Venture Capital and Venture Philanthropy

A few leapfrogging thoughts. First: one of my favorite investors and intellectuals--and an adjunct professor at Yale is Richard Foster. Dick pioneered the work on disruptive innovation and modern importance of Schumpeter’s creative destruction. He helped lead a variety of McKinsey practice areas and advised top companies for 30 years. I’ve previously shared extended Forbes interviews with Dick, but speaking to a class of his at Yale recently reminded me what a first-rate renaissance thinker and doer, he is.

And speaking of Yale, Mark Reed nanotech Professor recently noted of a recent nanotech and cancer breakthrough: “This is the equivalent of being able to detect the concentration of a single grain of salt dissolved in a large swimming pool."

And speaking of both thoughtful people and cancer breakthroughs, I’m very pleased to share--with permission from the excellent R&D Magazine--an outstanding article by Dr. Jonathan Simons, MD, President & CEO of the Prostate Cancer Foundation. Simply stated: this is the way philanthropic research and support should be done: the same way my partnership at Lux Capital thinks about things. Here’s the link....


And here’s the article:

Venture Philanthropy in Medical Research (By Jonathan Simons, MD, President and CEO, Prostate Cancer Foundation)
Monday, December 7, 2009
“You cannot depend on your eyes when your imagination is out of focus.” -- Mark Twain

Our eyes would tell us that funding for medical research finds itself now at a kind of triple witching hour. Financial, political and social assumptions that have held sway for the last half century are expiring simultaneously and the world economy is in a deep recession. Biomedical investigators are left wondering where new funding will come from in a financial system that may be years in recovery.

We have just elected a new administration that is publically more science-friendly than its predecessor. In his first address to the nation, the President challenged the scientific community, and our country, to find a cure for cancer―yet the American government is confronted by escalating demands, a growing deficit and diminishing resources. We seem, finally, to be mustering the social consensus required to reform a health care system that fails to serve a significant portion of our population, though the nature of those reforms is entirely uncertain.

It is a time of volatility, when past assumptions should be rethought. Small actions can have inordinately large effects, for better or for worse. It is a time of opportunity, for a whole generation to reconsider established ways and means and to ask whether they still provide optimum solutions. It is a time for more innovation, to seek new ways to amplify the value returned on investments made with fewer resources.

In particular, it is time to examine closely the institutions and processes that allocate resources for medical research. While we celebrate and admire the government and philanthropic funding mechanisms that have underwritten much of the progress achieved by medical science in the last 50 years, we do believe that these times warrant replacement of old processes with a larger role for high risk and innovative funding approaches. Such imaginative investment strategies must clearly focus on delivering solutions with tangible value to humanity—in our case at the Prostate Cancer Foundation, an end to the suffering and death caused by prostate cancer. For example, having the ability to distinguish between lethal and non-lethal varieties of prostate cancer could have saved $40 billion dollars during the past two decades, by avoiding over treatment, and thousands of lives, by directing intensive care to those who need it most. One inherent problem with government funding today is its tendency to promote only the “safer” projects, and not the more “risky” research with preliminary data that could lead to new approaches for prevention, treatment and, ultimately, a cure.

We believe that a well-proven mechanism already exists in a ”Venture Philanthropy” model pioneered here at the Prostate Cancer Foundation and adopted with demonstrable success by other philanthropic organizations supporting research including the Lance Armstrong Foundation (testicular cancer), the Michael J. Fox Foundation (Parkinson’s disease), the Multiple Myeloma Foundation, the Melanoma Alliance, and others. Applying the principles of venture philanthropy more broadly―preferably (and most expediently) through extant organizations—should maximize the value returned on our research investments.

Principles

Perhaps the first principle of venture philanthropy is that there are no universal rules. Venture philanthropy has its roots in the worlds of business and finance, where success depends on the ability to spot the opportunity that others have overlooked. Each situation is unique and must be approached without preconceived solutions. “Leverage” has gone from darling to pariah in financial circles, but it remains essential to success in venture philanthropy. In this context, success requires finding ways to encourage innovation and avoid inertial and negative thinking by leveraging the specialized knowledge of a motivated community of interest. Notwithstanding the first principle stated above, that there are no universal rules for judging innovation, certain patterns have emerged in the 16 years we have practiced venture philanthropy that seem to have general applicability, at least as a framework for analysis. We have explicitly followed six principles in the funding programs we have created:

Eliminate the endowment model: rather than building interest equity, build urgent discovery equity. A cash in, cash out model puts resources where they are most needed for patients, with the most valuable return on investment—progress. The PCF is in business of putting itself out of business, not building a self perpetuating organization.

Streamline the funding application process: time is money. Traditional grant applications can be hundreds of pages long and their preparation often consumes an unjustifiable amount of researchers’ time. As William Strunk Jr. outlined in The Elements of Style, vigorous writing is concise. A cogent research plan can be evaluated in five pages or less. Thus, our applications are strictly limited to a five page maximum. We take no more than 30 days for review and approval, and we make funds available within 60 days of approval.

Demand information sharing and encourage collaboration: the traditional process of peer review and publication, while fulfilling an absolutely vital role in the scientific process, can impede the free flow of information and slow progress toward vital new discoveries. All researchers receiving funds from the Prostate Cancer Foundation must agree to share their results freely within one year of funding at our annual scientific meeting, regardless of publication status. Our Challenge Awards and Therapeutic Clinical Consortium Awards are specifically structured to support collaborative research efforts.

