Clarus Leans on Customer Reviews at the Broad Institute to Bet on NanoString
[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 about NanoString, Clarus made it up its mind to find ways to invest in a new generation of high-powered genetic analysis tools that would have potential for use as diagnostic tests, Galakatos says. Financially, the strategy was to invest as growth equity players—that is, to find products at a commercial stage that needed help to reach their potential, as opposed to earlier-stage venture investing necessary to develop the technology in the first place, Galakatos says.
OVP and Draper Fisher Jurvetson shouldered that initial risk with NanoString, when the company was founded in 2004 as a spinoff from Leroy Hood’s Institute for Systems Biology in Seattle. The latest financing from Clarus and the other two firms amounts to something of a lifeline for NanoString. The company’s early CEO, Perry Fell, stepped down back in March, and it hasn’t yet hired a permanent replacement. Before the money came in, NanoString was “pretty darn close” to running out of cash, OVP managing director Chad Waite told me last month. [[Editor's note: An earlier version of this story referred to Perry Fell as the founding CEO of Nanostring. He wasn't involved at the founding, but was listed as CEO in the company's announcement of its first fundraising round in 2004. The company's founding CEO was Krassen Dimitrov. We regret the error.]]
Now NanoString will clearly have a real chance to see what it can do in the marketplace. Part of that will depend on whether its users, at places like the Broad Institute, are able to generate results from experiments that otherwise would be impractical to do with some other tool. Nanostring’s machine is not cheap, at $250,000. And there’s tough competition from Affymetrix, Carlsbad, CA-based Life Technologies, and San Diego-based Illumina. Like any new entrant in a field like this, NanoString had better have a winning value proposition. Galakatos didn’t say how much time the company will get to prove itself, although the financing “should get them to profitability,” he says.
As to whether the NanoString technology was in jeopardy, and was essentially saved by some really strong customer reviews before the new investors came along, Galakatos didn’t want to go quite that far. “It’s better to be financed than not,” he said, adding. “We’re just very excited about the opportunity. Their technology is unique.”