What I Learned About Venture Capital This Summer

I’ve worked with Lux Capital over the last six months as both a part-time and summer associate. I’m writing this blog post to reflect on some of the lessons I’ve learned. In this post, I plan on covering a number of topics including how to add value to a venture capital firm firm, what VCs do day-to-day, how to evaluate whether you’re a good fit, and how to think about getting a job in venture.

How To Add Value To A Venture Capital Firm

Constraints such as industry and investment stage focuses can have a big impact on which activities add value, and venture capital firms pursue different mixes of these activities to benefit their stakeholders. Here are the primary ways to add value to a venture capital firm:

  1. Sourcing – Sourcing looks very different depending on the firm. Some firms have big brand names that attract so much inbound startup interest that they spend more time filtering than they do hitting the pavement to find startups. Sourcing channels look very different across industries as well. For example, although it’s possible to find cool consumer software startups on Product Hunt, biotech breakthroughs might be found only through people connected to academic systems or university tech transfer offices.

    Sourcing is finding reasons to say yes to investing in a startup. Questions one might ask include:

    • Are the founders the right people to build the product?
    • Is the market opportunity big enough for a venture return (in the billions not millions)?
    • Is there product-market fit?
  1. Due Diligence – Due diligence looks very different from firm to firm, and many firms rely heavily on the lead investor to take on the brunt of the due diligence with the assumption that they will do sufficient diligence, given that they are taking the largest risk.

    Diligence is finding reasons to say no to investing in a startup. Questions one might ask include:

    • Are the founders ethical?
    • Does the startup have a moat/competitive advantage?
    • Is the startup missing key people that they will need to successfully execute?
  1. Portfolio Company Support – VC activities that may add value to a portfolio company include providing introductions to relevant people, helping find and introduce key hires and providing a sounding board for key business decisions. Entrepreneurs should do just as much (if not more) diligence on their investors. Speak with other startups backed by investors to understand whether potential investors are good board members and value adding.
  1. Investor Relations – AKA fundraising. Most venture capital firms are in a perpetual state of fundraising whereby they are deploying capital from the last fund at the same time that they are raising money for the next fund. Some funds attached to other entities (think corporate VCs, large asset managers, etc.) don’t have to bother with fundraising, although they may dedicate extra time pitching to investment committees or integrating portfolio companies into the corporate side of the business.
  1. Other (Portfolio Strategy, Attending Conferences, Operations, Marketing, etc.) – Given the dynamic nature of venture capital firms, there are a number of important activities outside of those previously listed. These vary in relevance depending on a firm’s size and investment focus, so your experience may vary.

What Do Venture Capitalists Actually Do? Are You a Good Fit for Venture Capital?

Beyond professional competencies there are a few functional traits that are common to VCs:

  1. Hustle – Do you have the ability to work with little to no direction, or do you need structured problems and projects to succeed? This is a key difference between venture capital and traditional MBA paths like consulting/investment banking, where there are clear projects and workstreams. Hustle is NOT the same as working long hours – it’s the spark and drive to get things done without someone else telling you to do so. My own hustle has ranged from academic to professional: I took organic chemistry at age 17 at an accelerated high school program and ended up graduating early from UT Austin. I played poker professionally to pay for school and help support my family financially in the early days of my career. I chose to do an internship this summer before starting my full-time job while many MBAs were on vacation.

    While there is certainly mentorship and apprenticeship, venture capital firms are not structured like consulting firms and investment banks with in-depth, structured training programs. Thus, you must be a self-starter if you hope to succeed in venture. Even more important, all the entrepreneurs you are funding have insane amounts of hustle. If you can’t hustle as much as your entrepreneurs do, you aren’t the right investor for them. While it is important to be 80/20 while sourcing, you’d better hustle and learn as much as possible during diligence and after investing if you want even a chance of being able to add value to your portfolio companies.

