today. But we encounter our share of another type. Collins, again:
We have arrived at a unique moment in history: the intersection of an unprecedented abundance of capital and an explosion of Internet-related business ideas. But, for all of the incredible opportunities unleashed by this combination, there is one monumental problem: The entrepreneurial mind-set has degenerated from one of risk, contribution, and reward to one of wealth entitlement. We all have friends and colleagues — often mediocre friends and colleagues at that — who have struck gold after 18 or 12 or 6 months of work in a built-to-flip company. And we have all entertained the thought “I deserve that too.”
Just about every venture capitalist will tell you he prefers to back proven entrepreneurs who have successfully built companies in a prior life. Most will even admit that of course they look for an exit at some point – their Limited Partners legitimately expect a return on their investments.
The problem Mr. Collin’s student encountered is actually two problems: the first is the reduced chance at success of the short-term approach; the second is the mismatch of goals and vision between entrepreneur and investor. If these partnerships are like marriages, some are better to end after a couple of dates instead of after an exchange of vows.
Job creation and the carried interest: how venture capital firms are different from hedge funds and buyout funds
House Democrats plan a renewed push to raise taxes on executives at private-equity and venture- capital firms to help pay for year-end economic recovery legislation, a top congressional aide said.
“There is strong support for taxing carried interest as ordinary income and I expect this issue to move forward in the coming months,” Beck said.
Matthew Beck, a spokesman for the House Ways and Means Committee, said the panel will revive an effort to raise the 15 percent tax rate on “carried interest,” a term for the share of a fund’s profit from successful investments that is paid to executives.
That portion of an executive’s pay, now taxed at lower capital gains rates, would be subject to income tax at rates of as much as 35 percent. The top tax rate is scheduled to rise to 39.6 percent in 2011.
A short news clip, but potentially huge implications for the venture capital industry. By way of background, venture capitalists receive a management fee from their investors to run the day to day operations of the firm, much like executives of any business receive salaries each year for running a business. The real “upside” for venture capitalists, though, comes in the form of “carried interest”, i.e. a share (typically 20%) of the profits from their investments in private growth companies. These investments are long term in nature (often 4-7 years) and very uncertain (since most early stage private companies fail). While the owners of most businesses receive their “upside” when they sell their business, generating a gain that is taxed at long term capital gains rates (currently 15%), venture capitalists are typically not able to sell their venture capital businesses but rather earn their upside a little at a time as they (hopefully) generate profits from their investments. Capital gains treatment has historically been viewed as a mechanism for offering favorable tax treatment to long term, value creating investments – the government wants to reward long term investment. This is even more important in the venture capital context, since venture capitalists provide growth capital to the kinds of businesses that generate most of the new jobs each year in America (see our postings entitled “New Businesses Vital to Economic Revival” and “Don’t Ruin Venture Capital“).
The push to start taxing this carried interest at the much higher ordinary incomes rates is a new and disturbing phenomenon. Much of the recent support among certain Democrats in Congress for changing the tax treatment of carried interest is driven by (in some cases understandable) animus toward hedge funds and the mega (billion dollar plus) leveraged buyout funds, some of whose founders have gone out of their way to live lavishly in the public eye ($30 million birthday parties don’t sit well with the average Congressman, particularly when economic times are hard). Whether that criticism is fair or not, the problem for the venture capital industry is that it is being lumped in with the hedge funds and big buyout funds in the proposed legislation. While hedge funds invest primarily in public securities (thus creating no new net jobs) and buyout funds utilize financial engineering and cost-cutting to generate attractive returns on equity as they pay down debt, venture capital funds invest in much earlier stage private companies that have the potential to grow significantly and create large numbers of new jobs while developing new technologies, products and services. These are exactly the kinds of new companies that create most of the new jobs in America every year.
While the media often focuses on the excesses of billion dollar private equity funds, the average venture fund is under $120 million and invests in 15-30 companies over 4-5 years with an average investment hold period of 4-7 years. It is a very long term business that requires a multi-year commitment from the venture capitalist fund managers with very uncertain returns. The venture capital model is built around generating long term capital gains for both the investors and managers of the Funds, and the capital gains tax treatment both recognizes the long term and uncertain nature of the gains created and offers an incentive for talented professionals to focus on (and undertake the high risk associated with) investments in small private growth companies (versus, say, becoming an investment banker or joining a hedge fund). While taxing carried interest at ordinary income rates (currently 35% and scheduled to move higher) arguably may not substantially change the behavior of the managers of a billion dollars hedge fund or buyout fund, it dramatically changes the economic calculus for smaller venture capital fund managers. And, ironically, as smaller venture funds become less attractive to their managers and thus less viable, capital will tend to concentrate in ever larger funds – i.e. the supposed “bad guys” that some in Congress are going after. But the real kicker is that many of the Congressmen who support increasing the tax on carried interest are the same people who complain that there isn’t enough venture capital in their home state being invested in new businesses. By running a stake through the heart of the small venture capital fund model, they will certainly not help to foster new company formation and job creation in their states. We hope they (or the Senate, if the House is a lost cause) realize the dangers to job creation here before it’s too late and step back to think about how the venture capital industry is both different from hedge funds and mega buyout funds and uniquely beneficial to the economy.
For more information on the carried interest issue, check out the NVCA’s take here.
Echoing the thinking in one of our favorite books, start-up investor Esther Dyson advises to not take yes for an answer. I’ll have to re-read Professor Roberto’s book to see if he uses the same anecdote about the Queen.
Congress seems intent on punishing the financial industry, but it is important to remember that VC firms don’t ask for bailouts. Gordon Crovitz in the WSJ:
Just when the economy needs risk-taking the most, risk-takers are under the most threat. The Treasury now wants venture-capital firms declared as systemic risks and put under tight restrictions as part of the broader re-regulation of financial firms. Venture capitalists argue that since they don’t use debt and their firms are comparatively small, they shouldn’t come under rules designed for highly leveraged, too-big-to-fail banks.
