Climb By VSC: Episode 32

Published June 7th, 2023

Arvind Gupta⁠ co-leads ⁠Mayfield⁠’s engineering biology practice and is Founder and Venture Advisor at IndieBio. He was the first investor in breakout bio companies such as Geltor, Synthex, Prime Roots, NotCo, Prellis, New Culture, DNA Lite and Memphis Meats. As Founder of ⁠IndieBio⁠, Arvind redefined the pace and possibilities of early stage biotech, investing in over 136 companies in five years, defining human and planetary health, and growing the IndieBio portfolio into billions of dollars in value. Prior to founding IndieBio, Arvind was Design Director at IDEO in Shanghai where he earned numerous international design awards.

Investors Need To Roll Up Their Sleeves And Help Founders On The Ground Level

Vijay Chattha: Thanks, everybody, for joining us for another episode of Climb from VSC Ventures, where we bring on some of our favorite company builders. Today we have Arvind Gupta, partner at Mayfield and founder of Indie Bio. And his scope is two things one, reversing climate change and aiming to cure disease through his investments. And he focuses on human planetary health. So I want to welcome you, Arvind, to the Climb podcast.

Arvind Gupta: Thank you. It's great to be here. I appreciate it.

VC: Yeah, and I've had the privilege of knowing you now, I think, for 16 years. I came into the SOSV office in San Francisco. And I still remember you're the first VC I met that was wearing scarfs consistently and I was like, that's good luck. Like I want to be, I want to get my scarf game up leveled at this point. So that's what I remember you and of course, since then, you've been building so many important parts of our society to build companies and help founders solve those two problems you're going after so, so I just maybe talk a little bit about like your early life career path and then how did I get to IndieBio and then maybe tell us a little more about IndieBio itself and then we can get to Mayfield?

