Accelerating life science tools R&D with venture studios
By Risa Stack
Risa Stack is a venture partner at RA Capital. She has played a significant role in the early operations, financing, and development of over 25 companies.
July 22, 2021
Trying to pinpoint the earliest drivers of the current biotech boom cycle might be like trying to agree with a group of friends on the best film or tastiest ice cream flavor. Even those in the know will have different opinions (the answers are obviously Apocalypse Now and chocolate mint).
But for me, the excitement was originally driven by the tantalizing promise of ex vivo cell therapy, personified by the biotechs Juno and Kite. Cell therapy excitement hasn’t gone away. The success of those pioneers – each scooped up by a large rival for billions, rewarding their investors handsomely – has spawned a next generation of ex vivo cell therapy companies, and has led to the next frontier: in vivo gene editing.
This new generation of companies benefits from the first generation’s talent and insights as they cycle and recycle through the ecosystem. But it is truly underpinned by advances in life sciences tools and technologies.
For example, the low cost and “relative ease” of DNA sequencing led to the ability to develop chimeric antigen receptors (CARs). And renewed interest in the immune system has driven deeper understanding of the many types of cells that comprise it; looking for these needles in a haystack has sped the development of technologies to analyze individual cells.
Venture investment in life science tools in the US and Europe nearly doubled from 2019 to 2020 to about $10.3 billion, according to data from Silicon Valley Bank (though the ~$25 billion investment in therapeutics companies puts that figure in perspective). Exit valuations for tools companies also jumped in 2020, according to SVB data, with $27 billion in IPO or M&A exit valuation, versus less than $9 billion the prior year and $4 billion the year before that. Tools companies have also outperformed all other healthcare subsectors on the public markets over a one-, three-, and five-year time horizon, according to data from Fidelity.
Interest in life science technologies and tools is accelerating with the advent of CRISPR and other aspects of synthetic biology. The ability to have a capital efficient way to advance these innovations is very attractive and will help drive innovation.
Enter the venture studio. Studios are probably more familiar to tech investors, but they could provide a model that would accelerate company building in the life science tools space as well. My friend, Paul Conley, recently started the life sciences studio General Inception to give it a shot.
A bit of history
Before we talk about Paul’s studio, the history of venture studios is worth exploring. The concept is often credited to Bill Gross, who founded Idea Lab in 1996. In this model, the employees of the venture studio have the necessary skills to help entrepreneurs build their businesses.
Maybe they’re product development, early-stage marketing, or operations experts. They more than mentor; they temporarily become part of the management team, working side-by-side with entrepreneurs to achieve early key company milestones. (Think Francis Ford Coppola, John Milius, et al. coming together with United Artists to make and distribute Apocalypse Now.) The concept is similar to venture creation, but with a greater focus on capital efficiency; it’s also beyond the workspace and community traditionally offered by an incubator - think less advising, more execution.
The studio and its employees typically receive common equity for their work (just like entrepreneur founders). In cases where the studio conceives of the idea or innovation, it may get 50% or more of the common equity. Additionally, the venture studio often invests a small amount of capital, usually under $1 million and often in small increments, such as $100,000, to run key experiments, or fund an experiment at an outside academic lab, or build prototypes, etc. The goal of the venture studio is to build portfolios of early-stage projects, with experienced executives mostly working part-time on multiple projects.
In addition to providing the human resources, the venture studio may partner with other organizations, such as prototyping firms and incubators, that help provide needed services. Funding for venture studios may come from venture funds and family offices wishing to expand their pipeline of newcos for potential investment.
In providing back-office support (HR, graphics, legal) and a sense of community, they can be like incubators. In providing mentorship, they can be like accelerators. But in providing some money when that’s what it takes to answer a question, interim management, and actually originating some ideas internally instead of just working with ideas that founders bring with them, venture studios are distinct. A founder might come into a studio with one idea and leave as part of a team working on a different idea that's been validated by an experiment funded by the studio. That's not what incubators and accelerators are designed to do.
