Fundraising Fundamentals with Greg Yap and JP Sanday from Menlo Ventures

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Transcript

We seek to transcribe the audio as accurately as possible. Please excuse any minor grammatical or misspellings. 

Grant: Hi, everyone. Thanks for tuning in. I'm Grant and I help produce this podcast. Before we dive into today's episode with Greg Yap and JP Sanday who are both partners in Menlo Ventures, I want to give a shout-out to the listener, darknight_39, who said, "Interesting to hear the backstories of how companies got started and are solving problems. Rob's accent is fun to listen to too." 

We couldn't agree more there. We appreciate all of our listeners. If you enjoy this show, please head over to Apple Podcasts and leave us a review. We read every one and we'll share reviews on future episodes.

Our mission here is to help companies launch and scale life savings products. To launch and scale a major milestone, many founders need to achieve first is getting funding. That's why we wanted to get Greg Yap and JP Sanday to the show. Links to their full bios are in the show notes. But suffice it to say, they not only know the path of launching and scaling products and companies, they’ve walked it.

The main takeaways from today's show are number one, as a founder, know the difference between a platform company and a product company. Number two, if you're looking to raise capital, approach investors in an altruistic and human way. Greg and JP shared their emails on their bios. Anyone can contact them. Greg also shared those 5P frameworks for investing: program, platform, portfolio, partnerships, and people. 

Number three, how has the value chain in life sciences evolved over time, and what is their outlook as investors on the future of regulated industries such as how most countries today end up adopting whoever has the most stringent regulations and how companies need to evolve to that.

All right, let's get on with the episode.

Robert: Greg and JP, welcome to the podcast today. I really appreciate you both taking the time to chat. I know I've had the fortune to be able to get to know you both and the awesome team at Menlo over the past few months. 

I think having the time to learn from you, ask you some questions, hear your thoughts about life sciences, where the industry is going, and fundraising, in particular, will be incredibly valuable to the quality of a team who listens, but also our global audience as well. So, thank you so much.

JP: Thank you, Robert. Good to be here.

Greg: Yeah, thanks for having us. It's great to be part of the Qualio family as well.

Robert: Yeah, I appreciate that. For everybody who doesn't know, Greg and JP, I won't give your bios, but I'll just say that you got some really amazing insights here both from coming up from within health care and life sciences, and also coming from the finance side. The software investment side as well. I'm not sure if you’d like to give the 15-second bio as to what forms your view on the world. I could dive into about a million questions, we’ll only get to a few.

JP: Sure. I guess my 15-second version—Gregs, is more interesting, but my career is like an Oreo cookie. I started as an investor 16 years ago. I was an operator for seven years. Then, I came back to being an investor with a totally different level of empathy. 

In my first stint as an investor, I was part of a firm that invested in a QMS called Sparta. Then, I looked at both technology and healthcare. The appreciation of the two coming together and empowering more advancements in life sciences and healthcare is something I've had my eye on for quite some time. Having seen it from the inside, like Greg, but again, like in that Oreo cookie, the middle is always the best part. But the whole thing is a pretty interesting bite. 

Greg: I'm kind of like the life science half of our pair. I've been an investor-only for the last four years, but the 20 before that were all in life sciences, health care, operating roles, and have lived some of the problems and challenges that your customers face. 

I worked at Roche for a few years. I ran their cancer diagnostics assay division in that role, went through the FDA six different times with Class II and Class III. I've lived through product launches. Our portfolio included 400 IVD products. I have even lived through things like an FDA recall. I have experienced some of the challenges of quality management from a user perspective for sure.

Robert: Thanks, Greg. Thanks, JP. When we serve our customers and when we speak to people in the industry, what’s consistently the number one challenge that is always on everybody's mind—just like any startup or scaleup company is—is typically capital. How do we raise money? Where do we get it from? How do we deploy that? 

For my questions today, lots of them will focus on that journey. But before I get there, there are some things that will be really valuable to pause on. One is that in venture capital, you're obviously looking at the world the way it was, the world as it is today, but you're trying to make bets on the way the world is going to be.

