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PureTech Ventures, JDRF Team Up to Form Type 1 Diabetes Startup Creator

Xconomy Boston — 

Disease foundations often give money to startups working on treatments that might help the people they advocate for. But it’s not too often you’ll see a nonprofit foundation join with a venture firm to create their own company, as JDRF and PureTech Ventures are doing today.

Boston-based PureTech has secured a $5 million investment from New York-based JDRF (formerly known as the Juvenile Diabetes Research Foundation) to spawn T1D Innovations. The new entity is described as a company-creation vehicle that will help form, and provide seed funding, to startups that develop innovative therapies for type 1 diabetes. The plan is to funnel as much as $30 million from other non-profits, strategic and financial investors, into T1D, and use the cash to start eight to 10 projects. Many may go by the wayside, with a few surviving and becoming new independent companies.

“The goal is not to make a quick buck, that’s not why we’re doing this,” says David Steinberg, a PureTech partner and TID’s initial CEO. “It’s really to lower the activation energy of getting these things out of academia and out of the realm of more basic research into that translational development pipeline.”

To be clear, TID isn’t a startup accelerator, and it isn’t meant to be a long-term venture. Rather, its goal is to find promising, transformational ideas in the area of type-1 diabetes, keep them breathing, and usher them from concept to company —all within the timeline of a typical fund’s investment cycle. Ideally, each spinout company would then either find a pharmaceutical partner to help develop its program, or land a Series A round from traditional venture investors to get itself off the ground.

This is important, Steinberg says, because this type of funding is drying up, in part because the government sequester’s squeeze on National Institutes of Health grant money is making it harder to translate scientific ideas into potential products.

“The real problem that this is addressing is what’s typically referred to as the Valley of Death—this translation gap between new basic research and longer term, clinically relevant development of these technologies,” he says. “A vehicle that can go out and start companies around the most exciting technologies, not just invest in existing companies, that allows not-for-profits to participate, those are kind of the two key things that make this unique.”

PureTech is doing this by aligning the goals of for-profit investors with non-profit entities without putting the latter’s tax-exempt status in jeopardy. T1D will initially own the majority of the equity of each startup, and then sell shares as each company develops and raises its own outside funding, with the proceeds flowing back to T1D and its investors.

For patient foundations to take part, this is a little trickier. Foundations have two pools of cash: endowments, and money set aside to further their missions. Those foundations typically use the mission-related cash to provide companies with grants, grants with paybacks, debt, or equity investments. Any profit then flows back to the foundation strictly to invest more in its mission. Going the equity route is complicated, however, because there are various restrictions on non-profits, among them the amount of stock they can own in a company.

So PureTech did a few things: For-profit members of T1D can’t stray from the mission of the group. There’s also a so-called “mission committee” in place that JDRF sits on. That committee has the right to rule out potential investments that aren’t consistent with the goals of the organization (the committee won’t manage T1D’s investments on a day to day basis). T1D is also structured in such a way to prevent taxable income from going to JDRF at the wrong time, according to Steinberg.

“We did a whole bunch of legal and accounting work where we could actually allow non-profits to have equity holdings in companies out of mission-related capital while still having many layers of protection and oversight to ensure that it doesn’t in any way put in jeopardy their not for profit status,” Steinberg says.

PureTech chose type-1 diabetes as the focus of this vehicle because of a long-standing relationship with JDRF, and a few specific properties about the disease: there is a big need for medical advances for type 1 diabetes (which could, in turn, make big dollars for for-profit investors), but it is a small enough patient group that it doesn’t attract the attention of the traditional investment community.

Type 1 diabetes accounts for just a tiny percent of people with the disease in total. It occurs when the immune system attacks insulin-producing cells in the pancreas, rendering people unable to keep their blood sugar in check. This is far less common than type 2 diabetes, in which people gradually lose the ability to control their blood sugar—typically when they become overweight. There’s no known cause for type 1 diabetes, and there’s no cure. It’s a chronic condition that affects kids and adults of any age, and has to be managed for life through insulin injections.

This isn’t to say large pharmaceutical companies avoid investing in treatments for type 1 diabetes. Rather, it’s just really tough for a startup with a transformative idea to get the backing to break in given the size of the market. So T1D is taking a broad approach. It’s not interested in incremental advances, just potentially transformational ones that can treat, or potentially prevent or cure the disease altogether. And it’s not just interested in drugs, but medical devices, and even electronic apps that could possibly have a substantial impact on patients. By taking this approach, T1D can take a variety of routes to company creation while still pursuing the longer, costlier, startup that requires a full-blown drug development process.

“We’re not going to go after slightly longer lasting insulins, or e-app type things that are really just tracking things but really don’t affect your disease,” Steinberg says. “There are a lot of really exciting new things going on that we think are going to have a big influence on the area, so we actually have a chance to start some companies that will be potentially transformational.”