M. D. Anderson Cancer Center
Date: April 2008
Duration: 0 / 14:48
Okay. So we're moving along and now we go to the next
level. I'm going kind of slowly away from all the free money
going in to more the professional investments. Martin Lindenberg,
good old friend of mine, M.D./M.B.A. brought several companies up to public
market. I think you sold one to Siemens. In fact, he is the
guy who made me write my first business plan for a business that I
already had running for a couple of years by then and it's still
growing by the way and still don't have business plan but it's still
doing well. So you see these things happen. So he is the
founding chairman of Houston Technology Center where Deborah Mansfield
is now working and Tom Kraft and did many, many things in his life,
knows all about business plans, starting up companies. He was CEO
of several companies and now he is involved in few years in a very
interesting early staged financing model that he's gonna talk to you
all about it.
Thanks Oli. So, it's nice to be here. Well thank you for
being in the audience. So, what is AlphaDev? It's a
different way of building startups and along with building startups we
plan to and have been able to start showing that we can build the bases
infrastructure of the community because one of the reasons we see so
few licensed startups in this community is the lack of entrepreneurs,
what some people call free radical entrepreneurs who can actually put
these things together and try to move them forward. So I need to
tell you very briefly about who we are, how we work, what are the
differences between us and some others and then just give you snapshot
regarding we where at. So since I figured out which way this mass
works. So this tells you what we are. If you've got
something that's got enough of management team and got two million
dollars of venture capitals, you don't need us. We'll either fund
life sciences, devices, diagnostics, biotech, therapeutics and possibly
IT if there's enough of a cross over between something that's really
important to patients and their doctors. We're very science and
engineering driven. When we talk about development, we're in that
awful part of the cycle where research ends and real commercialization
hasn't yet started and that's what we call development and we're a
business. We are an operating company. We happen to be in
the business who is starting other companies. And actually this
language that you see, the categorization of us as a pre-venture life
science technology development company actually came from Oli
Wenker in conversation about three years ago I think maybe 300 years
ago. I'm not sure. [Laughter] Anyway, so this is how
we do it. We have a parent company that's been around for about
70 years and profitable. Virtually, every one of those years
currently doing about 550 million dollars yearend revenue and that's
Aquinas, privately owned. AlphaDev is essentially a venture of
Aquinas and includes a few people who are partners in it like me.
And we start companies typically with an institution and/or
investor. Our goal is alignment of interests. What does
that mean? We wanna set it up so everybody's pulling in the same
direction. And that is a fundamental concept which makes us a
little different than many other players who get involved in starting
companies in early stages or in financing them later on. Often
the institution and/or inventors have an ongoing role in the
companies. So they maybe board members, they maybe consultant,
they maybe technical advisors, and so we don't just take this stuff and
run away with it. What do we do? Well, we can bring you a
management team that consists of the kind of people that you couldn't
possibly afford unless you've got several million dollars funding your
startup and you don't have to pay cash for that. The company pays
for that in the form of shares and royalty. So the same way as
the institution and/or inventor or contributing intellectual property
what the company gives back to them over time is royalty of sale and
what the company gives back to them in the early stages is stake in the
company or what is known as equity or shares. So, in fact in
AlphaDev's case you don't have to have a business plan. It can be
an idea. It can be technology. It can be a prototype.
It has to have intellectual property of some kind as to being protected
or protectable that's gonna address a significant medical need and it
has to fit our model in the sense of if we apply our management over
any where from as little as a year or two to as much as 10 or 12 years
that there's an expectation that could it create some real value and we
can take it through those steps that are necessary. Now, the
other interesting thing about this is that there's not cash being used
by the company to pay for management. So some people might say
why would inventors want to give up shares? And the answer is
well, you gonna give them up any way. You gonna give up shares to
people who put money in, you might as well get some management and
other things if you're company happens to fit in our model. So
the way this is set up typically, AlphaDev's stake is usually a
minority stake in the company and the sharing of the royalties will
follow the same pattern as the way the stock the is shared.
AlphaDev and the research institution and/or inventor all act as
founders of the company which is a way of saying we're in together from
the beginning and we don't make money until the thing really
succeeds. And that's unusual. We call it pre-venture
because generally venture capital is used for companies that are more
developed. So what else do we provide? Well, we provide
significant extra input into a company. We have the management
team. We provide junior lab management and office management that
could be in the form of interns and fellows, people who work for us and
we can bring some senior advisor and strategy to the company as well
from some of the people inside of our parent company, Aquinas. We
also provide office space, computers, telephones and those don't cost
anything additional to the company either. So it's a lot slightly
different approach. One of the reasons we can do this, is because
when you've got stable of little companies each one's needs tend to
vary. During the times when you've got a lot of pressure to get a
certain grant done or to finalize an application or writing a patent or
hand over the design to an engineering firm is a lot of activity.
But then between times is less activity. And so the beauty of
this model is you're not paying for management to be around all the
time. That management can be applied to other companies.
