Section 3: Leveraging Disruption for Society:
Lindy Fishburne, Breakout Labs: The Scientist Entrepreneur
Lindy Fishburne, Breakout Labs10
Breakout Labs uses philanthropy to support a growing list of early-stage companies in areas ranging from food science and biomedicine to clean energy. It was founded by the Thiel Foundation in November 2011.
What was the founding rationale of Breakout Labs?
Peter Thiel and I developed Breakout Labs approximately three years ago. It was created as a revolving fund using philanthropic dollars. This allows us to use the tax-advantaged dollars of the foundation to directly invest in early-stage hard science and hard-tech companies.
We made the argument to the [US] Internal Revenue Service that we are growing the market for funding radical science innovation, which can be impactful. I’m not referring to IT and tech, which is relatively easy to create, but to the hard stuff, such as the intersection of biology and technology where there are scientific risks and unknowns, but the things that can emerge would be meaningful. The market to secure the early funding needed for this kind of activity is broken. It’s therefore a space where philanthropy should exist in the same way that we’d expect philanthropy to exist when the housing or food-supply markets are broken. Breakout Labs argues that we need philanthropy to address the early-stage funding gap for hard science and hard technology in the pursuit of radical innovation.
How does Breakout Labs differ from typical venture capital investing?
There are awesome technologies coming out of universities, many of which have received millions of dollars of federal funding before they are ready to roll out. We then invest $350,000 into those early-stage companies, and we use standard terms in an effort to make seed-stage investing into a standardized process. In the broader market, we’ve seen that seed-stage investing often takes the same approach as traditional venture investing, where entrepreneurs must put in a lot of work engaging the investor but for a much smaller check. On our terms, the $350,000 goes in as a “convertible grant”. Just as with a Series A funding round, our funding converts to equity with a 10% discount, and we have a small capped royalty. Any returns we receive are ploughed back into funding the next generation of scientific advancement. Therefore, we don’t have a typical venture structure. We don’t have LPs [limited partners]. No one takes the money home. We are looking for a more philanthropic return, and that has a different threshold than a VC [venture capitalist] would expect.
By joining the entrepreneur earlier, we have greater scientific and technical risk than market-based funders are typically willing to take. That’s exactly the context where we believe that philanthropy should exist. We’re acknowledging that venture funding can work, and the benefits can be astonishing, but someone first needs to take the science to a critical milestone or key end-point in order to attract the follow-on funding needed to commercialize and scale.
We have funded about 19 companies in the last 24 months across a range of advanced technologies. Our core criterion is that there is a fundamental scientific or technical breakthrough at the root of the company or idea, and we’re often looking at platform breakthroughs. These may impact how we look at an entire problem, or it may be a whole new approach – for example, Modern Meadow is biofabricating meat and leather without animal slaughter. That has profound potential and global impact. In addition, we’re also funding CytoVale, which is developing a whole new class of biomarkers that would allow you to detect disease radically earlier and faster than the traditional biomarkers.
In addition to the funding, these early-stage companies really need access to networks, strategy and the people who have gone before them. Accordingly, a large part of what we do is to build a network among Breakout Lab’s community, so that they can help each other and share resources.
On another level, we also represent the portfolio to the venture community, follow-on funders and strategic partners. This includes large Fortune 500 companies that regularly review our portfolio for technical collaborations and possible investments, as well as family offices who would like to invest in this space, but don’t yet have the deal flow or diligence expertise on their own. We’ve also built a strategic relationship with NetScientific, a fund in London, which has committed to initial follow-on funding for our companies in the med-tech-category space.
In total, by securing a Series A or strategic partnership, we’re trying to build an entire ecosystem to help get these companies out of the university or lab and into the market so they can continue to advance.
In terms of the technologies and sectors on which Breakout Labs focuses, are they strategic decisions, or are you led by where you encounter innovation?
In terms of focus, our primary area is what we see as the intersection of biology and technology. We don’t use the term biotech, which is too narrow and connotes traditional therapeutics. Instead, we’re seeing a much wider world at this intersection. Sometimes, it involves software; sometimes, biology and sensors, or biology and 3D printing. It can mean everything from diagnostics to therapeutic platforms. For example, we have people looking at oral delivery of biologics. We also have folks reprogramming cells to allow you to create your own internal drug factory, rather than being on a pharmaceutical regime. We’ve just funded a company called Cortexyme, which has a radically different point of view on the root cause of Alzheimer’s. They are looking at a specific pathogen, and if they are correct, they would overturn the hundreds of millions of dollars of pre-existing research. We also have a company looking to regrow human bone using a patient’s own adipose cells.
While many of our companies sit at this nexus of technology and biology, we’re also interested in breakthroughs across advanced technologies. We supported one AI [artificial intelligence] company, which we exited and Yahoo bought. We’d love to see more on new materials, where there is actually less activity than we anticipated. But our sweet spot is certainly this intersection, which is where we see such a revolution and opportunity for innovation, yet such a pullback on investors.
When investing in the intersection of biology and technology, do you have an overarching investment theme, or is it more idiosyncratic?
