Biotech Pioneer Steve Gillis on Life as a VC, How Today’s Entrepreneurs Can Make It, and Seattle’s Future in Life Sciences (Part 2)

Xconomy Seattle — 

Yesterday, we ran the first installment of an extended interview with Steve Gillis, the biotechnology pioneer who’s now a managing director at Arch Venture Partners. Today, we have the second half of the conversation, in which Gillis talks more about ways biotech entrepreneurs can adjust to the tough fundraising climate, and Seattle’s realistic assets as a biotech cluster—when it’s unlikely anyone will ever create another Immunex or Amgen.

Xconomy: Do you have any advice for the scientific entrepreneurs out there now who are in their late 20s or early 30s?

Steve Gillis: Jump in with both feet. What’s the downside? If you have technology that will lead to products that help people treat some unmet medical need, first and foremost before you think about financial return, that should be a motivating factor. Whether you’re going to be public or bought. If you’re worried about the fact that if you’re successful you’ll be acquired and likely out of a job, and therefore you shouldn’t be successful or shouldn’t be acquired, that doesn’t really make sense to me. So what? If you’re bright and entrepreneurial, you can do it again.

At Arch, one of the things we tend to do is back people who made us money in the past. It’s a lot easier hurdle for someone who’s been successful to say, “I’ve been successful with this, and now I want to start something else, and damn it, I can be successful with that.” It’s a pretty good argument. It certainly takes management risk off the table, of risks you’re talking about when you’re considering making an investment in a startup company.

X: You mentioned that the IPO market no longer really exists for startup drug companies, and some people like to say the venture model is broken for biotech. What do you think is going on?

SG: I don’t think it’s broken at all. It used to be that you could raise $100 million in private money, take a molecule through proof of concept in man—whatever that means to whatever audience you’re talking to. But usually it meant the product had a tolerable safety profile, and you knew it worked in some set of patients. You might not have done a study that was highly statistically significant as compared to the standard of care, but as one of my partners once said, you knew there was a pony there. And you could be rewarded with a public valuation of $500 million.

Today, you can get through those same steps, having put $100 million into a company, and be rewarded with a public valuation that’s $50 million. That’s no fun for anybody. So you have to be able to get to that same proof of concept on less money. And presumably, a shorter period of time. The way to do that is with bright people who have done it before. Platform technology with multiple product opportunities, and yeah, maybe you license off one or two product opportunities so you can have non-dilutive capital in your company and not always be beholden to investors for capital. You get there, and get there in a way that some bigger fish is not just interested, but feels they have to have you for dinner.

X: Are there a couple good examples here locally that you think are following this new model?

SG: They are all following the model. They are all bright people. They all know the public market is not a viable option for them or their investors. We’re pushing all our portfolio companies to find sources of opium. As in “OPM”—other people’s money. Whether it’s DARPA, stimulus money, licensing deals. They all hear us. They are all doing it, and will continue to do it.

X: Cancer and immunology are a couple of historic strengths of this cluster, and seems to be gaining prominence globally within Big Pharma. How does this position the Seattle cluster for the future?

SG: I think it positions the area well. There are a lot of good things happening here. But it’s Seattle. Try as you might, it’s not going to be Boston or Cambridge. It’s not going to be the Bay Area. Is it every bit the equivalent of San Diego? I think so. Part of the reason is there are only so many academic institutions here. I don’t want to go through the list, but we have X, and Boston probably has 10x and the Bay Area has 5x. So I’d say to the entrepreneur in Seattle: stop complaining about it. Get on with your life and try to start something.

X: Do you mean license something from somewhere else and build it here? Does that make sense?

SG: Go find the best things that are here and go work on them. Or find the brightest people that are here. To a great extent, that’s the Arch model. It was, and still is, to walk around the halls at universities and try to find the top 1 percent of the intellectual property that’s there and see if something makes sense to start a company around.

X: I mentioned cancer and immunology. Are there disease categories you think the region lacks in, and might benefit from some kind of boost in a targeted way?

SG: We’re not big sector investors, we’re agnostic on sector. We tend to look for developments that can have impact in multiple disease areas. Some VCs say, “We don’t do oncology companies, or we only do oncology companies.” We aren’t like that.

Obviously metabolic disease is going to play an increasing role in healthcare budgets and opportunities. We have a great diabetes research center run at Virginia Mason by Jerry Nepom, but we don’t have seven of them. We don’t need seven of them. But Seattle can hold its own quite well, even with the quite larger biotech hubs of the Bay Area and Boston. But we don’t need to keep kicking ourselves in the rear that we’re not Boston or San Francisco. We’re not going to be.

X: How many portfolio companies are you on the board of?

SG. Eight. Technically, I’m on the board of more because they’re part of Accelerator, but I don’t really count those. In Seattle I’m on the board of Accelerator, Trubion, VLST, Theraclone, and VentiRx, and Qwell Pharmaceuticals. In Boston, I’m on the board of Surface Logix and Variation Biotechnologies, which is half in Boston and half in Ottawa, Canada.

X: Is there another Immunex or two in your portfolio for the region?

SG: I don’t think there’s a company that’s ever going to be like that—unless we go back to the future, which I don’t see happening. I don’t see anyone paying for an R&D engine that includes paying for 300 to 400 people. It ain’t happening. Are there billion dollar companies, or companies with that kind of potential? Absolutely. But you’re not going to see that size of R&D group built again. It’s just too expensive in today’s world. So much of it can be outsourced that couldn’t be outsourced before.

X: It sounds to me like there’s a lot of potential to create value, but maybe not so much in terms of jobs. Where will the job creation come from?

SG: These places will create jobs, but they’ll grow to the size of 40-50. If they do their own manufacturing—which I don’t know why anyone would do today because of the cost of bricks and mortar, and investors don’t like owning buildings—but maybe on the top end they’ll get to 100 people. Not to be cold, but the goal of the biotechnology industry is not just to make jobs. Jobs are a fallout from starting companies. The goal is to develop products that change people’s lives, and make a difference, and actually do make money. So, the way a particular region can generate jobs is to make sure the region generates lots of companies as opposed to one giant success story.

X: I hear what you’re saying, but for a young person that’s starting out or someone with a really good education and some experience—a lot of them are unemployed locally. Where can they realistically turn? Does the region need more cases of a company like Covance coming in and buying up part of Rosetta? Can Big Pharma or contractors to fill out that ecosystem?

SG: Sure. Or people should consider getting involved in some sort of area that’s peripheral to the biotech industry. Maybe you’ve got a science background, and maybe you’ve never thought about it, but if there aren’t any jobs, maybe you go to law school. You could go to work for an IP firm. Or you get some further training and go to work for some investment group, or in PR. Or, you say, if your love is really in catching on at a science-based organization and doing science, maybe you work for less than you thought you’d work for to get your foot in the door.

I’ve counseled students and other people that if this is your passion—don’t necessarily do it for free, but you might offer to do it for free for a little while until someone catches on that you’re talented. Then when the next job opening comes open at that place, maybe you’ll get the job.

X: You said before that you’re having fun. That’s surprising given all the turmoil we hear about in the venture industry and portfolio companies. What’s fun?

SG: I still like being at least peripherally associated with good science. And building things. I like to build companies and see people’s ideas reduced to practice and tested in people. I still get a big kick out of that. I’m no stranger to working hard, so the fact that we’re in a difficult investment climate, I’m no stranger to that either. It’s part of life. I don’t let it eat me up. If it did, I wouldn’t be terribly effective at what I’m doing. It takes a certain amount of conviction to roll up your sleeves and get the job done.