Daily Archives: November 24, 2009

What’s good for venture capital is good for the country

Today’s WSJ reviews Start-up Nation, a book about how a small population can be very entrepreneurial and attract venture capital if it focuses on the right things.  Although the book explains Israel’s high-tech success (per-capita VC invested 2.5x that of the US and 6x that of the UK), most of the lessons apply to the economic development efforts of Southeastern states as well:

[Israel has] a “classic cluster of the type Harvard professor Michael Porter has championed [and] Silicon Valley embodies”: the tight proximity of research universities, large firms and start-ups, a talent pool drawn from around the world, and an ecosystem of venture capital and military and other government R&D funding. In addition, they contend, Israel has a unique entrepreneurial culture that combines individualism, egalitarianism (a penchant for organizational flatness) and nurturing.

The authors further speculate on the origins of Israel’s unique entrepreneurial culture.

Where does this culture come from? Mainly, the Israeli military. “You have minimal guidance from the top,” Messrs. Senor and Singer write, “and are expected to improvise, even if this means breaking some rules. If you’re a junior officer, you call your higher-ups by their first names, and if you see them doing something wrong, you say so.” High-school stand-outs are recruited into elite military units and trained intensively, with an emphasis on technology. When they’re done, everything required to launch a start-up “will be a phone call away. . . . Almost everyone can find some connection to whomever he or she needs to contact to get started.” Israel is a country, it seems, where everyone knows everyone.

This description of the mandatory service requirement for every Israeli obviously won’t be duplicated in the U.S., but the principles of building an entrepreneurial culture and the importance of a broader network certainly apply.  States in the Southeast that are looking to build a stronger “venture capital ecosystem” would be wise to study the factors that have made Israel a leader in venture capital investment and not focus too exclusively on simply increasing the amount of investment capital available (though that is obviously a critical piece of the puzzle).

It’s easier to rationalize than to be rational

This article by Jason Zweig from the 11/13/09 Wall Street Journal echoes one of our favorite books.  Although this article focuses mostly on stock-picking, we believe the phenomenon of “the confirmation bias” affects all types of decisions and agree with the quotation from Staley Cates at Longleaf Asset Management that “a lot of psychological traps can be combated with humility, but [not this one].”

The tips below for fighting the confirmation bias are good ones and resemble some of the approaches we take when considering a venture capital investment.  Assessing the probabilities for various levels of success and failure will never be an exact science, but that discipline helps focus us on the spectrum of outcomes and better understand the risk-reward tradeoff in a particular investment.

As part of that exercise, like the author suggests, we try to imagine various failure scenarios and what set of circumstances would lead to them which should make for more accurate probabilities on our spectrum of returns.  The truth is, experienced investors are humble enough (and have the scars to prove it!) to know that any investment has the potential (statistically speaking) for a bad outcome and a good outcome.  The key is to try to design an investment process that allows (over the course of an entire portfolio of investments) for a better probability of good outcomes than bad!

How to Ignore the Yes-Man in Your Head

A mind is a terrible thing to change.

You decide gold is a good bet to hedge against inflation, and suddenly the news seems to be teeming with signs of a falling dollar and rising prices down the road. Or you believe stocks are going to outperform other assets, and all you can hear are warnings of the bloodbath to come in the bond and commodity markets.

In short, your own mind acts like a compulsive yes-man who echoes whatever you want to believe. Psychologists call this mental gremlin the “confirmation bias.” A recent analysis of psychological studies with nearly 8,000 participants concluded that people are twice as likely to seek information that confirms what they already believe as they are to consider evidence that would challenge those beliefs.

Why is a mind-made-up so hard to penetrate?


A Doctor in Full

Dr. Druker is Chief Scientific Officer with Ballast Point Ventures portfolio company MolecularMD.  One of the best things about the venture capital business is working with people like Brian and the team at MolecularMD, who are not only building a great company but also helping to save lives.

Roger McCaffrey, writing in the October 5, 2009 Wall Street Journal:

The man who developed Gleevec could have said ‘wait.

Last Friday, a molecular biologist named Brian Druker shared the 2009 Lasker-DeBakey Clinical Medical Research Award for his part in “converting a fatal cancer into a manageable chronic condition.”

A scientist willing to risk so much for one patient is a doctor in full.

The cancer is chronic myeloid leukemia (CML). The drug Dr. Druker developed, Gleevec, manufactured by Novartis, has saved thousands of lives.