We invest on a case-by-case basis. We aren’t looking for one technology type, or one narrow vertical that we’re mining. There are a couple of reasons for this, including not knowing where the next technological advancement will come from. Additionally, we avoid directly competitive plays because there is so much connection and sharing among our portfolio companies, and we don’t want to harm that interaction.
All proposals are received through our website, where applicants are asked 10 basic questions about their scientific insight and development plans. Those are reviewed for fit, and for those selected, the next stage involves a full proposal, which covers how the money would be used, what milestones would be hit and what market would be created by this technology.
When we look at the challenges of radical innovation, a basic problem is knowing if the team is purely a research team, or if it is a team ready to successfully operate in the market; that’s a fine line. We are getting better at identifying the right teams; and, by having terms which are financially driven, we send a message to applicants that we are looking for people who are ready to build financially successful operations and bring impactful technologies to market.
Breakout Labs focuses on the United States. What are the success factors from which other countries could learn in this area?
Actually, both outside of the US, and in the middle of the country, the network of funders needed to advance these companies is lacking. From an ecosystem perspective, that’s the biggest problem outside the US and even in some areas of the US. Investors are looking to fund people they know; they want to invest in deals close to them. That also means you need a quality set of entrepreneurs taking on the risks to build innovative companies. There needs to be a geographically close community of funders and partners and a supply of qualified entrepreneurs, and this is simply lacking in many places.
Using the Alzheimer’s cure as an example, why do you think a start-up approach to curing or treating Alzheimer’s has advantages over an established pharmaceutical company? Conversely, what prevents the pharmaceutical companies from producing their own cure?
There are many reasons. Start-ups aren’t beholden to a history of what has, and what hasn’t, worked. They are less concerned about taking risks that might threaten job security. For a start-up, being disruptive is exactly the thing to do. Shooting for the stars is exactly what’s expected, but big pharma is managing quarterly earnings and needs a stable pipeline.
In the Alzheimer’s example, if our company is right, they will ultimately need to partner with big pharma to develop and bring a treatment to market. Right now, big pharma is looking outside for essential new ideas. They have cut R&D budgets and their culture doesn’t support fundamental innovation. It’s clear that they are counting on start-ups to do this exploratory work. It’s concerning that while big pharma is cutting back on attempts at innovation, there isn’t an ecosystem to support biotech start-ups. That’s where Breakout Labs steps in.
Examining the ecosystem, and how Breakout Labs focuses on intensive growth versus extensive growth, why isn’t the government playing a similar role?
In the US, the government has the Small Business Innovation Research (SBIR) programme, which is similar in terms of the amount of money and the stage at which they grant. The big difference is in the way we source our investments, the team qualities we look for and the support we offer our portfolio.
I don’t think the government is best poised to find and nurture entrepreneurs, and, in turn, they are fans of our programme. Our entrepreneurs have a 40% success rate of receiving their SBIRs versus a general success rate of 10%. The US government sees the value of what we do beyond the money: the mentoring, the strategy, the networking, the connecting. They aren’t in a position to do that themselves. They spread their money around the country, often to geographic areas where companies are isolated and not connected to an ecosystem or network, and their chances of success are diminished because of that. On the other hand, we’re focused on ensuring that if we fund you, you are connected and you’ve got access. For example, just yesterday, I had a call with a strategic partner about one of our companies they’d like to work with. We can engage with funders and partners and share just the right information at relevant times to facilitate the relationship. I don’t know if the government could solve the network connectivity and strategic pieces the way that we can.
In terms of government, do you encounter many regulatory issues in the medical field?
Obviously, our primary regulatory challenge is with the US Food and Drug Administration. The lack of clarity encountered is the biggest issue. The market isn’t necessarily adverse to rational regulation that is transparent and fair. However, the market is adverse to regulation seen as opaque and inconsistent. That sends funders running. The lack of clarity on the regulatory pathway around new approaches, such as self-therapy and gene therapy, has a ripple effect for the investing base.
What is your future vision for Breakout Labs?
We will have shown that this early-stage, hard-science space is investable. Money can be made here. Really dramatic innovation can emerge with patient investors. Many of the companies we have invested in will have products and technologies on the market, and they will take us in radically different directions in terms of cures, treatments and detections than we even think about today. Breakout Labs will have been part of that.
From an ecosystem perspective, we will have brought philanthropists into the conversation about funding radical innovation.
The current definition of philanthropy is too narrow. We actually see companies as more direct agents of change than non-profits. When we talk about changing healthcare or saving lives by taking a new diagnostic or therapeutic to market, that is best achieved through a company with a clear mandate for success. The idea that philanthropy can be done through companies in order to have the optimal impact is an area we’d like to explore, and I hope that in 10 years’ time we see a shift in philanthropic resources.
A new type of entrepreneur is emerging, and they are going to need programmatic support from institutions, government and the marketplace – the scientist as entrepreneur. In the past, VCs would tell you that they wouldn’t fund a company with a scientist as CEO. This is going to change. We will see the value of leaders with scientific expertise and passionate dedication, and they will have the skills that allow them to be successful problem-solvers and builders.