  2. Ability to manage cognitive dissonance of cynicism and optimism – A somewhat cliché quote from F. Scott Fitzgerald states, “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”

    Let me be the first to say that this quote is somewhat narcissistic. That being said, VCs face a very difficult problem: New businesses that will eat the world 10 years but don’t exist yet look absurd today. Absurd businesses also look absurd today. Successful venture outcomes rely on fundamental changes in human behavior that are rooted in Extremistan. Black swans are impossible to predict, because the data we have today do not show the scale of the coming change. Most VCs address this problem by talking to people. Constantly. They try to find both confirming and disconfirming data and opinions. Decisions for truly revolutionary products will by definition always have more disconfirming than confirming data.

  3. Intellectual Curiosity/Passion – VCs are passionate about not only what a product is today, but what the business will be a decade from now. It’s going to be near impossible to find and evaluate startups if you’re not passionate about new products. If you’ve never beta tested a product in your life, it will be very difficult for you to understand an early stage startup’s customer base.

    In addition, VCs love learning, and that learning converts into both sourcing interesting startups and connecting with people that help develop frameworks to evaluate whether a startup is a good investment. Do you enjoy talking to other people about their work, even if their work is not something you’d like to do yourself? I am extremely curious in people, and one of my core life assumptions is that everyone has different life experiences and unique points of view that I can learn from. If you ever see me on an airplane, I’m likely talking to the stranger next to me. Although I can be introverted and need alone time to recharge, I feel extremely excited about the prospect of a day of back-to-back one-on-one meetings with interesting, passionate people.

  4. 80/20 – VCs see lots of deals. Tons of deals. Because of the time constraints of having 24 hours in a day, VCs have to say no to deals all the time. Sometimes, they say no to great deals. VCs are constantly trying to filter between signal and noise, and they need to be able to get to 80% of the “truth” quickly to decide whether they should continue to invest time in a startup or an idea. Often, the “truth” you find leads you to say no quickly. Sometimes, you find something interesting and continue digging. Rarely, that digging leads to an investment.

    80/20 in VC looks very different from 80/20 in private equity or management consulting. Because the markets are totally nascent, the analysis is much more qualitative than quantitative. Consulting cases generally dig into every last branch of a framework through multiple workstreams. VC diligences hit on the high level branches and dig into only a few of the branches that they deem interesting. That’s not to say that they don’t go deep at all, but they are not exhaustive diligences that last weeks or months. One big reason for this is that you can do too much diligence.

Certainly one important question anyone interested in VC should ask themselves is: “Do you believe in venture capital as an asset class?” If you’ve never thought about this question before, you should read this Kauffman report.

Paths Into VC

There are a few ways people tend to get into VC, including:

  1. Entrepreneur – Or other operational roles in early stage firms generally with a fairly successful exit and good relationships with VC backers
  2. Journalist – Usually covering entrepreneurship and technology
  3. Finance – Asset management with exposure to early stage private equity/venture capital, or consulting/investment banking in relevant industries, such as tech or healthcare)
  4. Networking – Few venture firms post job openings like traditional companies. Many hires are people that are previously known through networks

Many who get into venture have a stellar academic track record, and most have some background in technology, investing, or both. That being said, there are no reliable pathways into VC. Like most opportunities in life, opportunities in VC come from some combination of luck, timing, and surface area for opportunities (read: network). If you’re coming from one of the aforementioned paths, you’re still going to have to hustle to get in the door.

Ask the questions that nobody else asks because they assume the answer is no. Add value before you’ve even asked for a job. Don’t take no from an answer, and find out what it will take to convert a no to a yes. The hustle and preparation for getting a VC internship parallels what actually being in the job is like: VCs are very busy people with a substantial amount of inbound interest. Great entrepreneurs are extremely busy building their businesses and have tons of inbound interest from customers, partners, potential employees, and investors. Knowing how to get someone’s attention who has high demands on their time is an important skill to have, whether you’re trying to get into VC, or just trying to accomplish something great.

