San Antonio — What’s the best way to build a startup? Bootstrap it, raise little or no VC funding, and (ideally) sell it for hundreds of millions—or billions—of dollars, according to two venture capitalists.
That’s what they did at least. Andrew Farquharson, now the managing director of InCube Ventures in San Jose, CA, was the chief operating officer of Almeda, CA-based Operon Technologies when it sold to European nucleic acid company Qiagen in an all-stock deal worth around $110 million in 2000. Farquharson and his co-founders tried, but failed, to raise venture funding and instead were able to bootstrap.
Gary Frashier was the CEO and chairman of Melville, NY-based OSI Pharmaceuticals for almost a dozen years until late 2001. He says the company used grants, licensing deals, public offerings, and “no real” VC funding to develop a solid tumor drug, erlotinib (Tarceva), that eventually had more than $1 billion in global annual sales. OSI sold to Japan’s Astellas Pharma for $4 billion in 2010.
“Don’t take venture money if you can avoid it,” said Frashier, who now is a managing partner at San Antonio venture firm Targeted Technology. “If you can get there in a way that’s reasonable, do it.”
Speaking to a group of people in San Antonio who are considering founding a startup, Frashier and Farquharson perhaps weren’t intending to say that there is no value in venture funding. Indeed, they cited the aphorism that there’s more value in owning a small percentage of something real than there is in owning 100 percent of nothing. Their point was to emphasize that sources of funding such as government grants, among other opportunities for raising funds without giving up an equity stake, can potentially do more good for early stage companies than venture capital, at least at the start.
It’s common for medical device startups to do so, though it may not be common knowledge for those that haven’t worked in the startup world before. That was part of the reason for having Frashier and Farquharson on the panel addressing would-be entrepreneurs in San Antonio, many of whom were local scientists or researchers considering founding companies that might bring medical devices to market.
The panel was part of the final class in a workshop series aimed at teaching people in the healthcare industry about developing and pitching a sellable product—particularly those who have little experience doing so. The series was run during the course of five months by The Health Cell, a life sciences and healthcare group founded in 2013 by three people in the San Antonio healthcare industry.
The workshop concluded with the 40 or so attendees pitching potential medical device or diagnostic technologies—ideas that haven’t necessarily been turned into companies yet—to Frashier, Farquiharson, and other investors on the panel. The winner: a group that had an idea for a device to aid in helping restore the wall of the heart after it thins.
During the discussion, Frashier said that deciding whether to give up equity for funding depends on circumstance and timing. Dilution is bad when you come looking for VC funding because your startup has run out of money, and must therefore give up a large stake of your business, he says. It’s positive when you’re in a position to negotiate with the potential financier because you’re not in need, he says.
Amit Mehta, another panelist who is a San Antonio radiologist, angel investor, and venture capital investor, noted that dilution is still something of which to be wary. Grants through the federal government’s Small Business Technology Transfer (STTR) and Small Business Innovation Research (SBIR) programs can get a company far in 2017, Mehta says.
“I worry a huge amount about dilution. I self fund my company,” said Mehta, who runs a contract research organization in San Antonio with other radiologists for medical imaging, called Intrinsic Imaging. “Use the government’s money. It’s there.”
A workshop attendee asked the panelists how they personally make money. Mehta noted that some venture capitalists get a small salary and a large carry—a payout for bringing a deal to the firm that gets funded—while others get the opposite. The best investors, Mehta said, do it for the carry, saying that finding good deals is hard and fun.
Farquharson said he made more money co-founding and selling Operon than by being a venture capitalist. InCube Ventures is a part of InCube Labs, a healthcare-focused research and development business that invents new technology and spins them into separate businesses. InCube has offices in San Antonio and California.
Pratap Khanwilkar founded the workshop series with Acelity research and technology director Kris Kieswetter and Teresa Evans, who is an employee of the University of Texas at San Antonio Health Science Center and is also involved in the local angel network and a new accelerator program. Khanwilkar perhaps best summed up the experience of making money as a venture capitalist.
“As Mark Twain said, ‘If you want to make $10 million, start with $100 million,’” said Khanwilkar, vice president of product at InCube.
