John Mulligan, October 16, 2006 Invention to Startup Seminar

1. John Mulligan, October 16, 2006 Invention to Startup Seminar

2. My Background • Trained as a geneticist • BS in biology from MIT • Ph.D. with Sharon Long at Stanford Biology Department • Post-Doc with Ron Davis in Stanford Biochemistry Dept. • Helped set up Human Genome Center at Stanford • Director of Genomics at Darwin Molecular • Applying genomics / genetics to drug discovery (1993-1999) • Founded Blue Heron • Scientific strength of Darwin Molecular • Clear business goals • Strong links between business and scientific planning

3. GeneMaker® Gene Synthesis: Get the Gene You Want • Customer orders via secure website • Blue Heron manufactures and ships DNA molecule(s) • About 2 to 4 weeks later, customer receives exactly the DNA they wanted • No QC necessary: can download sequence trace data from their secure website • Start experiment right away

4. Blue Heron Biotechnology, Inc. • Custom gene synthesis • Fee-for-service • No downstream ties • Service business based on an assembly-line production process • Unique products for every customer • Uniform assembly process • Automated, scalable, database controlled • Large potential market • $300-$400 million spent on reagents for cloning • Fully-loaded costs 3- to 5-fold larger ($1 to $2 B) • Current gene synthesis market ~$25 million (~2% of potential)

5. Blue Heron Biotechnology, Inc. • Established in 1999 • Started with a product idea and developed the technology for this product • Venture funding in 2000 • Commercial launch in 2001 • SBIR funding • Phase I and II SBIRs, tightly focused on business needs • Now use robots developed with first Phase II SBIR • Projecting sustained profitability by mid-2007 • Plan to exit through acquisition

6. Starting a Technology-Based Company • Business Model • Integration of scientific and business planning • The role of professional managers (MBAs) in a technical organization • Financing strategies • Rewards and costs

7. Business Model • How will the company make money? • Who is the customer? • How will they buy your product? • What will it cost to make? • How will you get the information to customers? • How is this different from what is currently available? • Realistic knowledge of the market helps • A founder or advisor with direct experience (business development, sales, marketing, etc.) • Try to sell something as early as possible • Reality check, experience, new ideas, MONEY

8. Scientific and Business Planning • Many companies, big and small, fail to integrate business and scientific planning • Science should address business needs • Business goals and plans should correspond to scientific realities • Science is unpredictable, business planning is all about predictions… • Both need to be adjusted regularly to continue to match

9. Professional Managers • Many reasons to choose professional managers (~MBAs) • May be needed to raise capital • Tackle the vast number of details in starting an organization • As a scientist starting a business you have two choices • Do a job you are untrained for and may not like • Give the job to someone who may not understand the most important issues the business will face • Hiring a CEO who is not steeped in the technology can be very risky while technology is the main issue

10. Poor Management is at the Root of Many Failures • Scientists may fail to understand how to • Focus on the critical issues for the business • Manage a large, disparate group of people • Do business development successfully • Make money • Managers may fail by • Not understanding science and scientists • Managing too much • Focusing on GANT charts • “Micro-managing” • Hiring other professional managers • “Death by vice presidents” • Making decisions that are based on business needs rather than technical reality

11. Managing Your New Company • Find a scientist to run the company when science is the main issue • Confident but not an egomaniac • Understands science but willing to be wrong • Industry experience a big plus • Support with business skills early • Controller very early, CFO as soon as you can afford one • MBA business development, product development or sales • But not so soon that they have nothing to do- they will start managing whether or not it is needed… • Replace CEO with professional manager when appropriate

12. Investment Financing • Venture financing vs. “friends and family” • Venture financing • Required for many biotech businesses • Best chance of getting the technology in use • 50% - 80% of your effort while pursuing financing • Will consume 20% to 30% of your effort on an ongoing basis • Don’t believe the “added value” stuff- it’s the money • Money may get more “expensive” as the company matures • Fantasy, reality, (partial) success, SUCCESS

13. Bootstrap Financing • Many companies start this way • Sustaining this model depends on getting revenue quickly • Not feasible for some types of companies • Blue Heron is based on a capital-intensive manufacturing process • Government grants and partnerships may expand the range of companies that grow this way • R&D funding • Clinical trial support • Contracts • Many of the biggest returns to the founders have been from bootstrapped companies

14. Rewards and Costs • Professional • Financial • Personal

15. Professional Rewards and Costs • Expanded scope for projects • SIZE: Larger teams allow you to tackle problems of larger size and complexity • COMPLEXITY: Easier to form and manage multidisciplinary teams • Concrete impact of your ideas • Often the value of basic research, while clear, is abstract • Putting an effective new therapeutic or a new tool software engineering on the market impacts peoples lives • Learning experience • Focus on completion • Excel skills…

16. Financial Rewards and Costs • Potential for return implicit in any business • Starting a company not the surest route to $$ • Many small bets may be better if financial returns are your goal (e.g., consult for several companies) • Conflict between maximizing financial return and professional or personal goals • Requires an investment, even if you are using “other people’s money” • Time • Salary • Attention • Go in with clear (written?) limits on total investment

17. Personal Rewards and Costs • Satisfaction in building a company where people want to work • Stress • There is always more to do than you can finish • If you fail the happy people mentioned above lose their jobs • Payroll comes every 2 weeks • Conflict with the home front • Time: committed to a 45-50 hour week, still hard on family • Emotional: worries and stress can spill over • Statistical: up there with remodeling your house

18. Summary • Have a good business model before you start • Test the model with experienced advisors • Try to sell something- products, deals, pet care • Find a scientist to run the company while science is the main issue • Provide strong business advisors and support early • Be ready to switch when business issues are most important • Choose the timing for venture financing carefully • Best returns from boot-strapped companies • Better chance of getting the technology out and getting some return with venture capital • Consider the rewards and costs