No venture capital firm has asked to be bailed out, and none are too big to fail. As hard as it is for regulators to understand, the nature of venture capital is such that it should not even aspire to be a low-risk enterprise.
How this debate turns out matters, because some 20% of U.S. gross national product is created by companies that were formed through venture backing. They include Intel, Apple and Google. How policy makers treat venture capital is a measure of the amount of innovation and enterprise that happens in an economy, with more regulation leading to less innovation.
This is a tough time for venture capital, with investments by firms falling more than 50% in the second quarter. The 700 or so venture-capital firms in the U.S. are mostly small partnerships, with a modest voice in Washington. They say the industry as we know it can’t survive if firms are regulated as investment advisers, which would mean complying with rules for disclosure, compliance, record keeping and privacy designed for huge firms.
This is a good time to recall that the venture-capital industry was born as a reaction to New Deal regulations that stifled capital and prolonged the Depression. The country’s first venture-capital firm (other than family-run funds) was American Research and Development, planned in the 1930s and launched after World War II in Boston.
Its leader was longtime Harvard Business School professor Georges Doriot, who is the subject of a fascinating recent biography, “Creative Capital,” by Spencer Ante. Mr. Ante, a BusinessWeek editor, tells me that as he researched the topic “one of the most surprising things I learned was how concerned financiers and industrialists had become about the riskless economy in direct response to the New Deal. Even in the 1930s, people understood that small business was the lifeblood of the economy.”
American Research and Development backed early-stage companies deemed too risky by banks and investment trusts at the time. The firm was an early investor in Digital Equipment Corp., the Boston-area company that revolutionized computing.
Despite financial success, the history of the firm is a reminder that our regulatory system, by its nature focused on avoiding risk, has a hard time dealing with investment firms whose mission is to take risks. Doriot was a well-known name in commerce and academia from the 1940s through the 1970s. He was the first French graduate of Harvard Business School, a founder of the INSEAD business school and a leading adviser to the U.S. military.
But even as a pillar of Boston’s commercial and academic worlds, Doriot had many run-ins with federal regulators. Over the years, regulators dictated compensation for the American Research and Development staff, tried to force disclosure of the performance of its early-stage companies, and second-guessed how it tracked the valuations of its investments.
The Securities and Exchange Commission hounded the company so often that Doriot once wrote a three-page memo saying, “ARD has more knowledge of what is right and wrong than the average person at the SEC.” He was prudent enough not to send it. He did mail another memo to the SEC enforcement office in Boston, in 1965: “I rather resent, after 20 years of experience, to have two men come here, spend two days, and tell us that we do not know what we are doing.”
Uncertainty about which regulations applied to early-stage investing slowed the growth of venture capital. It wasn’t until deregulation in the late 1970s that the industry took off. The capital gains tax rate was cut to 28% from nearly 50% in 1978, and for the first time pension funds and other fiduciaries could include venture capital as part of an overall portfolio. During this vital period venture firms began to nourish what are today’s high-tech leaders, from information technology and the Internet to genetic research and health care.
The proposal now to tighten how venture firms operate suggests that we are in a stage of the regulatory cycle closer to the New Deal than to the entrepreneurial era that followed. Adding regulatory burdens would do nothing to help the investors in venture funds who are willing to take the big risks, knowing that about half of venture-backed companies fail. It would only increase the costs of doing business and make risk-takers more risk-averse.
A study co-authored by Dan Breznitz, assistant professor at Georgia Tech, indicates that Atlanta leads the nation in infrastructure required for start-ups, but that those start-ups often leave once they achieve a certain critical mass. Among the reasons cited for this phenomenon included raising capital from outside the southeast. VCs provide critical connections to their portfolio companies – suppliers, customers, management talent, potential acquirors – and if those VCs are on the coasts it increases the odds that successful growth will end up moving the company to the coasts.
The Atlanta Business Chronicle reports that the Atlanta startup community is taking steps to build more ‘social bonds’ that would lead to more local financing:
Growing a serial entrepreneur community will help embed technology companies in Atlanta, said John Yates, tech-industry rainmaker and partner at Morris, Manning & Martin LLP.
“It’ll be the serial entrepreneurs who will be the angel investors in those early businesses, will be on the board of directors and will help bring venture funds to town,” Yates said. “They’re going to be the glue that’s going to keep those tech companies right here in town.”
…the study’s findings regarding a lack of social bonds is not new. And in the past year, the community has rallied to do something about it. Community boosters, for instance, have organized discussions between emerging technology companies and Fortune 500 firms to identify problems in search of a solution.
“The purpose is to give the big companies a chance to communicate to the smaller companies, ‘This is what we’re interested in,’ ” Blake said. “The goal is to create a demand-pull rather than a supply-push to the innovation process.”
Other local initiatives include StartupChicks, which fosters entrepreneurship among women, and Startup Riot, a pitch-fest that connects entrepreneurs with investors. Ignition Alley, a new co-working space in Atlanta, hopes to get entrepreneurs out of their bedroom offices and into a shared working space, where they can network and bounce ideas off each other.
The Breznitz study’s findings helped shape the reinvention of the Advanced Technology Development Center (ATDC). In its new avatar, the tech business incubator at Georgia Tech has moved from a “private club,” which helped incubate about 15 companies annually, to a more inclusive organization that works with more than 200 firms, said Fleming, who is also ATDC’s interim director.
“One of the things that we are trying to do with the ATDC reboot,” he said, “is to bring in more entrepreneurs [and] build more linkages between them.”