Startup Investor School: The Basics of Seed Investing
blog.ycombinator.com
blog.ycombinator.com
Biotech venture returns have outperformed techs in recent years, with more IPOs, higher m&a returns and shorter time to exit. Counterintuitively for those who think bio is too capital intensive and it takes too long to get drugs approved, the best exits have been early stage deals where under $20-30M is invested
I know a few seed investors who've had several high multiple exits less than 18 months from seed, including one that sold for over $1B in less than 18 months
Despite this exit environment, the number of seed / early stage investors in biotech has not grown in over a decade. VCs have responded by just seeding / starting companies in house, but there are tons of great seed stage companies that just go unfunded bc people are intimidated by biotech
Indie bio, qb3, Jlabs, illumina accelerator, start x, y combinator are prominent Bay Area ones
The best opportunities come from relationships with influential, well networked academic researchers; venture investors; r&d execs at big pharma; and successful serial entrepreneurs. If you have any of those in your network, that's the best place for high-quality deals. However big VCs often have established relationships with these folks and they will seed the most promising ideas
Universities also have a lot of events supporting startups and these can be a good way to get involved in the ecosystem and build a network. If you talk to enough phd students and postdocs you'll get a sense of what opportunities are out there. phd students and postdocs are an incredibly under appreciated group, and they have a ton of potential to start great companies if they get the right support. If you get smart on the space and make an effort to meet these folks you'll find many seed opportunities
Obviously these are not ideal paths. One of my passion projects is running a program that connects promising young scientists to life sci VCs to explore startup ideas. The main goal is mentoring young scientists as PhD students / postdocs are a woefully under appreciated sector of our workforce, but a few interesting startups have emerged from this as well.
Biggest problem? We don't have enough float to keep up with demand. There's significant demand in the life sciences & biotech space right now - especially with the confluence of software and bio. It's been very hard to talk to investors because (no offense) they hear life sciences, bio, genetics, etc. and they turn away because it's out of their comfort zone of investing.
If you're an angel or seed investor, I'd highly recommend diving in and learning more around the problems of the space. They are large, lucrative, and have high probability of disruption compared to current status.
It's funny, I talk to people about bio and they say "I'm not a scientist, I can't invest here" however they realize they can invest profitably into things like AI without being data scientists / math PhDs. In many ways, bio is no different than any other technical field: learn enough to be dangerous, know how to lean on experts where appropriate, and you can get involved
As an example, we just bought a device called an Eppendorf EpMotion 5075. It costs around $20k and looks like it was something I would have built in high school. Exposed wires, slow, insanely expensive parts. Worst of all: there's no API for us to programmatically connect it with other devices in the lab, such as a DNA extractor.
You also hit the nail on the head with the investment mentality. Know enough to be dangerous. Ask "why" to learn more about the problems. And (IMO) most importantly, realize that you don't have to put down $1M as a seed. You'd be shocked at the ROI on just even $50k...
There are a couple clients of ours that we're testing our sequencing as a service where we generate monthly contracts and they get the exact same service, protocols, etc. in record turnaround time.
Client base includes companies like Children's National Hospital, UCSD, Pfizer, USDA. Nothing proprietary just yet (except it being really hard) but we're using profits from services revenue to develop IP-driven gene pipelines and informations. Basically specific gene panels and software paired together. We're one of 2 commercial companies in the country offering HLA-Typing which is the same integrated pipeline as described above.
Additionally, we're passively starting to develop high resolution data sets to ingest into a database at some point around specific novel variants, such as HLA Typing, to accelerate research
The end goal is to virtualize the entire lab so that anyone can start research, whether academic of pharmaceutical, from a home office. This means building a software layer that allows them to directly create, design, and implement protocols that interface with the equipment in the lab. So instead of building a $1M lab, you just log in online and run your experiments.
You can think of it as what AWS did to the data center.
Are you in San Diego by chance (just guessing bc UCSD)? I work with a virtual biotech there and we contract out all of our r&d. We don't do genomics but some of our investors have other portfolio companies that might be interested in your services
What's ironic is that even though UCSD has one of the premier genomics cores in the world, their lead time and prices are astronomical. We converted an entire UCSD department from their facility to ours by simply improving speed, price, and turnaround. We're finding that the big facilities have so much overhead that they can ONLY focus on big projects, leaving a huge gap in the market for the smaller guys.
