Clarus Leans on Customer Reviews at the Broad Institute to Bet on NanoString

7/29/09Follow @xconomy

[Corrected July 29, 10 a.m. See below.] Warren Buffett says he became one of the world’s most successful investors partly because he only invests in businesses he understands. But where do you find investors if your niche is in something called direct multiplexed measurement of gene expression? Last month, Seattle-based NanoString Technologies, the developer of this new way of analyzing genes, had the good fortune to find a couple investors at Clarus Ventures in Boston who actually do understand that field.

This was the interesting backstory I gathered on one of the bigger venture deals we’ve seen lately in the Xconomy network, the $30 million investment last month in NanoString by Clarus Ventures, OVP Venture Partners, and Draper Fisher Jurvetson. The company has invented a machine that provides a digital readout that can say precisely how much a given gene is dialled on or off in a biological sample. This digital technology has high enough bandwidth to enable large-scale genetic analysis experiments, which might, say, be used to compare 100 genes from 100 different patients with diabetes to see how the patients respond to treatment. The people who understood the technology well enough to write a critical check were Clarus managing director Nick Galakatos and Finny Kuruvilla, a young principal at the firm.

The initial seeds for this financing were planted when some of the world’s top geneticists, at the Broad Institute of Harvard and MIT, were among the very first customers of NanoString when it introduced its commercial product last July. They were raving about how the NanoString tool was simple to use, making it possible to digitally analyze the activity of hundreds of genes at a time without the cumbersome need to amplify biological samples using traditional tools like RT-PCR (real-time polymerase chain reaction). Some of the biologists there shared their enthusiasm for the new tool with Kuruvilla.

Kuruvilla knew what the people at the Broad were talking about. He’s got an MD from Harvard Medical School, a doctorate in chemistry from Harvard University, and a master’s in computer science and electrical engineering from MIT. Just before joining Clarus, he worked at the Broad Institute, where he led a collaboration with Santa Clara, CA-based Affymetrix (NASDAQ: AFFX) to develop novel tools and software to crunch huge volumes of genetic data. Essentially, the people at the Broad are trying to work on the frontier of turning the vast amount of genetic data pouring out of sequencers into something closer to knowledge that biologists can build on. When they said NanoString had made a significant advance in this field, Clarus, a fund with $1.2 billion in assets, decided to do more homework over the next year.

“There’s really no substitute for hearing good words from a happy customer,” says Nick Galakatos, the Clarus managing director who led the NanoString investment.

Months before Kuruvilla and his contacts at the Broad got excited … Next Page »

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  • http://www.nanostring.org Krassen Dimitrov

    For NanoString to realize its full potential, Perry Fell, Chad Waite and Jennifer Fonstad need to resign from the BOD. The three do not understand the business or the technology, and nearly killed the company in the 2005-2007 timeframe with terrible decisions about product and IP. As it is, they still dominate the Board (http://bit.ly/9DDTu), which is dangerous for NanoString. Clarus is badly outnumbered, and Mr. Kuruvilla, with his astonoshing resume, is not even on the BOD.

    I have asked Fell, Waite and Fonstad to resign, and they have declined for now. I understand they want to save face, however, this is a dangerous game with their LP’s money (including WSIB).

  • NanoString Scientist

    Krassen – You are a scientist. As a scientist I think you need to consider the facts. Fact #1 – The NanoString BOD has 2 of the top 100 VC’s in the country on the BOD based on the Red Herring rank of the top 100 VC’s. Fact #2 – You were never never able to raise VC money as a founder and you were terminated as an employee since you could not get the science to work or lead the team. Fact #3 – The Company has been very successful in the 4 years since you left. A lot of us depend on our NanoString jobs to support our families. Your continual jabs at the company are totally unproductive as you are really out of touch with the real progress we have made. Why don’t you just focus on supporting your family by focusing on your current academic job in Australia and leave the running of the business @ NanoString to the professionals who have invested the millions of dollars you were not able to raise.