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CRISPR – The Future of Synthetic Biology

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I am excited to be interning at Lux Capital this summer because I am passionate about commercializing emerging technologies. Lux’s focus on partnering with passionate entrepreneurs solving difficult hard science problems is an ideal platform for me to explore the technologies that will define the future. Today’s post is on a piece of technology known as CRISPR that has revolutionized the genetic engineering industry, and holds keys to a future often described in science fiction.

CRISPR

CRISPR, short for clustered regularly interspaced short palindromic repeats, is an important component of the CRISPR/Cas9 system for genomic editing. It represents a huge improvement over previous tools: Zinc finger nucleases (ZFNs) and Transcription Activator-Like Effector Nucleases (TALENs). The CRISPR/Cas9 system is much faster, more customizable, and cheaper than both Zinc fingers and TALENs, and has dramatically improved researchers’ ability to manipulate genomes.

Origin & Development

The origin and adoption of CRISPR/Cas9 for genomic editing is fascinating and quite serendipitous, since the original mechanism comes from nature. CRISPRs are repeated sequences of DNA that were first identified in the E. coli bacteria in the late 80s, but their true purpose and mechanism were not understood for approximately two and a half decades. These sequences are now understood to provide the bacteria with adaptive immunity. When attacked by viruses, bacteria can copy the virus’ genetic code and store it in between CRISPR sequences. Whenever the bacteria runs into the same virus again, this code is transcribed into RNA that corresponds with the viral DNA. A CRISPR associated protein (Cas protein) then cleaves the virus’ DNA, rendering it harmless. In this way, CRISPRs act as a library to store information on previous attacks, with future instructions on how to utilize Cas9 to identify and fight its assailants.

In 2012, Dr. Emmanuelle Charpentier and Dr. Jennifer Doudna published a groundbreaking paper that showed how you could use the CRISPR/Cas9 system with an RNA sequence to selectively cut DNA in a test tube. A few months later, Dr. George Church and Dr. Feng Zhang published two papers simultaneously that showed that this system could be used to edit genomic material within the human genome. Although some might argue that the later research applying the system to the human genome could not have happened without Charpentier and Doudna’s original work, the US Patent office rewarded US Patent No. 8,697,359 to Feng Zhang of the Broad Institute and MIT in April 15, 2015, sparking an intense patent battle.

Despite the patent ownership issues, use of CRISPR has rapidly increased amongst researchers. Over the last 10 years, papers mentioning CRISPR have skyrocketed from 6 in 2005 to 645 in 2014.

Application

CRISPR represents a major step change in genetic engineering for a number of reasons. First, CRISPR increases genomic editing speed, allowing researchers to perform the same experiments that used to take months, in days and weeks. Further, it is a magnitude of order improvement on cost from existing systems. Customized Zinc finger and TALENs systems can cost anywhere around ~$5000 or ~$500 respectively, while a CRISPR/Cas9 system can cost as little as $30. The increase in speed and reduction in cost provided by CRISPR will allow researchers to perform more experiments and reach conclusions and insights sooner. CRISPR’s use in genetic research has become ubiquitous in the three years since Charpentier and Doudna’s first paper.

Beyond being an improved tool for researchers, CRISPR’s promise lies in its potential for genomic disorders to be edited in vivo. Several papers have now been published claiming use of the CRISPR system to suppress or even inactivate and viruses such as the human papillomavirus and hepatitis B virus. More exciting is the potential for the system to be used to neuter disease carrying insects or even to directly fix genetic defects in living, breathing, humans.

However, this amazing potential does not come without its complications. The ease and low cost of CRISPR will make genetic engineering more feasible for research and inevitably drive towards modifying things even more controversial than genetically modified food. This risk is magnified when CRISPR is paired with what’s known as a “gene drive,” which biases inheritance such that populations are significantly more likely to inherit modified genes. While this combination of techniques is very powerful and could allow for a rapid defense against parasites or harmful organisms, any hidden consequences would be drastically exacerbated. This tremendous potential has already led to rapid experimentation including a recent controversial experiment editing the genome of monkey embryos.

