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David Berry of Flagship Ventures on Funding Advice, Investment Themes, Trends in Biofuels

A rising star of the Boston-area venture capital scene is in Seattle today. He’s David Berry, a partner with Flagship Ventures, and he’s speaking on a panel tonight that will tackle a question on every young company’s mind, when it comes to financing: to VC or not to VC? The event is organized by the MIT Enterprise Forum, and the other speakers will include Jonathan Sposato from Picnik (a bootstrapped startup recently acquired by Google); Mark Ashida from OVP Venture Partners; Michael Butler from Cascadia Capital; and moderator Chase Franklin from Daptiv (the former CEO of Qpass).

Berry’s background is quite different from the other panelists—and from most VCs. He graduated in 2005 with an MD-PhD from Harvard and MIT, where he studied bioengineering under professors Ram Sasisekharan and Robert Langer. Flagship Ventures stole him away from an academic career to work on building new companies and developing technologies in energy and therapeutics. He has since co-founded LS9, a Silicon Valley-based synthetic biology firm developing new fuels and chemicals, and Joule Unlimited (formerly Joule Biotechnologies), a Cambridge, MA-based startup that’s using genome engineering to create other types of clean fuels. (Given the strong interest in biofuels and renewable chemicals in the Northwest, Berry has plenty of connections out here.)

When it comes to advising entrepreneurs, Berry is frank about the alternatives to venture money. “It’s unusual for a VC to say venture capital is not always the best choice,” Berry told me by phone yesterday. “But with venture capital firms folding, you have to know where your money is coming from. While money is fungible, long-term money isn’t.”

Here are a few edited highlights from my chat with Berry:

On his general advice to entrepreneurs:

“At some point you do need capital. There are ways where you can get government grants and so forth. In certain areas you can get some revenues to offset capital needs. As [entrepreneurs] think about where they want to go, the real question is who are the best partners to have along the way, to build the company. That means someone who’s not only trusted around the board table or as an advisor, but someone who will challenge you and push back and make sure you’re thinking strategically in the best way possible.

“From our end [Flagship], we invest in the beginning of a company—the two most important assets are its people and its IP. We care about having the best people around the table, entrepreneurial people who want to solve big problems. Also, people who have a very interesting approach to that—differentiated technologies that are IP protected, and that have some degree of validation.”

On alternatives to VC in energy and biotech:

“Venture has played a bit of a mainstay role as of late. In energy, there are sovereigns and private wealth holders which have played significant roles—Temasek, and Masdar has been quite active as of late, out of Dubai. On the biotech side, the wealthy individuals tend to colocate with great entrepreneurs. Big companies seem to be taking an interest in getting involved earlier and earlier. This is a cyclical thing. The Agios-Celgene deal is quite interesting; pharma is taking significant interest in what could be a game changer in the biology of cancer.”

On his career path from academia to VC:

“My interest had always been in developing technologies and building companies. My [original] goal was to recapitulate what Bob [Langer] was doing. I applied for professorships, and also won the Lemelson-MIT Student Prize. I had offers on the table, and thought I was going down that path—things were looking very rosy. I got approached by Flagship to consult on a project. They wanted my advice on a business model, which became Codon Devices [now defunct—Eds.]. They didn’t follow my advice, but they liked it. They made me an offer to be someone to build new companies and come up with new ideas and develop technologies. This gives me the upside of doing what I want to do…and it’s so focused on bringing things to market. It’s a very interesting perspective. I interact with the top professors in the world [which would be harder to do as a young professor].”

On Flagship’s investment philosophy:

“Our modus operandi has been focused on associating with breakthrough technologies. Finding the great innovators and entrepreneurs of our time and partnering with them to build companies. Also, founding companies and inventing technologies, which is what I spend my time on.

“It’s always misleading to look at venture returns in a one-year period. The 2009 returns were really bad. What we’ve seen is VCs are starting to retrench—what are they good at, and how do they make money. Some are saying they don’t require a lot of money to get there. In our analysis, we’re really good at creating companies and working with entrepreneurs.”

On current trends in biofuels:

“People talk about a handful of things. One is how to get to market in a cost-efficient way. You hear about specialty chemicals too; the cost point of chemicals is typically higher than fuels. They’re asking how to be more capital efficient. We’ve tried to build our technology around straightforward deployment. Joule is entirely modular—when we deploy one [plant], it’ll work to ‘scale linearly.’

“On the other end, our focus is on recognizing what the market wants. People don’t fill up with 94 octane—the market cares about price. So the focus we have, and continue to see, is on technologies that get you the lowest prices possible. Algae was popular about a year ago. Before that, it was cellulosic ethanol. We’ve taken the approach of [analyzing] the fundamental thermodynamics and mechanics of any process. We have no investments in algae, because the theoretical maximum [yield] is 2,000 gallons per acre per year. A lot of these companies are migrating to make food additives. And we’ve seen a lot of companies in various approaches of biodiesel migrating to chemicals. Right now the front end is trying to transition to the commercial stage.

“Our philosophy is to invest in things that will be [cost] competitive. At the end of the day, the consumer doesn’t know where that fuel comes from. In a fungible market, you have to be differentiated in a certain way. It could be the approach by which you build the technology—you know your process will work at a much smaller scale, and you minimize the cost of those elements…In a modular system, the costs have to be that low from day one.”

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