Actively recruit the best and brightest young minds into the field: talented young scientists must be attracted to a field of research early in their careers when they are making choices that typically last a lifetime. Our Prodigy Awards and Young Investigator Awards are specifically designed to recruit the best and brightest young researchers as they embark on their careers.

Encourage flexibility and mid course adjustments: it is fundamental to the discovery process that new results suggest new directions for investigation. Use of funds in exploration of promising new leads should not be delayed by requirements for re-review and approval. If we approved the original application, we should trust the scientific judgment of the investigator and not waste time with reapplication for changes suggested by new findings.

Encourage and reward game-changing hypotheses and innovative new research methods: large institutional and government funding programs are well-suited to supporting advances that ultimately constitute the vital aspects of incremental scientific progress. However, they may not be the best way to liberate “breakout” ideas discoveries that can transform a field and generate new therapies and cures that can make an urgent impact in the lives of so many. Our Creativity Awards seek out the best “game-changing” ideas that are not being funded otherwise.

All competitive systems, political, economic, and biological, experience a natural ebb and flow between the forces of stability and innovation, conservatism and liberalism, proliferation and adaptation. In stable times, consolidation, incremental improvements in efficiency and economies of scale can return enormous benefits. In turbulent times, the optimal balance shifts to innovation. Systems incapable of fast-adapting to a changing environment are predestined for extinction. It is time now to increase the application of these six venture principles, particularly their emphasis on adapting to change, at every level of scientific inquiry exploration.

Michael Mauboussin: Exclusive Video Interview with Legg Mason's CIO

See my interview with Michael Mauboussin, Chief Investment Officer of Legg Mason Capital Management

E.O. Wilson and a Powerful Mind in Harlem

I always say that people, kids especially, need two things: the right heroes, and a deep desire to learn. Over 12 years ago I met a man who had a profound impact on me and embodied both of these things: Ivan Hageman. He grew up in a crack rehab center, was Harvard educated and accomplished but opted out of the system to return to ‘El Barrio’, the neighborhood of East Harlem, with a grass roots approach to shelter, protect and nurture the minds of the many kids who had lost the ovarian lottery. Kids born to socioeconomic circumstances not of their choosing and ethnic heritages commonly treated as a liability, as shackles to shed instead of rich roots to celebrate in the Caucasian cacophony of insularity that long defined New York City.

Ivan taught me to speak with conviction. And he inspired me to co-found Coney Island Prep, the first charter school in my native Coney Island, Brooklyn. I spent today with Ivan and the full East Harlem School at Exodus House, (where I first volunteered over a decade ago) and was reminded of how amazing this man is, standing in a now state of the art multi-million dollar facility and the eye-opening impact he has had and is having on these kids and this community. Here are his words, reprinted with his permission from a recent communication to friends of the school.

…The School is quiet now. Another graduation has passed, and we ready ourselves for our new students and our summer semester. I have some time to reflect in these pauses in our calendric rhythm, and much of my thought has turns to these most recent alumni. After having served as a source of some occasional low level despair, as do most rising 8th grade classes, this recent graduating class became quite dear to us in these last several months. They became a group that included talented scholars, actors, and athletes. Most important, they became a group. Not lone virtuosi.

So much of what we hear in the media is about the lone teacher making all difference. Or the lone principal. Or the lone strategy for bubbling in the right answers on a high stakes test. Or the lone charter cartel with best practices for the urban student. How lonely are all the answers to our national education question.

From my office wall hangs a small Japanese wood block print. It shows the priest, Nichiren, skirting a humble mountain village as he heads into exile. We cannot see his face, and his body is bowed beneath a burden and against the wintery blast. He is alone. A couple of nights earlier, I talked with an architect friend and his spouse, a wise academic. We spoke of struggles of the Iranian people, Persian politics, and finally of the existential horror one must experience in exile- when one must leave home forever. The families that send us their children have all experience some form of exile, too, as have most Americans, in one generation or another. We are a nation of exiles.

E.O. Wilson takes things a step further, suggesting that psychological exile is our human destiny: unlike the mind of other animals, our neurology lets us know that we live; we will die, and then sends us off on a search to make sense of the grim news. Few can do so. Lives of the lone and quiet despair bloom and fade all around us. Not so on our little half acre in El Barrio!

Together, amidst the play of light and shadow that fills our new school building, we make a home. In the face of all of the uncertainty and frightful probability that lies beyond our walls and in our minds, we end our exile. Together, students embrace Algebraic unknowns and make Shakespearean forays into the loving, vengeful human heart. On the soccer pitch, lacrosse field, and science lab, students struggle with problem solving, team work, and finding that last reserve of courage. Together, students soften their hearts, open their eyes, and strengthen their bodies. This is all truly beyond metric or measure, but obvious for all to see. It is in circles of debate and inquiry, not lone rows of rote resignation, that we find our humanity and our true home.

It was a thrill for us to see this graduating class, together, leave us from our new and serene backyard – and to know they have this same home to which they will return. What a blessing it would be if all children in our city could end their exile in a place like this.

Ivan M. Hageman
Head of School