And the same time the people who drink some of the other work can be
interns or fellows who are learning on the job. But they're not
learning on the job in one company or one segment or one mission of the
industry, they're learning on several companies which might be
different stages of development. So that's a little bit unusual
approach too so typically someone comes in for an internship, they
maybe with us for a few months or on a part-time basis for a month of
three. They might be getting credits towards one of their
courses. The Rice M.B.A. has a program where one of the
entrepreneurship classes actually gives credit to people who work in an
intern role with us. Others could be the people who come in to
the fellowship program and spend a full time year or two with us and
graduate with a lot of skills about how to build life science
companies. And this is not the aimed specifically at post
docs. These can be people with that J.D., M.D., an M.B.A., might be a
Ph.D. It could be all range of skills, people who are interested
in learning how to build life science companies. So then what
about money? At some point this companies have to spend
money. You're gonna be prototyping and things like that.
Well, the out of pocket money that's used for the lawyers and the
consulting people that we need and the clinical trial houses or the
prototyping businesses that we use as providers, that money comes in in
the form of a convertible note and what is that? It's a
loan. But it's a loan which will until next time money comes in
to the company that loan will become shares in the company at similar
value to what the new money sets. And that makes life kind of
simple because we don't have to have an argument about what your
company is worth when we start working together, which is an
interesting approach and a little bit different than many players in
the business. So let me summarize by saying what makes us
different. Well, first of all, we'll do the business plan and
that's not upon the slide. But we'll do it with you and if you
don't have an idea of where this is going and how can it really be a
product and we probably don't have a very long conversation. But
assuming those elements are in place. You've got something that
looks like it could be a product or a company that it's protectable and
that it fits our model and that it needs management and with somewhere
between 50,000 and 250 or 300,000 dollars put in very carefully over a
period of time which could be as little as two years and as much as
10 years then that might be an AlphaDev situation. We've got
committed long term capital so most venture capital firms have an
investment cycle. That's because their money comes from
institution who say, look, I want my money back in seven years or nine
years. And so they've gotta put money in your deal and get it to
other company and then somehow be able to return money to their
investors. So they're under the time pressure which luckily we
don't have. We structured this to be different. There's no
pre-money evaluation which I mentioned before. All of the
infrastructure and management cost is cashless. It's all paid at
success and we have a flexible cycle time. Now, that maybe quite
important to some types of projects and science because if you do a
startup company around a technology where you're trying to take it from
A to B in order to prove that it has value and you get money from angel
investors or venture capitalists or the state. If you hit a bump
in the road and you don't get to your milestones, your end points,
boom! You company essentially has died. What we do is
you've got no management burden and you've got to defined
infrastructure burden that's related directly to your company because
we're spreading those costs over several companies. So if you hit
a bump in the road we can put the signs back in the lab or we can go
out and get some more grants funding to try to see what the obstacles
are and move it forward. So for many early staged projects which
could have a big impact but we know there's a lot of risks, we'll take
them on and we'll trickle the money in a very disciplined way achieving
certain tests along the way and if we agree they haven't met a test
that's fine we don't necessarily kill it, it gets another chance.
And so that's another big difference compared to most of the approaches
to the starting companies around technology. Now, the other piece
of obviously is that the bigger we grow the more we are generating
talents so the people who have come and work with us as interns and
fellows, some of them are gonna end up going back in and starting other
companies in this community or around the country or maybe around the
world. And so that was part of our mission also, on the one hand
to grow companies and on the other hand to grow human talent, human
capital which is probably the largest missing ingredient in this
ecosystem that we have in Texas and certainly in the Houston life
science scene. So quick snapshot, are there any questions?
Anyone got a burning question because I'm going to be happy to explain
anything which was really not clear enough. Yeah?
What if the company doesn't get the expected profit or doesn't succeed as anticipated, how do you make up?
We don't have money. It's like most other investment
businesses. You can't assume you're gonna make money on every one
of them that's why you have to have a whole stable of them. The
best way to make money is to make sure if they're not succeeding that
you cut them off, put them back in the lab or you stop finding
them. But we also note that out every 20 or 30 companies that
come through our hands, two or three or five or, if we're really lucky, 10 will
actually have a substantial exit and return more money than went into
them. Now, some of us have been lucky along the way. In my
career, five of the six companies that I hope to start will grow had
positive exits. A couple of them were on the public market on the
NASDAQ worth over a hundred million dollars. That's just luck
because the normal numbers going for just about everybody in this
industry is two or three out of every 20, you're doing great. So does
that answer your question? So quick a snapshot, we've had about
80 opportunities come to us. This is unsolicited. We
haven't gone out and advertise. This is just word of mouth.
Almost all except I think two or three have been from the local community, a
couple came from California and one from the Northeast. We started six companies and we now have nine, three of the others were preexisting at some
level but we decided to take them on. The kind of activities that
we are in, you can see it's a whole range. Some of other things
are quite advance, some of them are very early stage and they're kind
of across the board. We don't care as much about the exact
category they're in as long as it meets a significant need and there's
an opportunity for us to make a difference and built it forward to
something of value. So we can go into more detail on this at any
time. The kind of institutions that we partnered with so far, you
can see there one or two reasonably well-known institutions on the list and
so far everybody who's working seems to be relatively happy. So
this time I guess for about another half a second's worth of question,
Dr. Wenker.
[ Laughter ]
Any questions? Anyone?
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