If they're interested, we're happy to have conversations. Our website is: https://www.thesequencingcenter.com We're always looking to connect with other folks who are just annoyed with the general way things are operating.
will pass your info along, thanks!
Also dig into the scientific literature (or hire a phd if you don't have a technical background) and connect with leading researchers in the space. Ask them about their work, and the work of competing academics. Do this enough and you'll find interesting science
I am actually looking to get my genome sequenced. I am looking to do ~30X and I just want the fastqs. I am a bioinformatician and can do my own analysis. Is that a service you provide?
We also only have an Illumina MiniSeq which is really designed for bacterial, viral, yeast, and targeted human sequencing. It doesn't have the power to do full WGS however we're working on figuring out how to acquire a NovaSeq.
https://www.thesequencingcenter.com
We're located in Fort Collins, Colorado which is great for low overhead costs! I'll send you a note. Thanks!
So dealflow is very network driven. Life sci VCs, successful biopharma execs and entrepreneurs and academic key opinion leaders are good sources if they are in your network
Getting to know the cell biology / biochem / bioinformatics community at your local research institution is a good way to find untapped early stage deal flow but to take advantage of this you often need to bring some domain expertise or operational expertise to bear, as a lot of the folks in academia can benefit from operations / industry support. If you can speak at a university event or guest lecture in a class that can be a time-efficient way to get into the flow of things at the institution
Not an angel or seed investor but how does one start to learn about problems in this space?
If you live near an area where it is hot, I'm sure there are meetup-ish things or other social mixers of some sort. Otherwise/also, find the online communities where those folks hang out.
Heck, I've cold-called folks a few times when I had clueless questions about their industry. Once someone thought I was a freak, or maybe a scammer, but most times being direct, respectful and not too dumb led to folks humoring me. Now, I'm not suggesting ringing up a random CEO and asking them for an extemporaneous survey of emerging market opportunities, but, especially with startups, generally folks like to talk shop.
- biopharma / therapeutics: the largest and most lucrative sector, but also the most specialized (~$11B venture dollars invested in the US in 2017). Basically companies that develop FDA regulated medicines to treat disease. This has been one of the top performing sectors in all of venture the last few years. It's also the most "different" industry / steepest learning curve if you're coming from a tech background. I wrote a post on the opportunity in the space here: http://newbio.tech/blog/biopharma_opportunity.html
- med tech / diagnostics: accounting for just under $5B in 2017 US venture funding, these deal with medical devices (hip implants, surgical tools, coronary stents etc) as well as diagnostics (ranging from standard blood tests to AI-driven liquid biopsies to detect cancer). Investments here tend to be more doubles and triples than the biopharma homeruns. Reimbursement is a key concern here
- bio-IT: this emerging space has received a lot of hype lately (a16z making a large play here, Verily is also in this category). It is a bit of an amorphous term but concerns opportunities at the intersection of biology, chemistry, software and data analytics. The big opportunity here is using tech to multiply the efficiency / productive of drug development and scientific research
To start learning more, id focus on biopharma, as the opportunity here is massive and really understanding biopharma will help you understand bio-IT. Subscribe to the following news feeds:
-endpoints news -fierce biotech -stat news
When you read about an interesting company, dig deeper. Talk to anyone in your network familiar with the company. Read the scientific literature (and look up all the terms you don't know). Email the academic founders to ask about their work. Email founders of competing companies. Really try to understand the appeal of the investment and the rationale behind the science. It is a steep learning curve but enough reps can get you there
Also, follow Bruce Booths blog at atlas ventures. He is one of the leading seed stage investors and also one of the few life sci VCs who blogs
The reason why is my fellow investors don't have a clue and so back all the wrong companies. If you try and pick the good ones the end result is they run out of money while the ones that hype garbage to the moon suck up all the cash. I should say this is an Australian perspective and I do realise that in other markets things might be different.
And these companies have been getting acquired / going public at very robust valuations: http://newbio.tech/blog/biopharma_opportunity.html
The good biotech seed investors I know have been doing very well and involved in several companies acquired for 10 figure sums
Disclaimer: links above are to my posts / analyses
The real blocking point is Series B and beyond where there is very little true VC money. Biotechs really need support at this stage and it forces far too many Australian biotechs to list on the ASX at a very early stage.
I think the major killer here is the distance - Australia is just so far from anywhere other than NZ.
The biggest problem is not valuations, but cat herding. As soon as you put a dozen grey hairs in a room you will end up with 13 different opinions. This can make progress a lot slower than it should be.
