A Contrarian in Biotech
Peter Thiel was the first large investor in Facebook. Now he’s turning his investing skills to biotechnology.
Investment opportunities in biotech are rapidly increasing.
Peter Thiel is the co-founder of PayPal, the investor who discovered Facebook, and the author of Zero to One, a short account of the counterintuitive thinking that’s made him a godfather figure in Silicon Valley (see “The Contrarian’s Guide to Changing the World.”)
But what’s less well known about Thiel is his affinity for biotechnology. By now he has invested in more than 25 startups, one of which has already turned into a $1 billion success story.
That puts Thiel, 47, at the vanguard of prominent tech investors putting their money into biology. Google drew attention when it started Calico, a life-extension company, in 2013, and this year the accelerator Y Combinator said 10 of the 116 startups it accepted were biotechnology companies (see “The Startup Whisperer”), a record for that program.
Thiel, like Google, is motivated partly by the hope of defeating aging, an area of medicine that he says is “structurally underexplored.”
But the wider change is that biology is getting cheaper and easier to do. That means biotech companies are acting more like software startups. These days, you can order DNA online, crowdfund a genetic engineering project, or outsource experiments.
Austen Heinz, CEO of Cambrian Genomics, a company that sells built-to-order DNA strands, says you can imagine what will happen if biotech becomes as easy as software to try and to test. An “explosion of biotech companies is coming,” he says.
Most of Thiel’s biotech investments have been made by his charitable Thiel Foundation. But at least five biotechs have received funding from his venture capital firm, Founders Fund, including Cambrian, Emerald Therapeutics, and Stem CentRx, which has an antibody drug in clinical testing for lung cancer.
To Thiel, the biotech industry suffers from a fundamental problem. Companies have to spend tens of millions developing drugs that might work but might not. They’re not really sure, because biology is so unpredictable and complex. “Most companies are very heavily invested in the unpredictably paradigm,” he says. “But when you treat it as a lottery ticket, both the participants and the investors have already psyched themselves into losing. A small probability times a big payoff normally equals zero.”
By contrast, Thiel says, he’s looking for companies with a theory that can be systematically put into practice, not a plan to gather empirical evidence. Take Counsyl, a genetic testing company that offers DNA tests to would-be parents. “Their basic pitch was ‘Genomics is a fraud,’” says Thiel, who became one of Counsyl’s investors in 2011, putting in $17 million since then.
At the time, scientists were hyping the idea that DNA could tell you the risks for common diseases like diabetes. Instead, Counsyl created an inexpensive, highly automated, and consumer-friendly way to test for rare disorders whose inheritance patterns are well understood. In fact, they follow Mendel’s theory, first elaborated in the 1800s.
Counsyl’s tests are now used in connection with more than 3 percent of U.S. births, and the private company is valued at around $1 billion. It is one of Silicon Valley’s “unicorns,” those rare runaway successes that Thiel often seems to be involved with.
Counsyl’s success cleared the way for Mark Kaganovich, who launched SolveBio, a startup that hopes to become “the Bloomberg” of DNA information. “It made the Valley aware of genomics,” he says. His bioinformatics company took in $2 million late last year from the venture firm Andreessen Horowitz, among others. “Thiel is a master technologist and salesperson. If he is looking to change biotech, the old players need to watch out,” says Kaganovich.
Unlike Thiel, Andreessen Horowitz has said it won’t fund actual biotech companies that do laboratory work, because the area is too unfamiliar. Instead, the money it put into SolveBio is part of the booming category of “digital health,” mostly medical software or fitness gadgets, which last year garnered $4.2 billion in venture investment, according to Rock Health.
Thiel has invested in digital health too, but he says it worries him when too many companies are chasing the same ideas. “I would say everything that fits a trend is bad, just always bad,” he says.
Funding biology companies that do “wet lab” work keeps Thiel in less crowded territory. There’s also a connection to his interest in anti-aging strategies. He takes human growth hormone daily and has signed up for cryonic freezing. These are what Thiel might term “definite” behaviors–taking action rather than assuming no change is possible. “The way people deal with aging is a combination of acceptance and denial,” he says. “They accept there is nothing they can do about it, and deny it’s going to happen to them.”
In 2011, the Thiel Foundation created Breakout Labs, an internal organization that gives small companies, often of just two or three people, investments of $350,000 to “de-risk” scientific ideas and prepare them to raise more cash.
Breakout has become the foundation’s largest effort. It has so far put $7 million into roughly two dozen hard science companies, nearly all them biotechnology firms. These include 3Scan, which is commercializing a new kind of scanning microscope, and EpiBone, a New York City spinoff of Columbia University that’s using a bioreactor to grow replacement bones.
Lindy Fishburne, Breakout’s executive director, says Thiel’s hope is to “jailbreak” good technologies trapped in universities or other institutions and get them into the economy. Fishburne says Breakout will only invest in companies actually run by their founders. This may be Thiel’s most significant departure from the way many blue-chip biotechnology startups get formed. These are often conceived by venture firms and overseen by professional managers; they spend their seed money licensing patents and lining up advisory boards of important researchers.
Compare that with Immusoft, a Thiel investment that is using gene therapy to turn blood cells into drug factories and hopes to treat a rare syndrome called Hurler’s disease. Founder Matthew Scholz, a software entrepreneur, says he became obsessed with the idea that the immune system can be “programmed.” Previously, he’d run a truck logistics company. Thiel wasn’t discouraged that Scholz had no formal training in biology or had used Wikipedia to make sense of academic papers.
Scholz says the Breakout grant allowed him to demonstrate his ideas in mice for the first time. This year he expects to ask the FDA to permit tests in people. “It’s gone from ‘This guy has no business in this space’ to ‘Oh, Dr. Scholz is calling,’” he says.
Thiel’s contrarian formula is no guarantee. A few years ago, Founders Fund plowed money into Halcyon Molecular, a startup run by a pair of college dropouts in a loft with a foosball table. Halcyon wanted to develop an ultra-cheap DNA sequencing machine. But it failed.
More to the point, none of the companies in Thiel’s portfolio have ever put a drug or treatment on the market. That may be the ultimate test of a biotechnology company, but getting there requires it to complete years of studies and gain clearance from regulators. “That is different than the tech world—they are used to something happening more rapidly,” says Terry McGuire, head of the health-care practice at Boston-based Polaris Ventures, which made more investments in biotechnology companies last year than any other U.S. venture fund.
McGuire says West Coast tech investors are good at making bold, extreme bets. But no one has a monopoly on inventing the future. “There is boldness that we find here as well,” he says, “but it’s tempered with reality.”