Key for Houston’s Biotech Ecosystem? Building a Bench of Executives

Xconomy Texas — 

Life sciences leaders have lamented that one part missing from the biotech ecosystem in Texas is a robust community of executives who know how to turn good ideas into profitable businesses. In Houston, Fannin Innovation Studio has set out to fill that gap.

“If you are in Boston, you already have a management team nearby to harvest it, and venture capitalists ready to fund it,” says Atul Varadhachary, Fannin’s managing partner.

Houston—and Texas in general—instead lacks such a bench of experienced executives capable of building large, successful life sciences and medtech companies.

Not that they don’t exist, Varadhachary is quick to acknowledge. Houston has had some notable biotech entrepreneurs, including Jeff Sheldon, who founded and sold Idev to Abbott in 2013 for $310 million, and Nancy Chang, who sold her 20-year-old company Tanox to Genentech in 2006.

But “many of our innovations die,” Varadhachary says, because the number of high-caliber executives is too few.

Or, if those innovations don’t die, they relocate. The most recent example is Codiak BioSciences, a biotech company that seeks to exploit exosomes for their diagnostic and therapeutic potential. The firm was formed with investments from Flagship Ventures and Arch Ventures Partners, among others, and based on research from Raghu Kalluri, chairman of cancer biology at the University of Texas M.D. Anderson Cancer Center in Houston, who is studying how exosomes can act not just as delivery vehicles for waste but also for a variety of drugs. But Codiak CEO Doug Williams and his management team are all in Cambridge, MA—and that’s where the young biotech is being headquartered.

Bruce Butler, vice president of research and technology at the University of Texas Health Science Center in Houston, agrees. “Candidly, the greatest shortage that we have in our ecosystem is a shortage of CEOs,” he says.

Ann Tanabe, chief executive officer of BioHouston, agrees. But she says she expects those numbers to rise. Namely, she cites the Cancer Prevention and Research Institute of Texas, which gives grants to young cancer-focused biotech companies and scientists

“The CEOs are coming from all over and building their companies locally,” she says. “The hope is that they’ll have exits down the road and stay in Texas for the next (company) and the next one after that.”

“No, there are not a bunch of CEOs at the ready, but that community is growing,” Tanabe adds.

In the last year, the Texas Medical Center has put some considerable muscle behind efforts aimed at boosting Houston’s biotech ecosystem. Among those include its TMCx accelerator, which helps entrepreneurs in medical devices and digital health to commercialize their ideas. This year, the TMC also unveiled a new biodesign fellowship with the goal of giving researchers, doctors, and others in life sciences managerial experience, the type that is crucial to making research a marketable product.

Those activities have also enticed others to invest in Houston as well. Drug giant Johnson & Johnson is working to open a JLabs outpost in Houston, scheduled to open in early 2016.

“It’s always a big issue, finding the right entrepreneurial talent,” says Erik Halvorsen, who last month joined TMC as the head of TMC’s Innovation Institute. “It’s really going to take a coordinated effort and collaboration.”

Fannin’s Varadhachary says the firm has focused on the need for expert management since its founding as AlphaDev in 2005. (The firm changed its name to Fannin Innovation Studio last year.) The idea was to have a single management team in place that would lead the physicians and scientists seeking to commercialize their research.

In February, the firm raised money from outside investors for the first time, about $7.3 million from about 30 investors. (Previously, the firm operated from funds provided by founder Leo Linbeck, executive chairman of Houston construction firm Linbeck Group, and it solicited grants to help support portfolio companies’ operations.)

Rakesh Agrawal, founder and CEO of Houston technology firm SnapStream, is one of those Fannin investors. He says Fannin’s approach is designed to produce “visual signs of success.”

“You want people talking about winning because that incents other people to get into it,” says Agrawal, who is also an investor in about 40 early stage companies. “I really think that’s a significant part of their motivation in this, to have investors walk away with making money and then be reinvesting that money back into the Houston life sciences ecosystem.”

Fannin has picked up steam in the last year, launching five new companies, including biotechs developing treatments to combat asthma, inflammation-induced cancers, and autoimmune diseases. The firm has nearly doubled its number of portfolio companies to 12 since 2013.

Some Fannin companies are starting to get traction. A notable standout is Procyrion, which is developing a catheter-based circulatory pump device and has raised about $12.9 million through two funding rounds. (Fannin had originally put in $150,000 in seed money.)

In addition to incubating young companies, Fannin runs a sort of managerial training program through its internships, which are designed for engineers or researchers interested in the business side. “We now have had over 70 interns over the last five years, over 30 just in the last year, nine of whom are now full-time with Fannin or our portfolio companies,” Varadhachary says.

Chris Durst, a Rice University PhD in bioengineering, says he always had aspirations to do his own thing, to, as he says, “hang out my own shingle.” After meeting Linbeck, he joined Fannin as an intern in 2008.

During the 12 weeks of the program, Durst says he got experience in deal screening, how to negotiate deals, and corporate operational tasks.

“I had to write down two-thirds of what was discussed because I didn’t know what any of it meant,” recalls Durst, who today is a Fannin principal leading two portfolio companies. “I was given enough rope to hang myself but I was also given a safety net.”

Varadhachary says that the firm now has at least 10 people that are either already at the CEO point or could get there in the next couple of years. “This number has doubled in the last two years, and we expect to continue to grow it steadily,” he says.

While naturally Fannin wants commercially successful companies, Varadhachary says the firm’s philosophy entails “actively looking for ways to disprove the idea.”

The thinking, he says, is that the quicker the firm can realize viability, less time and money is wasted on a flawed product or business model. The project can be scrapped or they can use the lessons learned to tweak their thesis or move on to the next idea.

“In any business you have a 50 percent chance of failure, in life sciences it’s 90 percent,” Varadhachary says. “We believe it’s a skill set that has to be learned by practice.”