The Chessboard Fallacy

The Farnam Street blog recently ran a post called the “Chessboard Fallacy.” Its main thesis is that the world is not our chessboard. We cannot act as if people are simply pieces to place where we want and to manipulate as we see fit.

The reason is rather obvious: People have their own ambitions and desires, and often there is little we can do to change that. The takeaway lesson is less obvious: “Any system of human relations that doesn’t accept this truth will always be fighting the world, rather than getting it to work for them.”

Certainly, many would agree with the author’s conclusion, perhaps none more so than the “realists” who constitute the elites of American foreign policy. Trying to mold the world into a place that is friendly to Western ideals – democracy, individualism, freedom, and entrepreneurialism – doesn’t always work. Realists correctly point out that not all cultures share these ambitions, and therefore it is futile to foist these aspirations upon them.

We take a slightly more nuanced view. Though we agree that we must operate within the world the way it is rather than the way we want it to be, we still ought to strive to shape the world if and where we are able. Otherwise, how could we ever improve it?

Governments, charities, philanthropists, businesses, and – yes – VC firms all strive to make the world a better place. They will be unsuccessful in their mission if they (1) blindly follow their own idealism or (2) resign from their obligation to effect positive change. The key is to find a happy medium.

3D Printing Spearheads Regenerative Medicine

The future of medicine will be two-pronged: Personalized and regenerative. Personalized medicine will be accomplished with Big Data analytics, such as DNA sequencing and metabolomics. Regenerative medicine will be made manifest through advances in stem cell technologies and 3D printing.

Regenerative medicine is particularly urgent because the demand for organs far outstrips supply. Worldwide, millions of people are on organ waitlists, and thousands die because an organ never becomes available. Ultimately, therefore, the goal of regenerative medicine will be to grow entirely new organs on demand using a patient’s own cells. The future of this technology was recently discussed by Prachi Patel in the journal ACS Central Science.

Many challenges lay ahead. To create organs, several different tissues must be arranged in a particular architecture and properly nourished with blood vessels. As a result, flat organs (e.g., skin) will be the easiest to produce, hollow organs (e.g., the bladder) will be trickier, and solid organs (e.g., heart and kidneys) will be the most difficult. Still, within a decade, we may see the advent of “tissue patches” to repair failing organs.

To learn more about this, as well as the type of “bioink” and manufacturing processes needed to make 3D printing of organs a reality, we highly recommend Ms. Patel’s article.

Medical Devices: Trends in Early Stage VC Deal Flow

Medical devices are an increasingly important subsector within the life science VC market. With the exception of 2016, every year since 2010 has seen an increase in the number of deals. (See chart below. The data is courtesy of PitchBook.) 

Extrapolating the YTD data for 2016 (which is as of Sept 13, representing 257 days), we should expect 543 deals valued at $1.79 billion by the end of the year. That represents a decrease of 27% and 5% in the number of deals and capital invested, respectively, from the previous year.

This slight downturn in 2016 is in keeping with the trend in overall life science VC deal flow. (See chart below.)

Extrapolating the YTD data for 2016 (which is as of Sept 9, representing 253 days), we should expect 654 deals valued at $6.65 billion by the end of the year. That represents a decrease of 32% and 7% in the number of deals and capital invested, respectively, from the previous year.

The drop in the number of deals is far greater than the decrease in invested capital, meaning that individual medical device and life science early stage financings by VCs in 2016 were substantially larger than those in 2015.

Turn Your Head and Spit: The Diagnostic Potential of Saliva

Urine and blood samples are commonplace in the doctor’s office, but scientists are now turning to more easily obtainable samples for diagnostics. For instance, it is hoped that the volatile organic compounds in breath could be used as biomarkers for cancer.

Saliva, which is the easiest fluid to obtain, may also be diagnostically valuable. A review in the journal Clinical Chemistry discusses some of the possibilities. Saliva tests for HIV infection already exist, and it is possible that saliva could be used to diagnose cardiovascular disease and breast cancer as well.

Though salivary diagnostics currently suffers from disadvantages (such as incomplete knowledge of the presence and/or relevance of salivary biomolecules and a lack of adequately sensitive detection methods), the authors believe that technological advances may eventually make saliva the “first-line diagnostic sample of choice.”

3D Technology: Print Me a Liver!

The first objects to be 3D-printed were rather simple: Parts, tools, and prototypes. But since its invention in the 1980s, 3D-printing has advanced tremendously, and it is now being used in biomedical settings where it has already proved quite useful.