I talk, as long as people will give me air time about the changes in the industry as I see it. What will really be interesting is to get your perspective. Again, JP, you’re part of the Qualio team. You’re like H1 insight. You're in this re-platforming of the life sciences industries and you're building a lot of expertise in. Greg, I'm not sure how many boards you are on right now, but there are some amazing companies you're getting to see how they operate from the inside. 

I’m curious, from both of your perspectives, what's the change you're seeing in life sciences right now?

JP: Yes. I will give credit to Greg for H1 because he led our Series A investment, which was the reason we had the great opportunity to co-lead the [...] anyway. I'd say, there are three big things that when we were setting out to say, okay, what parts of life sciences that will undergo the most change or will feel the most stress and in what order? Because timing does matter.

If you think about following a molecule as an example—all the way through from the R&D, research, and discovery of that molecule, all the way through commercialization—there are a lot of different steps in that process. At the beginning of that journey is where we started investing in a company called Benchling. Again, Greg can I talk a little bit more about our investments in actual therapeutics companies. They are really at the front lines and experiencing this firsthand.

Benchling really becomes the system of record and the collaborative platform for that process. That is very difficult if you don't have it or it was difficult. I think the pain has started to be felt more as molecules become more complex over time. That change within that market caused it to be a more relevant platform where people were willing to part with large dollars to solve a new problem that they had on their hands. Not only efficiency but a way to be more effective.

Then if you follow the molecule through, an area that we've looked into and are still looking into is when you start the clinical trial process. That's an area that we think is poised for a lot of disruption. There's a lot of interest in companies that are thinking about the decentralization of clinical trials. 

Last year was very transformative to that market. We were looking into it before that, but I think it really is going to be a big catalyst. If you think about the big problem in that market, the same patients and the same investigators are being paid again and again. There's a lot of burnout from people that run clinical trials. Identification of enlisting more patients to participate in particular as you get into biologics and more precision medicine is more and more important. 

Then, if you move forward through, okay, these life sciences companies have to start engaging with the medical community before that drug makes it out into the market, that's where H1 comes in to try to give the science and the commercial arm a little bit of a transition and embodied in these medical affairs teams that they have.

I’ll tell you, along the way, one of the things that we identified is, well, no matter what, there are a few key systems that are needed in addition to all the ones that we just mentioned. Quality is one of them because they even have a prayer to get it out into the market. You got to be able to prove quality and you've got to be able to get approval from the FDA. That's an area that had a lot of solutions, but not a lot of great solutions for the way the market was shifting. 

The three things I tell you were one, about regulation. That's only going in one direction and that's up. It's also becoming more stringent. It's extending to more parts of the chain—the value chain or the supply chain, so to speak. I'll talk about that in a second. They are starting to harmonize. It's almost like the opposite of the least common denominator, but it's like the most stringent one is the one everybody matches. Privacy in the world. Privacy this happens [...] GDPR and then [...] and other things. I think the same thing is happening. 

If Europe raises the bar, the FDA wants to be just as stringent or more. I think those things are for good reason. That protects us as patients and protects us as consumers. It's not a bad thing, but that's a reality. 

Then, the second one, we talked about that supply chain. Look at the vaccine for COVID. Those are all collaborative efforts. There's a lot more partnership happening. Greg will probably talk about our investment in a company called Recursion, which is now a very happy Qualio customer. That's becoming a more collaborative, decentralized process with a lot of different companies participating in the kind of a molecule making it all the way out into people's bodies, a medical device, or whatever it is. There are more people that need it.

Then, the third Ps would just be, look, the nature of these companies is changing. These aren't just monolithic companies, again, decentralized. There are a lot more AI-driven companies like Recursion or [...] really pushing the boundaries of a lot of different technologies around CRISPR. That calls for a different system that doesn't slow you down when you need to ensure more and more quality, more and more operating procedures need to be tracked and measured, and really put building quality into the fabric of who you are.

Most innovative companies really, truly believe that both [...] and Recursion are both Qualio customers. That was a big part of our process—understanding that this is really that change. Those winds have changed, and the need now for something like this really demands a more modern, flexible, quick to implement a solution that doesn't impede somebody from speed and quality but enhances it.

I'll stop there. It is way too long. That's the off-the-cuff way to think about it. 