To illustrate the danger, I’d like to tell a hypothetical story that could happen 5 years from now: CRISPR technology has developed to the point that we are able to modify one of the parasites that causes malaria, Plasmodium falciparum. P. falciparum is THE worst malaria causing parasite, responsible for the most malarial deaths every year. By coupling a clever CRISPR edit with a gene drive, scientists can change P. falciparum‘s code to render it harmless. The gene drive allows this edit to spread throughout the population of parasites in a matter of weeks. While this looks like a huge net positive for humanity, genetics is a complex beast. This genomic edit actually results in a previously unknown secondary effect that allows P. falciparum to cause a malaria-like disease in cattle wiping out food supply. If this story sounds like scary science fiction, it should. However, what makes this story scarier is that multiple papers have already been published about using CRISPR to edit P.falciparum, indicating that this hypothetical story may be a reality much sooner than 5 years from now.

The Future

Several startups have sprouted in the last year and a half with varying degrees of involvement from the original authors of the aforementioned groundbreaking papers. Despite the ongoing patent battle, Caribou BiosciencesEditas Medicine, CRISPR Therapeutics, and Intellia Therapeutics have all been founded in the past few years. Though their websites describe their mission in a vague way, these startups are focused on developing therapies based on editing the human genome using CRISPR. Though gene therapy has made progress in the past few decades, previous solutions have been limited to development of specific therapies targeted at individual genetic problems. CRISPR offers a platform that allows for rapid customization of therapies.

Here are a few business cases that CRISPR could achieve:

  1. Build a research platform – Build a product/service that reduces researcher pain points. Cost may be difficult to reduce, but time to run experiments, control of inputs, and standardized reproducibility could all be improved.
  2. Build a delivery system – Until now, gene therapy has been limited by our ability to deliver healthy genes to where they are needed in the body. CRISPR offers a mechanism for editing genes in situ, but some sort of delivery system is still necessary to get the desired CRISPR system in the right cell at the right location.
  3. Build a killer app – Develop a targeted gene therapy that was previously unachievable. This path was possible prior to the development of CRISPR, but CRISPR has dramatically reduced the difficulty of doing so. Large inherited genetic disorder markets such as hemophilia or cystic fibrosis could be targeted.

Despite the tremendous potential for CRISPR applications outside of research, there needs to be a dialogue to develop rules and protocols that protect against rash use of CRISPR that could irreversibly alter ecosystems. Nonetheless, the discovery of CRISPR is an immediate step change improvement for researchers, with long-term implications that are promising, potentially risky, but currently undetermined.

Hong Kong protests and their implications for business in Greater China

For many, the magnitude and impact of the protests in Hong Kong are difficult to understand. Some may see the protests as an extension of the 1989 Tiananmen uprising and a general revolt against an oppressive one-party regime. Others may see a movement that looks similar to Occupy Wall Street, with streets filled with young idealistic activists. While certainly there are some similarities to these historical protests, the truth is a bit more nuanced. To start, an understanding of Hong Kong’s historical significance is necessary.

Hong Kong’s Historical Significance

  1. Hong Kong as a gateway for unwanted change

    Even prior to the United Kingdom handover of Hong Kong to China in 1997, Hong Kong has long been a region of experimentation. From the mid-1700s, the greater Guangzhou region (the area surrounding Hong Kong, also known as Canton) was the only point of trade and contact with the Western world under the Canton System. This system was meant to not only limit the perceived commercial threat posed by foreigners, but also to limit a perceived political threat from abroad as well. Following the First Opium War, the UK seized Hong Kong as part of the Treaty of Nanking in 1842, forcefully opening more points of free trade. One of the goals of this war was to rectify a trade balance, wherein the West was purchasing large amounts of Chinese goods but were limited from selling products to the Chinese mainland. What resulted however, was the forced trade of opium into China. This was the first of many unequal treaties, in which China was subjected to the whims of the Western powers during what Chinese historian’s describe as the “Century of National Humiliation.” After a Second Opium War and years of forced opium trade, 27% of China’s male adult population regularly used opium by 1906. From a historical perspective, Hong Kong and the greater Guangzhou region represented an entry point for physical poisons.