On the positive we have a partnership with VC fund (SA SideCar) that matches investments by the angels 1:1 with no extra extra due diligence. They automatically follow on in later rounds which is really a massive positive.
Most engineers / tech VCs have been making initial forays into this world through bio-IT / software driven drug dev. This is potentially a really promising space, but I'd suggest starting with biopharma bc 1) it has been generating some of the best returns in venture the last few years and 2) being good at bio-IT requires a good understanding of biopharma and drug dev
Biopharma / therapeutics has generated some of the best returns in venture the last few years but is still mostly dominated by specialist VCs and has almost no seed ecosystem (most startups that end up getting venture funding are seeded within the top funds), so there is huge opportunity for seed investors to find the good opportunities outside of the top 5-10 life sci funds. The number of funded biotech startups and seed investors has not increased in a decade despite a doubling in venture funding and the best m&a / IPO environment ever. It is possible for companies to go from seed to IPO in under five years and $5-10B+ m&a in ~5-7 year timeframes (some good timely examples here: https://lifescivc.com/2018/01/two-carts-two-charts-dissectin...)
Finding the best opportunities in biopharma requires identifying the best science. This requires investors to be at least conversational in biology, chemistry and drug development and to utilize advisors / consultants / PhDs to dive deep into specific tech
To orient yourself to the world of biopharma investing, id start by reading more of Bruce booths blogs (he is the author of the post I linked above). He is one of the few life sci VCs who blogs and is also a pioneer in seed-series A biotech investing
Also I'd recommend following biopharma news and funding / m&a activity. If you see any investors / people you recognize in press releases call them up. If you see a deal that interests you, take a look at the scientific publications from the company and reach out to the authors and other scientists in the space to hear their thoughts
As a programmer, one of the things I got really excited about a few years ago was the idea of building a programming language for biology (which would leverage discoveries like CRISPR), but from what I can tell that is still very, very far away (if it's even possible).
One resource I really do recommend is Derek Lowe’s blog In The Pipeline [0]. I have spent hundreds of hours reading through all his posts (he is amazingly prolific) and the very informed (if cynical) comments. It really helped me understand the problems that come up translating a new scientific discovery into a licensed pharmaceutical.
Even if you don’t learn anything you will be entertained by his series on "things I won’t work with” [1].
0. http://blogs.sciencemag.org/pipeline/
1. http://blogs.sciencemag.org/pipeline/archives/category/thing...
-the "six rules of reproducibility" -- with software, in general if someone writes code that works on their system you can use that code and get the same result on your system. This is far from the case in biopharma, especially w academic findings. Failing to understand the dangers of the "reproducibility crisis" is a common pitfall for non scientists: http://blogs.sciencemag.org/pipeline/archives/2012/10/01/six...
-"software eats the world, but biology eats the pipeline" is a professional drug hunters take on the a16z bio thesis. This post references once by Bruce booth. Bruce booth is far from a Luddite and has invested in several computationally driven drug companies (nimbus being one example) but he suggests that there is a ton of potential, but you need to know the dangers before diving in: http://blogs.sciencemag.org/pipeline/archives/2017/04/28/sof...
-the "lessons for a new medicinal chemist" post is also a great one that shows how hard, yet how fascinating, drug discovery is: http://blogs.sciencemag.org/pipeline/archives/2012/06/08/les...
- Organic Chemistry course on itunes U (don't remember which one, just first 4-5 lessons)
- Introduction to Genetics: A Molecular Approach by Terry Brown
- Virology course on iTunes U, by Vincent Racaniello - https://itunes.apple.com/us/podcast/w3310-virology-videocast...
- Molecular biology of the cell book ( https://www.amazon.com/Molecular-Biology-Cell-Bruce-Alberts/... )
After going through that (took ~3 months full time), I went for a month to the Bay Area, went to Biocurious hackerspace, to get some practical experience, and within a month I did stuff like ordering custom dna online, and putting it into bacteria :)
All the above was sufficient to understand basics of whatever I'm reading now about biotech, and gain extra knowledge when necessary.