Biomedical research can be limited by the common techniques at its disposal. Tissue culture, for instance, does not replicate the complex anatomy (architecture) and physiology (function) of an organ. 3D-printing, however, solves this problem by creating scaffolds on which scientists can build life-like organs for research. Amazingly, 3D printing has already been used to create miniature livers and kidneys. And a 3D-printed tracheal splint saved a baby’s life.

Additionally, 3D-printing also has been used to create “toy” model organs on which surgeons can practice before performing complex operations.  

To learn more about the fascinating history of 3D-printing as applied to tissue engineering, we recommend this review by a team of biomedical engineers from Texas A&M University.

Why a Healthcare Spending Squeeze May Stimulate Biomedical Innovation

There is now a concerted pushback against ever-increasing healthcare costs. Insurers are refusing to cover expensive procedures, and hospitals are eschewing some of the newest technologies in favor of older, cheaper ones. American citizens are being asked to pay higher premiums and deductibles, and politicians are reflecting their discontent.

One might think that this is a toxic environment for biomedical innovation. But a paper by James C. Robinson, published in the journal Health Affairs, argues convincingly that an era of belt-tightening may actually serve to spur innovation.

Previously, the glut in funding encouraged incremental improvements in technology, which offered only marginal benefits while commanding top dollar. Now, with fewer dollars being chased, companies will be forced to maximize the value of their innovations. In this environment, newer products are more likely to be truly revolutionary.

Embracing Uncertainty in the Unknowable World of Investing

Uncertainty and fear of the unknown drive much human behavior. That fear of walking down a dark alley is rooted in millions of years of human evolution. In the 21st Century, we try to mitigate those primal fears by increasing our knowledge and sense of control. Such efforts explain why insurance and lobbying are multi-billion-dollar industries.

Yet, despite our attempts to control or foresee it, the future remains unknowable. Nowhere is that perhaps more true than in investing, where a brilliant idea may not necessarily translate into a lucrative one. But all successful investors have learned how to embrace uncertainty.

In an excellent essay titled “Investing in the Unknown and Unknowable,” Harvard economist Richard Zeckhauser argues that conventional financial wisdom does not apply in what he calls UU (unknown and unknowable) situations.

Some of the big lessons we learned from Dr. Zeckhauser’s essay include: (1) Make investments when your upside is larger than your downside; (2) Beware of asymmetrical information (i.e., when somebody might know something you do not); and (3) Make a move when the right combination of skill and expected financial payout stack the odds in your favor.

2000s: The Decade When Life Science Venture Funds Outperformed High Tech

Life science investing is “treated like an ugly stepchild relative to its ‘high tech’ sisters,” begins a 2011 article by Bruce Booth and Bijan Salehizadeh published in Nature Biotechnology. But with copious data, they go on to systematically bust the myths that lead to that sour attitude.

Perhaps the biggest factor driving the misconception is the wild success of venture investments in the high tech sector (hardware, electronics, IT, software, and media) in the 1990s. For instance, the gross IRR of VC investments in the IT subsector was a staggering 93 percent! High tech, therefore, gained and maintains the reputation of creating billionaires. The reality, however, is far different. In the 2000s, high tech investments came back to Earth. Instead, venture investments in the life sciences (pharmaceuticals, biotech, and medical devices) outperformed high tech. Furthermore, in the 2000s, high tech investments were riskier because they were much more likely to fail (i.e., produce a 1x return or less) than life science investments.

For sports fans, the authors conclude with a pithy baseball analogy: “Life sciences has a higher batting average but lower home-run percentage than technology.”

Sports fan or not, the article is worth reading in its entirety. It will serve as an effective antidote to any lingering doubts about the viability of life science investment.

Medical Device Investing: Overturning Assumptions

It is commonly believed by the founders of medical device companies, as well as venture investors, that achieving regulatory approval is the key to cashing in. But the assumptions underlying this belief are faulty, as outlined in an eye-opening article by Revital Hirsch.

Besides the reality that entrepreneurs always need more money than they think and that design and development often take longer than expected, Ms. Hirsch reveals that regulatory approval is no longer the “holy grail” of milestones. She writes, “Only 1 in 3 medtech start-up acquisitions are performed while a company is still pre-revenue.”

Her analysis continues with the striking statistic that a plurality (44%) of medtech companies need 6-10 years to go from inception to acquisition, while 32% need more than 10 years. Merely one quarter are acquired within 6 years.

All medical device founders and venture investors should read this article as a much-needed reality check.