My wife Priscilla and I have a rooting interest. Dr. Druker, a scientist, never had a child as a patient until he met our son John. John’s cancer, CML, killed almost all its victims until Gleevec was developed. Ninety percent of CML patients, whose blood stem-cells go haywire, now lead normal lives.

John was diagnosed with accelerated CML in 1998 at age 4 and all treatment had failed. His bone-marrow transplant meant seven weeks in a sterile hospital unit on a dangerous assortment of drugs. Hell on earth.

I still remember the desperation felt deep in my chest when we learned his transplant had failed. I took John to a big East Coast cancer center. A specialist there put it bluntly: “He is a time bomb.”

Later I revealed that we wanted an experimental drug. I had spoken to an oncologist, Dr. Carlo Gambacorti, doing stunning early Gleevec research in Europe—and to its chief investigator, Dr. Brian Druker.

“Couldn’t this be a cure?” I asked gingerly for support. The specialist fixed her gaze upon me: “Brian who?”

Dr. Druker was willing to help but cautioned, “This is in the hands of Novartis.” And Novartis had its strict protocols.

So we approached Novartis through Congressman Richard Gephardt and an intrigued Newt Gingrich, and through friends Pat Buchanan and Congressman Bob Schaffer. Novartis consented—but only if Dr. Druker quarterbacked.

“If John dies while he is on this drug,” said a doctor, “the FDA will shut the whole program down.”

Delays ensued. Novartis had FDA paperwork to deal with. Our “time bomb” was ticking away. But Dr. Druker hung in with us. He had nothing to gain. In fact, he risked his reputation.

Life has its vindications. Ultimately, in July 1999, John and I flew across the country to Portland, Ore., for the kind of treatment most patients only dream of, under Dr. Druker and his colleagues at Oregon Health & Science University and the Doernbecher Children’s Hospital. We used empty seats in corporate jets that the Corporate Angel Network, a nonprofit out of White Plains, N.Y., found for John. No cost.

On the Gulfstreams, flight attendants pampered John with his favorites—Beefaroni and hot dogs. Gleevec rapidly transformed his life. Fevers vanished, blood counts normalized—and miraculously, so did his bone marrow.

I looked forward to those cross-country flights. One featured an eye-level pass by Mount Rushmore.

But the flights did come to an end. A corporate jet flew John’s body back home to Connecticut in October 2001, on a bitterly bleak evening.

For all our early exultation, John did “die while he was on Gleevec.” My notes show that Dr. Druker worried this might happen. There was going to be no glory on John’s account. For anyone who touched our beloved son, there was only risk.

Fear of making a “mistake,” despite our assurances and confidence in the doctors, caused hesitation, and lower dosing of Gleevec at one stage. I asked a physician, “What is everyone afraid of?” His response was: “Lawyers.”

John’s life and death, and the manner in which his doctors in Portland dealt early on with the dilemmas, taught my wife and me that obstacles can be conquered when faced with courage and—the great unseen force in this entire saga—prayer. After all, we did get what we had prayed for: a miraculous drug that cured or managed this stem-cell cancer. But it was too late for John.

Dr. Druker’s agreement to treat John in 1999 was a large moral act—a triumph of the Golden Rule—that took more courage than his pursuit of a cure through years of fruitless lab work. He could have said “no,” or “wait.” Instead, he said, “I think I can help him.”

UPDATE: (01/19/10)  The New York Times reports:

Before 2000, fewer than half of C.M.L. patients survived seven years; now nearly 90 percent are alive seven years after diagnosis and, like Barry, lead relatively normal lives. (The basketball star Kareem Abdul-Jabbar announced in November that he had been living with the disease for nearly a year.)

“C.M.L. has become a chronic disease leading to a normal life span in the majority of patients,” Dr. Elias Jabbour of the University of Texas M.D. Anderson Cancer Center said last month in a teleconference workshop sponsored by CancerCare. “As for quality of life, among more than 3,000 patients who have been followed now for almost 10 years, there’s been no significant increase in the incidence of infection, other cancers or other causes of death when compared to the normal population.”

What led to this turnaround was identification of the genetic marker of the disease and development of a drug called Gleevec (imatinib), which attacks the leukemia-promoting protein, tyrosine kinase, found in 95 percent of C.M.L. patients.

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