Some funds can have studio-like initiatives internally - RA Capital, for example, has a team called RAven that consists of a fluid, collaborative team of executives and back-office functions and forms newcos around internally generated and externally sourced ideas. RAven aims to be capital efficient in considering which ideas to advance, but can and does fund those ideas further, through seed and sometimes through Series A before syndicating. (RA expects to continue to support its companies through many rounds of funding and into the public market, all of which makes it more than a studio.)
Back to Paul and General Inception. Paul has spent his investing career mainly focused on life sciences technology. Based on lessons learned in backing mostly first-time founders in first financing rounds over the years, he was motivated to create a new model that is geared specifically for co-founding companies where there isn’t a complete founding team yet or where a technology has promise but needs more proof of concept.
He founded General Inception in 2019, and has since funded more than 13 ventures, the majority of which General Inception formed itself, along with a few very early stage, or pre-seed companies. General Inception currently focuses on life science research tools, molecular diagnostics, synthetic biology, therapeutics discovery, development, and manufacturing (small and large molecule, as well as cell/gene therapy), microbiome and med-device/med-tech.
“I believe that we’re still in the early innings of a renaissance in the life sciences, particularly synthetic biology,” Paul says. “Using the venture studio model, my team and I believe we can build not just great companies, but great scientific founders who take full part in their entrepreneurial journeys at the front of the bus, again and again. Our goal is to be the ideal co-founder to them.”
One of the first companies from Paul’s venture studio, Switchback Systems, recently announced its Series A financing. In 2019, Paul met the scientific founder, Mary Noé, an organic chemist trained in the lab of Marvin Caruthers and a veteran of several synthetic biology companies. Mary’s idea for a novel DNA synthesis platform could radically reduce the time and cost of manufacturing highly diverse oligos, gene fragments and whole genes in a compact, benchtop form factor.
Needing only a few hundred thousand dollars to prove the concept, file the IP, and build a prototype, raising money from a traditional VC would have cost Mary a lot of ownership and not necessarily provided her with the expertise needed to build the prototype device. Working with Paul and the team at General Inception, she got the necessary people, resources, and capital. Once the prototype device was developed and the IP filed, Mary was able to raise a Series A round at a significant step-up from two of the Studio’s member VCs who partially fund General Inception’s corporate operations.
From art-house to blockbuster
So how broadly can the venture studio model be applied? Rowan Chapman, a founder of Initiate Studios, likes this model for healthcare IT and digital health. “The venture studio model works well when a small amount of capital is needed to reach a significant milestone,” she says. The studio model also works well for digital therapeutics, diagnostics, and devices, as long as there is a key transition that can be reached for less than $1 million. Studios generally won’t work for classic therapeutics, given the amount of capital required, but in some cases there may be simple innovation which can be tested for the same price as a diagnostic.
While companies founded in a venture studio may start out differently, most will follow the same financing path as traditional VC-backed companies – raising additional rounds of financing from venture and corporate investors until they IPO or are acquired.
Historically venture studios had more of an artisan orientation; they put together a group of people to innovate product development. The model is evolving to formalize the networks and math needed to build companies. By building a team of people steeped in the different steps needed to build a product and develop a market, you reduce the number of mistakes and the cost associated with those mistakes, increasing the likelihood of success.
In terms of math, with the right people around the table you can also assess projects from the venture standpoint: if we put in a certain amount of money, we should be able to achieve certain milestones and raise money at a significant step-up. Thus, the fundamental venture studio model becomes one of efficient innovation.
This evolution seems natural and fills a needed gap in the company formation process. VCs provide expertise, incubators evolved to provide guidance and space. A studio provides resources needed to build products and analyze markets. The venture studio model may ultimately help democratize these processes, connecting people with great ideas to those with the expertise needed to execute on their ideas and continue to innovate.
While perhaps spurred by the ongoing biotech renaissance, I believe the venture studio model in the life sciences is here to stay; it makes economic sense. The model may even increase in popularity if money becomes tight, as there will be less available capital for ideas without a requirement for prototypes and data.
As with the next generation of cell therapies, technology innovation is now driving therapeutic innovation more than ever. Venture studios can accelerate the development of technology into tools and processes to lay the foundation for new generations of therapeutics.