Robert: Thank you, JP. Greg, for you, I always say that this industry hasn't moved very much in 100 years or since aspirin first came on the marketplace, for lots of reasons. I also believe that the world has changed now. Do you agree with that statement? If so, why?

Greg: Oh, for sure. The world has changed dramatically. Part of my coming to Menlo, as a life science person coming into a technology firm, was really this notion of convergence of information technology being able to help accelerate these revolutions in biology. 

JP mentioned Recursion, which is a great example of computer vision meeting biology, bringing us to an unprecedented scale, and producing a very broad pipeline. Thirty programs, four of which are in a clinic. Pretty remarkable for a company of that age. 

There are lots of other examples within this. One of our thesis areas is our own platform technologies. Is there a technology that can really accelerate not just a single asset? Those can be the traditional biotech companies that are focused on individual assets. Those can be great investments. 

If I'm being honest, those are probably not Menlo investments. We're looking for something as a technology platform that could really produce a whole portfolio of medicines. We value the program as well. We've published on this 5P framework where the program is a critical component—the first component, but platform and portfolio are two and three. Seeing that combination is something we definitely aim for around our therapeutics investments.

Robert: That's nicely stated. That platform Ps I've heard you speak about before and both of you said this as well, is that it's like philosophy matters now. That's one of the most exciting things is to see that being incredibly important. It's definitely one of the lessons I've learned from COVID.

I'm curious, the last 12 months and the craziness of that, has that impacted your thesis or your thought about the future very much?

Greg: On the therapeutic side, in some ways, it has heightened people's appreciation for therapeutics. If we recall back, just prior to the pandemic, the worst regarded industry on the planet—the court of public opinion—was pharmaceutical companies. That was literally the worst. Now some of that criticism was earned. Some of that criticism was stuff that the industry really needed to take a look at. Some of it has changed and some of it frankly hasn't. 

I also think people have got a much stronger appreciation. The life-saving nature of medicine has been emphasized over the past year. That's helpful for our industry to remind people why so much money goes into this industry and why so much money frankly comes out of this industry because it has such a big impact on people's lives.

Robert: I like that you said that. I'm curious, with capital, do you think that with a broader shift in the world, how has capital changed as a vehicle to help companies succeed? Again, people are always asking (even Qualio) about different raising plans under capital plans are all part of the discussion about when they engage and how they grow their businesses. 

Has that changed? Are there any lessons here for companies thinking about their journey that they should maybe change from the advice of about 10 years ago on how to plan on getting where they want to get?

JP: I think it's always been our mentality at Menlo that despite the fact that today, I mean, I don't think anybody worries about there being a shortage of capital or a shortage of options for it. We're getting ever more creative with the ways it's packaged and sold, so to speak. 

It's easy to get distracted to think that capital first and strategy and long-term plan second because it is almost like the notifications on your phone. It is just in your face. It is in every news source. It is in everything we talk about. We've been desensitized to the word billions. That's very addicting to listen to that and to always be thinking, how can I get a piece of that? Every company doesn't end up being a $10 billion company and that's okay. 

The more important thing is to say, how can capital be an enabler and not a distraction? We view our phones in a very similar way. It is kind of a random thought. If you think about this phone, this is really an enabler to your life and everything you're doing. It enhances what you're doing. The second it starts becoming a burden, you start hating this device or you start hating that side of it. 

What's really important is that capital can function in a lot of the same ways, honestly. You certainly have to secure your future, but don't let the fact that you have money in the coffers change or make you do unnatural things. 

We've learned a lot of lessons from companies that start doing unnatural things. They’ve been unnatural because it's not authentic to who the founders are. It’s not unauthentic to that culture. It's also probably not practical given the market that they're in. 

I always talk about the market not only about the capital you pour in. You can put a million reps out there with a bunch of quotas but the market absorption rate doesn't change. The market is going to absorb your product at the rate at which it is meant to. The capital doesn't necessarily change that. At least of the capital, not on the company that is trying to sell it. Again, strategy and vision first. Capital second.