AG: Yeah, sounds good. I mean, Renaissance is an interesting word. It's really following curiosity to its logical end. And then where it ends, it kind of naturally branches into another direction. And so there is a logical thread that connects my entire career. But it's not obvious unless you get the backstory. So it's kind of interesting that I started in college at UC Santa Barbara. I was studying microbiology with an emphasis on genetic engineering. So as the first genetic engineering program, it was backward. Genetic engineering was really more a set of protocols than it was a set of technologies. And so the idea of reprogramming life to do something that is useful to people was enormously powerful as a concept. But because it was a set of protocols and not a technology, it was also imposed, impossible to implement in a short timeframe. So you can have an idea. Hey, I had an idea back then, what if we could engineer our gut microbiome? E. coli was was what we knew back then to express the enzyme cellulase, which breaks down cellulose which is an in-plant stocks and things like that, but would then we could cure world hunger because we can always eat grass and eat like, you know, sticks for for for nutrition, which obviously isn't really correctly. There's a reason cows have four stomachs and all that kind of stuff. So there's a lot of problems with that. But the idea of a general line of thinking of what you can do if you can reprogram life, sent me into that direction, but the fact that you couldn't actually implement that idea within any timeframe that was short of five years, made it impossible for me to want to pursue. And I studied economics at the same time because I was interested in self-assembling systems. DNA is one of them. Life, at its core, is another. And so economics is like a meta version of a self-assembling system. And, and that got me interested in macroeconomics. When I decided I couldn't be a genetic engineer. Practically, then I was like, What do I do with my life and the first of many times, I'll say that, and, and that led me to say, Okay, well, I knew, you know, macroeconomics, I could maybe trade options based on that knowledge. And so I moved to San Francisco and stood on the steps of the exchange and everyone that came out was like, hey, you know, give me a job getting coffee. You know, get coffee for you. And they're like, one guy was like, Sure. I can use someone to get coffee. It was before in the morning because of East Coast time, so you know, no one wants to wake up. So I woke up at four in the morning and got on the floor and started to learn how to trade and became a market maker. And got to watch the implosion, but from the inside of the exchange, so like it was open outcry back then, like in trading places. If you've ever seen that movie, and like, you know, you hear CrowdStrike roaring, you're like, oh, there's Worldcom it just blew up, right? So anyway, I realized that making money without creating any value is a soul-destroying activity, that's what I learned from that time. So for the second time in a few years, I was like, Well, what should I do with my life? And this time, I decided, okay, well go first principles. Do nothing. Whatever it is that you do when you do nothing. If you could get paid to do that, just enough to cover rent. You're on vacation for the rest of your life. Because a lot of people work to buy their own time back anyway, digression. So I did that. I kind of made enough to sort of do nothing for a bit and surfed and climbed and bass jumped and did all the things that I didn't used to do. And a friend who was teaching at a bishop was like, Dude, you should be a designer. I was like, Ah, it's like blending science and art to solve problems. Okay, so that's where I did a master's in industrial design. Ideal hired me out of school, and I became a design director. They're working on really kind of gnarly technology problems. designed the Samsung Galaxy curve and a bunch of other things, but always building businesses to produce in the long run. That's what it was about. And that became the framework through which I've now lived my life. Everything is about building businesses through product and that product solves a simple problem. So I live my life looking around for problems and those problems lead to business. Your product so after doing that for a decade, I realized my wife did a startup and I supported her. I got to watch basically, and realize that you can go from an idea to launch in two months and then people can be emailing you as a fitness startup like oh, hey, you changed my life. And I was like, Wow. No one's ever emailed me that I've changed your life. Like and I've done all these things that are, you know, supposedly, really great. So, long story, you know, getting shorter, decided to go into venture, but with a very different point of view than most people are going to venture. Miles' love for genetic engineering had never waned, and I had always watched the space. In the 20 years that had ensued. The ability to actually do genetic engineering became a technology and became fast and cheap, like super fast. super cheap. You can order DNA and it arrives in the mail the next day. You know, you could do PCR very, very quickly and very deeply like, it became obvious that this was a technology that was at the time It arrived and no one was financing. Biology as a true platform technology. Most people were financing biology as a means to make therapeutic drugs for people. And so I thought, okay, what are the biggest problems in our world? Well, climate change, and this is 2015 in 2013 when I made the switch, so 2013 No one was still doubting climate change even more than now if that's possible. And so I believe that it was a real problem. And biology is very uniquely suited to solving it. Because it's a problem of efficiency. And biology is very efficient. And so we can reprogram biology to make the other things we need more efficiently. So I thought, Okay, well what's the best business model to be able to do that? And the idea of taking the most expensive part of a biotech company, which is the lab and turning that into shared expense, which is a centralized lab and running an accelerator with many, many companies at the same time, where they share that expense was a way to drop the operating drop the capital costs and turn it into operating costs for these companies. And now you could find out about these companies for a lot less money, which means you could take more risk on what they're trying to accomplish. So that led to the creation of IndieBio when I joined SSP as a GP, and Sean O'Sullivan. I mean, what an amazing guy, right? Like he had the vision. He funded it out of his own balance sheet. But he was in the family office when I joined. And he had the vision to see that this would be possible as well. And so I joined Sean to build this and started the San Francisco office and it was the right place, right time, right team sort of thing. We set this up. Who knew what was happening? Like maybe we'd say okay, applications are open getting nothing. Okay. Instead, we got an application for egg whites without the chicken and I was like, this is gonna work. That was Clara foods. Now every company and because it was exactly the thesis to reprogram life to make things more efficiently and reduce the overall resource burden for those products. So then did Memphis meats and now called upside foods that were cell based meats and Michael works making leather without the cow using mycelium. So, you know, it goes on and on, did many therapeutics companies as well then built the New York office to be able to expand the operations to be able to expand the amount of companies that we do and really built a community as well. I think the community aspect is overlooked oftentimes you really do need to build a movement alongside just building companies. Now the company has been successful in helping build the movement, but giving the movement a place to convene, which was the lab, the event space at SOC and IndieBio was very, very helpful. So at some point, it became, you know, very much managing all of these things, but I didn't get to build these businesses and do product with the founders as much and that was great Nying at me and so I met Po Bronson. Scott to be seven years now six, many years ago. And, you know, he's just amazing, he's an author. He was also a bond trader, and no one really knows that prior to that. An amazing guy and so he helped us with the teams that are pitches and stuff I was like, Dude, you know, here's the key. And then he's stuck around and then it was like, Can I pay you to stay around? He's like, Yeah, that'd be great. So he came on and Oh, really, you know, we wrote a book together and I knew that he is as passionate for IndieBio as I am. And he had the mind to be able to take it to new heights and that would free me up to say, hey, Sandhill Road, wake up. We could make venture returns huge amounts of money. By investing in climate change in curing disease, as you can software, and so I made the transition to Mayfield in order to do so to working with my partner sheet and Naveen and the rest of the team here very closely, and it's been phenomenal. Being able to now work very closely with very few teams and really deploy my entire network into those very specific problems. It's been that's what I was, I was craving and meanwhile pose on taking IndieBio chip. It is an incredibly , you know, amazing place that I wasn't able to go to , so I think it was the right thing to do for everyone involved. So yeah, so now I focus on Series A at Mayfield.