Some notes: - Virology may seem a weird addition, but the course by Racaniello is super-fun, and if you understand how viruses work, you will understand how everything else works - If, like me, you were afraid of Chemistry and Biology in high school, don't worry. Organic Chemistry deals just with just four basic elements, and Molecular Biology is really not much different from mechanics - not that much to remember, and a lot to understand. - Even if you complete just 3-4 first chapters of all the above, you will get nice foundations for understanding biotech. - There are bio hackerspaces in major cities in US (not so much in EU - regulations)
Have $1 million in assets outside of your primary home or make $200k+ per year for the last 2 years with the reasonable assumption you will continue to.
If you do it as a hobby, count on losing every penny you put in, and treating that as the cost of pursuing your hobby.
If you do it as a business, count on working on it full time, i.e. AT LEAST 40 hours a week, and probably more like 60-80. The competition is fierce. And I would not do it with less than $1M in LIQUID assets which I could afford to lose. The reason you need this much is that in order to have a good shot at a return you need to be able to do two things: 1) invest in a pretty broad portfolio (i.e. at least 10 companies) and 2) have enough money to participate in follow-on rounds so you don't get diluted into oblivion.
Follow-on investments are economically just like making later-stage investments. The average return can be good, but you can also lose all your money and you need much more capital to participate.
Is there any good reason why these opportunities for follow-on investment might have higher expected returns than, e.g. putting the same amount of money into other seed investments? e.g. is it possible that if you participate in the follow-on, that you get some extra leverage to convert your previous shares into a more favourable class?
> And I would not do it with less than $1M in LIQUID assets which I could afford to lose.
IMHO -> Rule #2: If you do it as a business, don't use your money and use a standard 2/20 model. Why someone would do seed investing working 60-80 hours a week and use your own capital is beyond me.
I’m surprised YC has that as a requirement to participate in demo day, seems kind of archaic for a disrupter.
Maybe they find those exceptions to onerous and burdensome, but in my mind that just means there is a giant opportunity - 90% of the US market is being excluded.
1. YC has no problem filling up Demo Day, and I know of even high qualify, professional angel investors who don't get the in person invite. So it isn't like they have a shortage of angel investors. If they wanted to have more and more diverse angels at their event, they could just find a bigger venue, which YC seems averse to.
2. Isn't this a big conflict of interest? This is a company teaching me the basics of angel investing who conveniently happens to directly financially benefit if there are more angel investors pumping money into their companies. Now I'm sure the class will be done well because YC generally does that, but I'm surprised YC is even wading into this. Angel investing is either a bad or at best extremely risky way for the average (even rich) person to invest their money in. Hopefully YC has a lot of disclaimers at the beginning of this class about this fact. I'm all for more information being out there, but angel investing is the type of thing where depending on which facts you omit you can make it seem very different from what it is.
It will however likely suppress returns of existing angel/seed investors, as deal values are inflated.
Fwiw the timing of this makes sense. We are seeing reports of the angel/seed market drying up as the wave of post 2010 first time angels have lost their enthusiasm (or capital), and seed fundraising in 2018 is much much harder than in 2015.
There is a decided lack of investor education. As well as rigor. And opening up YC's methodology will have as large an impact as the introduction of convertible notes. Further, introducing new investors to how their money can be used for maximum impact and progress. Which naturally leads to outsized IRR. Will steer them away from the pitfalls of say, going all in on their best friend from junior high school's BBQ-flavored tequila distillery.
And regarding the sourcing of dealflow. There are definitely myriad untapped ways for the greater YC community to introduce talented startup founders and seed stage investors. AngelList is fantastic. The ability to post MVPs to ShowHN is tremendous. But something like a curated Youtube channel or Twitch livestream where people can pitch or watch demos 24/7 around the world at their convenience would be amazing.
Educating both groups goes a long way towards getting everybody on the same page.
This announcement should be about a new $1 billion fund that they're going to use to deputize and train a thousand new angel investors. Or at least something big enough to move the needle.
Observing YC's evolution is a bit like watching someone take over Philip II of Macedon's empire and using it to march around Greece in circles.
And yet there's potential for thousands of new startups to exist each year. Most people don't believe this, maybe not even YC, but that's what I'd call lack of ambition.
When ICOs (equity crowdfunding) comes into its own we will have a measure of how unambitious Silicon Valley has been. I predict it will be a shocking revelation.
Step 1: Be born into money.
Step 2: Put that money into opportunities prescreened by YC.
A lot will fail but there's a few exponents in there too so you can just shotgun anything interesting. Also don't worry if you miss the first round. There's several more rounds before the public gets any chance to invest - if they ever do at all.
Good one. I'd use it.
Apologies for that!