Greg: Yeah, just building on that. Capital exists to help you meet business milestones. That was how I felt as an entrepreneur and that's how I feel as an investor. Robert, you must be thinking through all of these things as well. To me, the capital raising has got bigger and bigger. It's gotten to be splashier and splashier, but it's really all about, how do you hit the business milestones that are necessary for the long-term success of the business?

JP: Just think about this, Robert. An IPO is not a liquidity event, it’s a financing event. A lot of people have forever looked at it as an exit. It's not an exit. It's a financing event. It's a different stage, different company, the type of company you have to run once that happens. Even more so today, everybody thinks more about that as an exit than ever before. Certainly, you can exit afterward, but hopefully, you're building a company beyond the point of IPO because then you're on the trend.

Robert: The S-1 says, this is how the founders exit, I'm not sure that would—

JP: Don’t play that well.

Robert: Well, actually, there is a trend towards yes, that's a fundraising milestone. But just like in the software businesses, in the life sciences across devices, therapeutics, and by overseeing companies that are private or still in some ways and some of that we see coming down to, you get much further and you see examples of that. 

Another Irish Fund founded a company, I always fly to the flag. Think of Bioworks, YC’s biggest bio company, one of their customers there. Y Combinator funding life sciences, 10 years ago that would have been like, what are you talking about? Now, this is possible. I think this acceleration we see, it's really exciting to see smart people being able to dip their toe and not have to IPO before they even get a prototype. That's really exciting for me. 

What do you folks look for in companies now? I'll talk about re-platforming Ps like the Benchlings, Qualios, the H1s, and companies like that. Purely in your space, Greg, when you folks are looking at the life sciences and investments, what does it take today, and what gets you excited?

Greg: I mentioned the 5 Ps briefly. That is an important framework that we use. Those 5 Ps, first is the program. We're looking for a traditional life science evaluation of the value of a lead program. Is that a drug that's going to be able to help a lot of patients? Is that a drug that there's a good economic path for?

The second and the third are related in platform and portfolio. Is this something that could be more than a single asset company, more than a single target company? Is it something you can work across a range of disease states? Is that a technology platform that has some sustainable advantage? Every platform gets competed with over time, but does this platform have a long run? 

The fourth for us is partnerships. Is there an opportunity for this company to partner, to get external capital, or to get external validation? Newbie therapeutics company, it is a long time for them to get to market. What are the ways that you can get it? A lot of times, a lot of the stuff is happening behind the screen. Can the company show some external validation and create these partnerships to be able to continue to drive the fundraising stories?

The other point I'd make on partnerships is that I tend to be a little bit more pro-partnerships than some of my investing colleagues. The reason is because I like to invest in real platforms. If it's a true platform, a lot of times the big question is, okay, I don’t want to give away the crown jewels.

I've been in board meetings even these last few weeks, the lead programs are often thought of as the crown jewels. But if it is truly a platform, then the probability of the first asset is the best asset is actually mathematically not very high. That platform should be able to produce a series of assets, and therefore a company's willingness to partner should not actually generate too much opportunity cost for that company because you do have a lot of opportunities that can come behind it.

The last Ps quickly is people. The other place where we are a little different from some of the traditional life science firms is that we don't take an idea out of academia, hire the whole management team, and build the whole company ourselves.

We like to back founders. We like to back entrepreneurs who are building the teams who are going through and doing the work. Many of our peers in life sciences now have shifted more to the incubation model where they do that work themselves. We want to actually find those founders who are in it for the long haul.

Robert: Thank you. I was going back to the platform Ps. It's worth calling out that my first experience in the industry directly was in the mid-2000s. Even in the early days of Qualio, a lot of the interactions we would have are with companies who are trying to get a hit. The hit is the path to the successful exit or path. 

What I'm hearing here is (and I actually see this myself) if you watch the industry, it's the ability to generate hits is where the big value is, right? It is the platform that enables you to be a repeatable generator. I think it’s where the real value comes from, which I think is really important to really call out.

Greg: Yes, I guess I would say from my view, there is a balance. The platform that's generating the hits is important. But then the biological validation of what those hits really means. You have the higher throughput a platform is. By its nature, the more false positives come out of it. That's just math.

If you don't have that combination of high throughput, data-driven, that's where the technology comes in. Then, the biology of being able to really sort that larger flow of data and to find from there the true gold, it's that pairing that makes the difference for the companies that we really like.