  • http://krassend@gmail.com Krassen Dimitrov

    Hi, Anonymous Scientist,
    Your “facts” are wrong and irrelevant, and I will be happy to correct them.
    Fact 1. I am not familiar with this Red Herring ranking, but it is meaningless. OVP is a terribly performing fund. To date they have only returned ~$20M of their $125M ‘99 fund, and only ~$23M of their $180M ‘01 fund, and they have had several write-downs on their ’06 fund. There is going to be even further write-downs, as I don’t see how Complete Genomics would be able to keep its valuation, and may not even be able to survive. DFJ is more towards the median, but they have been sharply criticized for raising gargantuan funds and collecting huge fees, without the corresponding performance.

    Both OVP and DFJ have invested in companies, which contradicted the laws of physics (M2E and GreenFuel), and which have spectacularly collapsed. In my view, this should be considered “criminal negligence” with other people’s money, and these folks should be sharing a facility with Bernie Madoff now; however, I realize that in “Unscientific America”, it will be hard to find a judge or a jury who finds it essential that people investing in energy have some basic understanding of physics and thermodynamics.

    Speaking of GreenFuel, they were awarded the prestigious “Red Herring 100 North America Award” in 2006, which comes to show you how meaningless these awards are. What matters is performance – making money for your investors – and both OVP and DFJ have failed to do so.

    Fact 2A. Of course, I was able to raise funding as a founder, two times: in July of 2004 and April of 2005, at share prices much higher than today’s. You probably meant to say that in order to do that, I had to have Perry as the CEO, and that is true and unfortunate. Lee warned me about Perry, and urged me seriously to consider the Accelerator, however OVP was offering more money and I was greedy. This is the fact.

    Fact 2B. I was not terminated because “I could not get the science to work or lead the team”; this is severe misinformation, whoever told you that messed up seriously with you. I was fired “for cause” for this: “as opposed to the initial product target approved by the Board and other members of management — a high multiplex, low-throughput fluidic card — Mr. Dimitrov was interested in a low multiplex, high-throughput, non-fluidic card based product.”

    If you are really a scientist, you know that the product that we have on the market now is “low multiplex, high-throughput, product” and the fluidic card is very different than the one the Board wanted. What you don’t know, probably, is that to get the Board to change their mind, I had to exert a lot of pressure behind the scenes, by writing to their Limited Partners and explaining the benefits of the low-plex, high-throughput product. Thankfully, I have saved all the documentation and will put it on nanostring.org, so that such revisionist history can be diffused once and for all.

    Fact 3. I am really sorry to say this, however the company has NOT been very successful; this is by no means a knock on you or the other scientists and engineers, but it is the reality. Here’s how you need to look at this things: Nanostring has an exclusive license to my technology from ISB, and prior to this last funding round had raised $17M in equity and $5M in debt. So you have $22M in cash + a license to the technology, these are your ingredients. If the company was successful, in the past four years, its value should have been way above $22M, and it is not. It’s value is way below that of many other single-molecule, or gene-expression technologies, and that hurts me a lot. I understand that you work hard and that there is a very compelling product, however, this came very late, because of the mismanagement in 2005-2007, and now others have products with similar sensitivity and ease-of-use.

    Moreover, as a condition of getting the license from ISB, NanoString was required to generate a certain level of revenue in the next five years, which the company failed, again because of mismanagement by the Board. So this year, ISB could have revoked the license, which would have practically killed the company. As the inventor, I pleaded to ISB to give them extension, and they did; so keep this in mind when you talk about your job and feeding the family.

    Moreover, yet, Perry completely messed up the patents, with the knowledge and support from Waite and Fonstad, including filing a fraudulent PCT application, which they had to abandon. This is a bit complex to explain here, just keep it in mind, too.

    We all need to support our families, and judging by your blatant grandstanding, you are working very hard at it. However, keep in mind that I have a lot riding on NanoString’s success (yes, in terms of supporting the family); I have invested a lot of money, time, effort and thought into it and just don’t see how I will be able to get something out of it, if these three people continue to be on the Board and to mess up with the business.