$54,000
$1,097

If I Were Going to Raise a Venture Fund, I'd Earmark 10% of Capital for Creating Startups By Funding Research that is Close to Completion

I should preface this short discussion by saying that I'm scarcely cut out to be raising a venture capital fund to target investments in SENS rejuvenation research companies and other useful ventures likely to help produce effective treatments for aging - ways to extend healthy life and defeat age-related disease. To assemble a venture fund requires superb connections to start with, and then successfully running said fund after you've persuaded people to put tens of millions of dollars into your care requires a whole set of other skills and experience that I lack, and in truth have no great interest in acquiring. You might look at the venture capital aptitude test for an only slightly exaggerated way to assess your own suitability for this line of work.

There are venture capitalists out there today raising funds for longevity-related investments in biotechnology and medical development, however. This is a natural consequence of deep pockets like Google and Abbvie becoming involved in the field, as well as the large sums of money being invested in ventures like Human Longevity Inc. Ironically, Human Longevity is actually a well-dressed personalized medicine company, with little to do with the enhanced longevity the principals talk about, but appearance counts for a lot in the calculations being made behind the scenes. Where there are deep pockets, there are potential acquirers for new companies, and so the nascent field of treating aging has become much more attractive as a place to start new companies. Combine that with growing awareness of the state of the science, very much on the verge and ready to deliver new technologies at a steady pace in the years ahead, and it explains the interest new seen in portions of the venture capital community.

If I were going to raise a fund to profit from the first decade of the SENS rejuvenation biotechnology industry, small but soon to grow, it would be under terms that earmarked 10% or so of capital for funding research. Let us say - to simplify greatly - that venture funds have a lifetime of seven to ten years before they dissolve and return gains or losses to the investors. A successful biotechnology company focused on a single class of therapies, starting out with a working technology fresh from the labs, may run five years from start to acquisition, or to going public, though that second option has lost its popularity these days. Either of those endpoints would close out the participation of a fund invested in that company: the fund owners would count their profits at that point. These timelines allow a venture fund with capital earmarked for research to selectively make non-profit donations to fund research groups in the first couple of years of its existence. The idea in doing so is to establish strong relationships with those groups working on technologies that are plausibly quite close to the point at which a demonstration can be made, a drug candidate established, or other suitable point to launch a startup is reached, and then push that research across the finish line. At that point, the fund then invests in the resulting startup.

Venture funds make all of their profits from the very few outstanding successes they invest in. They lose money on more than half of their investments, and manage only a small profit on most of the rest. This is why venture capitalists behave in the way they do: they need to nurture companies that swing for the fences so as to become enormous successes if they do succeed. If you have a great idea for a sustainable business that cannot achieve this goal, and flattens out at merely large and successful, then that business is not the right fit for venture funding. Given this distribution of gains from venture investment, I suspect that a fund could earmark considerably more than 10% of its capital for research and still do very well by the method I outline above. You still have to sell this earmark to the people who will be investing in your fund, however, and they will probably require some convincing as the number grows.

I should emphasize that good venture capitalists provide a lot of aid to their portfolio companies. They are far from being just a source of money. The idea of using a portion of the fund to advance the necessary state of the science so as to create startups to invest in, and becoming very familiar with the research community as this takes place, is really just an acknowledgement that the process of development and creation of wealth doesn't start at the point at which a company is incorporated. That is quite some way down the line from the true starting point. If venture funds can aid and nurture growth companies, they can also reach further back down the development pipeline to aid and nurture research groups.

One of the reasons that this strategy isn't seen in the wild is, I suspect, that it is in fact very hard to gather the right connections and knowledge to pick winners in the laboratory. The present situation for SENS rejuvenation research may be quite uncommon, in that there are (a) numerous lines of work that are not heavily funded, but that should yield a large number of good approaches to therapies if completed, and (b) knowledge and connections in the SENS Research Foundation and the surrounding community sufficient to identify these opportunities. Further, the approach of creating startups by funding research probably doesn't scale very well from the point of view of a fund organization, in that the fund would have to make a comparatively large number of investments in research and seed level rounds in order to generate the opportunity for a smaller number of larger and later round investments. For a fund of tens of millions of dollars, this is not a problem, but this is not a strategy that much larger funds could adopt given the way they are currently staffed and organized. There are only so many hours in the day, and there are only so many opportunities for smaller investments; you can't fit a whale into a fish tank.

Still, this is, I think, something well worth considering as our community moves forward and venture capitalists join our ranks. We have this opportunity, possibly uncommon, to reach back past the point at which companies start, to build hybrids of venture funds and research institutes focused on the most promising biotechnologies of rejuvenation and longevity. It would be a shame to let it go to waste.

Comments

I think one of the biggest uncertainties is how long it will take research to get to the proof of concept phase where investors would normally step in by starting a company. After proof of concept they have a basic timeline, but before that it is just extra risk and interest cost.

Posted by: jim at June 25th, 2016 1:33 PM

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