Robert: That seems like actionable advice there. Knowing people who worked in various R&D roles myself was always exciting about the thing that might work when you see that area. That's a good question to ask about making sure that the repeatability and how you discover that shouldn't be overlooked. That's really important. Thank you for sharing that, Greg. 

The tech stack. I'll often give the example of the DevOps landscape and how that empowered an army of companies like a lot of your software portfolio to become enormous companies and scale at speed—gracefully as you can at the speed of growth. 

In AWS, you got this massive DevOps landscape. We're seeing a repeat of that in life sciences right now. You folks are becoming like specialists in ICN in trying to be part of that wave. Benchling being the first and the biggest of its kind, flying the flag. You’ve got H1 insights, you also got Qualio. You're seeing these companies come to enable the next wave. What's your thesis around that and the importance of that?

JP: I think this is the difference between a product and a platform. A lot of companies say platform because they feel like it gets them a higher valuation and gets investors excited. But a platform, we have certain characteristics that we look for in a company. 

Sometimes they are just a great product and it just could be really revolutionary for that department, that vertical, whatever type of worker, whatever it is. You can have great success doing that and there's nothing wrong with that. 

Platforms are the ones that become enduring public companies most of the time if they don't get scooped up sooner. Those are the ones that people look to and then maybe it wasn't apparent initially. But eventually, you start understanding how their future products really weave in together and how hopefully, even one day, you give it to people to build on top of. That's really a platform.

At first, Salesforce could have been easily looked at as just a database of a bunch of your customers and a bunch of leads. Slowly but surely, as they start rolling out different things, they have their architecture, then makes itself a little bit available to people to build on top of, you can now build a life sciences company worth over $100 billion right on top of it.

In Benchling, certainly, you could view it as just the digitized version of the lab notebook. That would be really myopic in understanding both what Sajith wants to do and the way that they've only viewed themselves. 

What we try to look for is how realistic is it for people to really build on top of this in an enduring fashion such that it has many acts to its life? Not just one act. Certainly, sometimes that one act is big enough and great enough, that is just fine. 

There's this framework we use (and it kind of relates to your prior question) to evaluate certain companies, at least in the software world and applies a lot to vertical software in particular. It applies anywhere. It doesn't necessarily mean that people don't always hit all of these. When they do, you realize you have the ingredients of something that could be special. 

As special as something like in the AWS, some other platform, or business that really extends these tools. Again, enabling tools for someone or for others in an ecosystem to really shine. To really push the boundaries of how productive they can be or how far they can take, in this case, science. In our Menlo for Qualio, we actually mentioned this. We call it the trifecta, and there are three pieces. I'll read them because people who know Qualio, you'll understand this, that you pretty much hit all aspects of it. 

The first one is that this company, this platform, this product, can stand alone and eliminate or we consolidate and automate a bunch of what we call busted workflows. These are either some ways that people are working around things in a very manual way that needs to not just be digitized, but also automated.

The second one is that it can become a system of record that allows data to be written into it or process other data, create unique insights, and become some sort of data plane into the operations of that department, that business, that vertical, or whatever in that company.

The last one is that it attracts multiple constituents or counterparties into it so that the power of the network effects and that the next person that's in the system gives value to everyone else that's in the system. In particular, the ones that are connected—the supplier and its customer, vendor, or things like that. 

That allows better flow of information, seamless integrations between parties and workflows. Each of those independent workflows, that product can work independently for each of them and becomes very special when they're united. There's a lot of monetization opportunities around that for the company or for those parties.

You're smiling because it's like bam, bam, bam, right? Like that's kind of what Qualio is in a lot of ways. 

Robert: I should have read that before I did a pitch deck. 

JP: Yeah, there you go. Good job, good on you. All those new advancements in technologies and ways for people to move faster and push further, platforms really do that. Never confuse a platform with a product.

Greg: Maybe I'll just add to that thing. This is one of the places where teamwork really comes into play. We invest a lot in vertical SaaS across a lot of different areas. 