  2. Hong Kong as a gateway for controlled experimentation

    Since the United Kingdom handed Hong Kong back to China in 1997, Hong Kong has existed as a Special Administrative Region (SAR), with a different set of rules and regulations than the rest of the Mainland. Under this system, Hong Kong was granted a high degree of autonomy with a separate political system and economy described by Deng Xiaoping as “One country, two systems.” In particular, Hong Kong maintained its own currency, economy, and most importantly, government. The establishment of neighboring Shenzhen as a Special Economic Zone served as an experiment for market capitalism under the system of “socialism with Chinese characteristics.” The investment of large international firms like Foxconn, resulted in large economic successes that drove the rapid acceptance of market capitalism throughout the rest of China.

As a result of Hong Kong’s history, there is a subtle but important cultural gap between Hong Kong and the Mainland. Rightly or wrongly, many Hong Kong citizens see themselves as superior to Mainlanders. Nevertheless, China has continued to allow Hong Kong special privileges not afforded to the rest of China in maintaining Hong Kong as a place for economic experimentation. Given its special status in China, changes in Hong Kong have major implications on business in Greater China

Implications for Business in Greater China

Given this historical perspective on Hong Kong, there are a few key questions that businesspeople need to examine in the wake of these protests:

  1. Will China allow Hong Kong’s historical role as a gateway into China extend beyond an experiment in economics into an experiment in politics?

    What started these protests was that Beijing proposed a change that would limit the existing democratic election process, by effectively limiting the chief executive candidates to those handpicked by the mainland government. Thus, the results of these protests have very specific implications for the future of democracy in Hong Kong, and by proxy democracy in China. Although democracy in China is unlikely at this point, any steps towards or away from democracy in Hong Kong will likely effect the political discourse in greater China.As any who have worked in China know, it is very necessary to have relationships or guanxi (關係) in order to do business there. As market capitalism has spread through China from Hong Kong, business reform has also spread. Thus, the political discourse in China will likely have a long-term impact on the way business in China is done.

  2. Will these protests lead to more severe unrest in Hong Kong and Greater China?

    This is a key question with the potential for more severe short-term financial implications. Since the start of the protests, the Hang Seng Index has already plummeted over 6.4% as investors pull money out of Hong Kong. Certainly, these investors are afraid that extended unrest in Hong Kong will negatively impact business potential in Hong Kong.In addition to the effect of unrest on Hong Kong, one must also consider the impact of unrest in Hong Kong on greater China. Instagram has been blocked in China since Sunday, and other social media and search sites are being actively censored by the government. If the unrest contagion spreads to greater China, it is likely that the PRC will clamp down in a much more extreme manner, but this is dangerous territory. Images of protestors being met by police armed with tear gas and riot shields are likely to evoke memories of Tiananmen, even in China where this event is actively censored. China must tread very lightly, as a violent clampdown of prospects in Hong Kong would likely crush the future of Hong Kong as an international business center.

  3. How will this impact cross-strait relations and the prospect of Taiwan joining greater China?

    China has extended to Taiwan the offer of rejoining China as a special administrative region similar to Hong Kong. Given Taiwan’s status as one of the “Four Asian Tigers,” this certainly has large implications for business, especially for the information technology and high tech manufacturing industries. Since the election of Ma Ying-Jeou (馬英九) as president of Taiwan in 2008, cross-strait relations between China and Taiwan have improved dramatically, resulting in substantial Taiwanese investment and emigration to China.In recent years, one of the simpler ways for foreigners to invest in Chinese growth was to invest in Taiwanese firms investing in China such as Foxconn. How things play out in Hong Kong will have a substantial impact on the future of cross-strait relations and continued Taiwanese investment in China.

The PRC has a very delicate task ahead in figuring out how to address these protests. Extended protests and backing away from previous moves will certainly cause the PRC to “lose face,” but violent clampdowns would have very dramatic repercussions. For businesspeople, it is important to understand that these events could radically change the future prospects of doing business in greater China and Asia Pacific.