[Corrected 11/27/13, see below] Scientists have noticed for years that when they poke cells under a microscope, cancer cells are more easily deformed than healthy cells. But those odd observations have had little use so far as an aid to cancer diagnosis, because poking individual cells would be a hopelessly time-consuming and inaccurate test.
Enter the South San Francisco company CytoVale, one of the two latest startups awarded a healthy chunk of financing by Breakout Labs, a hybrid philanthropic and investment initiative funded by PayPal co-founder Peter Thiel.
CytoVale has developed a lab instrument that can process 2,000 cells per second, detecting a range of physical cell traits such as deformability and surface topography. Certain of these traits correlate with particular disease states such as sepsis and cancer. The company’s aim is to open a new dimension in the diagnostics field, where innovators have long been focusing on genes, proteins, and other molecular signals of disease. CytoVale calls this biophysical dimension of cell biology “mechanomics”—a play on the terms “genomics” and proteomics.”
“We’re looking for that kind of deep technological advance,” says Lindy Fishburne, executive director of Breakout Labs, one of the programs of the non-profit Thiel Foundation in San Francisco. Breakout Labs hunts for early stage companies that can advance pure scientific knowledge into “applied breakthroughs” that open many avenues for new commercial products, Fishburne says.
Breakout Labs celebrated its second anniversary this month by announcing the funding of CytoVale and another Bay area startup, Pareto Biotechnologies, which also concentrates on cell biology. Emeryville, CA-based Pareto is using the advanced genetic engineering techniques of synthetic biology to create yeast cells that may one day manufacture compounds as different as neutraceuticals, skin care formulas, and designer flavorings for the food industry.
Breakout Labs handed out its first grants in April 2012, and has now committed nearly $5 million to a total of 16 startups scattered across North America. They include Cohoes, NY-based SkyPhrase, which is equipping computers to understand human speech; and Sarnia, Ontario-based AVEtec, which makes engines using artificial “tornados,” or vortexes, as a source of clean energy.
But Fishburne says the “sweet spot” for Breakout Labs is the intersection of biology and technology, which both CytoVale and Pareto are exploring. Thiel’s aim as the sole funder of Breakout Labs is to fill the gaps in financing for innovations that could have a broad impact, Fishburne says. Biology-based startups have a harder time raising capital than young infotech companies, she says.
“Our purpose is to go where people are not funding,” Fishburne says. Breakout Labs isn’t an incubator where awardees spend time in residence. But the program creates a support system by connecting the startups with a network of fellow recipients, professionals, and investors.
“Our fellow companies have very warmly welcomed us into the fold,” says CytoVale CEO Ajay Shah.
Once a year, the startups convene for Unboxing, a demonstration day when they give seven-minute presentations in front of fellow scientists and about 120 investors.
Pareto co-founder Mike Mendez predicts that investors will give any startup chosen by Breakout Labs a closer look because of Thiel’s reputation for picking winners, and the program’s careful vetting process.
“That alone will change the course of Pareto,” says Mendez, a serial entrepreneur and innovator himself. “Their due diligence will land us deals we would never have gotten before.”
Applications for the program are accepted year round. Inventive teams in any country can sound out Breakout Labs’ interest in their projects by sending a one-page pre-proposal. About one in ten teams are then invited to submit a detailed 10-page scientific proposal and business strategy, Fishburne says. Groups that survive that scrutiny are asked in for meetings, and the best candidates are considered by an executive team. New companies chosen for funding are announced about every quarter.
Those who don’t make it receive feedback when their business plans need work, for example, or when their proposed technology seems to defy the laws of physics, says
Hemai Parthasarathy, Breakout Labs’ scientific director.
“A lot of them did,” Parthasarathy says.
Recipients of the awards receive from $50,000 to $350,000 to work with over a period of 12 to 18 months. Most grants are at the high end of that scale. Fishburne says those funding parameters were chosen to give the startups enough resources to meet a milestone that will set them up to seek their next round of outside funding. Applicants identify the milestones they want to reach, such as establishing a proof of concept or fabricating a prototype.
The startups often work on platform technologies that could be applied to a number of different products. Breakout Labs encourages the companies to choose the route that will most quickly lead to a commercial product, which puts them in touch with end users for feedback, and may yield a bit of early revenue.
One recipient, Bell Biosystems of Palo Alto, CA, is already selling some of the cells it produces through its synthetic biology platform, Fishburne says. Through advanced genetic engineering, Bell Biosystems has introduced an artificial, self-replicating organelle into cells. These synthetic spheres called Magnelles attract iron and generate a magnetic nanoparticle. The cells can then be tracked in the body through magnetic resonance imaging (MRI). Researchers might use such cells in preclinical studies to follow the fate of cell transplants in the body. Bell is also testing methods of selectively destroying cells containing Magnelles with heat from external magnets.
As its near-term project, CytoVale is working with UC San Francisco researchers to develop a diagnostic test for sepsis, a life-threatening over-reaction of the immune system to an infection. The condition is hard to diagnose, and even a half-hour’s delay in treatment can significantly affect a patient’s outcome, Shah says.
Pareto is pursuing partnerships with food flavoring companies to develop yeast cells that can produce traditional flavor compounds at lower cost, or make molecules that deliver a novel taste, Mendez says. [Corrected 11/27/13: A previous version of this paragraph stated that Pareto has already formed partnerships with food flavoring companies.]
Fishburne describes the Breakout Labs financing model as “impact investing,” to distinguish it from the practices of venture philanthropists who invest in non-profits. Startups chosen by Breakout Labs receive tax-free “philanthropic dollars,” and in turn agree to contribute to Breakout’s revolving fund for the support of future startups.
The grant recipients agree to return a 3 percent royalty on sales to Breakout Labs after their revenues exceed $100,000. The royalty payments are capped at three times the original grant. Breakout Labs also receives an equity stake in the companies according to a standard formula in the agreement. The startups retain intellectual property rights, but if a company folds, Breakout Labs would gain non-exclusive rights to commercialize its inventions.
The targeted return for Breakout Labs is 50 percent of the money it invests, Fishburne says. The program expects to wait a while for its money.
“We’re in for the long haul because we’re pushing really good ideas early,” she says.