One of the areas that we have picked out is an area rich with opportunity from a customer side, and therefore rich with opportunity from an entrepreneur and a company building side. It is in life sciences where there are so many workflows. I've lived some of them, your customers have lived a ton of those. Up and down their business, right? JP mentioned, right? 

You can talk about the R&D side. You can talk about the development side, manufacturing, and regulatory side. You can talk about in the commercial, go to market and medical side, and the clinical trial side. 

There are tons of these workflows that have resisted automation for many years, for a lot of different reasons: inertia, regulation. There's a lot of reasons why it has, but that just means that as we now get into this new wave of vertical SaaS companies that life sciences is therefore quite an area that is ripe for rapid conversion, we think at this point. They were slow to convert in the previous generations, very painful. But now, we feel like the acceleration that is happening across many parts of that continuum.

Robert: That's incredibly well stated. Thanks, folks. I know we're about to wrap up and I got a list of rapid-fire questions from the team based on the things that they get asked by the marketplace. You don't have time for all of them, but I guess one simple one, and anyone could take this for a quick response is, when should companies start thinking about the quality regulatory pathway and start getting it right? That's the question every company has. Greg, you might be the person who sees this go right and go wrong.

Greg: I'll take that one because I've been a startup CEO, I’ve been a general manager at a large company and medium-sized company. You have to start thinking about quality when you start thinking about the product. In our space, if you're building a regulated product or if you're building a product that could potentially be a regulated product, you have to start thinking about quality when you start conceiving the product. Otherwise, it doesn't work.

Robert: As an investor, how important do you view that?

Greg: It's critical. To me, the only way these products make an impact on human health is if they can go through and stand up against all of the things that are required of them from a regulatory and quality perspective. Otherwise, they will not be out there helping patients.

JP: To quote Greg on something during our discussion, “Also, never lose sight of one fact. If you sell to a regulated company in life sciences, you, therefore, are regulated in a lot of ways.” Maybe not directly, but certainly indirectly. That risk is being transferred all the way back as far as possible. You better believe that people are going to need everyone in the chain to be up to snuff.

Robert: It's actually why a large percentage of our customers are part of the supply chain into the IP owners. That's useful. 

The last thing, we're very fortunate to have partners like you to support us and be part of our team, to talk about the future, and get smarter together. How do people find investors like you? How do people have an idea? How do they get in touch in a way that makes you pay attention?

JP: We always pride ourselves in always responding to people that take the time not to blast us, but to try to engage with us authentically. That's the kind of the kick start of what we believe to be a very intimate and personal relationship with someone for hopefully a very long time. That's where we place so much emphasis on the people, the entrepreneur, and the founder when we invest. 

A lot of times, it's us also trying to get in touch with folks like you, Robert, and trying to be very thoughtful in the way we do that because you get hounded and your time is incredibly valuable for us. 

People think we're in the capital allocation business. We're actually in the human capital allocation business, which means our time. Certainly, if we start spending time in an area, our capital will likely follow. It would be doing an injustice to our current founders if we didn't focus.

When people reach out to us, it's really good to understand who we are when you reach out to us. We put a lot out there in terms of our points of view and how we never view ourselves as inaccessible to people. We're not that type of firm. We welcome everybody to reach out to us in our emails or on our website. Those are our real emails. We encourage people to use those.

What catches our attention is when people really take the time to know who we are, what we're about and really assess upfront if we're going to be a good fit for them. That's really important.

Greg: We do get a lot of inbound, so it is hard to get back to everyone. Practically an introduction. LinkedIn is a great way to figure out who we know in common. An intro from another entrepreneur who is absolutely going to get our attention, every single time will get our attention. 

Like JP’s saying, knowing a little bit about us. I would say the people who I don't bother to write back to are the people who have written to me and clearly don't know anything about me. I'm pretty public about the kinds of things that I'm interested in. If people think about those things, they can make those conversations with investors, not just me, but conversations with all investors.

Robert: Well, I think that's everything. We are a bit over time, but I appreciate it. I could hang on for another hour here to get through all my questions. JP and Greg, this has been really awesome. Thank you for taking some of your day to chat and share some of your wisdom. I know a lot of people will be very excited to hear it.

JP: Thanks, Robert. Thanks for having us. We're both really excited to be partnering with you.