VC: Very impressed with what you were able to build at IndieBio and what's continued to grow there. It's by far one of the most important brands and hubs and communities in this space. It has to be stated as such, so thank you, thank you for all that growth. So with that I didn't last I checked there's over a close to 136 companies maybe more now.

AG: More like 100 More no more than 200. Now, they have 200 a batch

VC: through good play and good language. But then you're going to a place now where you're like, maybe you'll do one or two deals a year right before. What did you learn from that? 130 Plus, when you were there, to now pick the four that you would do here? What's the difference?

AG: A lot? Well, I mean, I think one is that IndieBio What you can remember is the premise: lower the cost of risk to a point where you could take the risk without going out of business multiple times. I got to learn through experience with no one looking over my shoulder so which means I had full responsibility for all decision-making. And so you learn very quickly that way. And you know, when I made the transition, I made the transition in 2020 when everything went nuts in the markets, right during COVID. And I could only imagine how confusing and hard it would be for someone that didn't a lot of have a lot of pattern recognition because I've looked at some of these companies that say like, I think you're great, but look, you're not as far in terms of the derisking to really make what you're asking for a good investment. Yeah, I passed away. It was hard, but you know, now we're on the other side, where the economic climate has changed and, and a lot of things that I learned from experience, raising more than you need but at a higher valuation that you can support creates a condition by which execution has to happen perfectly, and no changes can be made to that well, so there's something called the coffin corner and I'm digressing pretty hard. I hope you don't mind, this is a little bit nerdy, but there's something called the coffin corner in aeronautics. And the coffin corner is the speed and altitude at which an airplane if it stalls the, the forces on its wings cause it to rip off and if it goes too fast, the sweet speed on the wings kaput because to rip off well, there's a there's a speed at which those two there's a point at which those two speeds meet. And that's called the coffin corner. That's why it's called the coffin corner, right? If your speed goes up by one mile an hour you die down by a mile or you die, right. And that's what raising too much that's at too high a valuation. Everything has to execute perfectly and very few people think about the actual airflow changing but you think about the plane right? So there's just no room for error. And I think a lot of you know so I avoided the coffin you know we avoided the concept or Mayfield avoided conflict corner and in that so these are some of the learnings that it took back but like, I think I think you know, the types of founders that tend to succeed there's a lot of there's, you know, many podcasts of content around, you know, just the takeaways from IndieBio, but I think the biggest ones are scientists can actually be our great entrepreneurs. That biology can actually be applied to multiple fields. The cost of biology can be a lot lower than people think. And, and I think that's important that for me that greatest, I think, thing that IndieBio has given her has biggest changer, anybody who has helped creators that scientists that don't have this, the standard pedigrees and the standard network more importantly, the LinkedIn net like the people that are connected to the club, can get a shot, they can actually succeed and create billion dollar plus companies because they have now through indiebio

VC: In that process, are there any other like, odd or interesting or predictable? Patterns? Like second time founders? How much less risky are they? Where are they based? Do they need to be close to you? Can they be anywhere?

AG: That's an interesting question on the location. So for IndieBio, I made it a rule that you had to come to the basement in the BIOS in a basement below. You had to come to IndieBio for the five month program. You could then go back and live wherever you want. But you had to be on site every single day for the program or you cannot get it no matter what. And that made any bio an amazing, vibrant, energetic place. But more importantly, what it did. Several things the founders learn from each other. They created a community, I was able to meet the team, the entire team was able to work with everyone directly on a day to day basis. brushing up against and that I think is more important than anything else. The ability to like real time work on business model design, work real time, work on go to market motion, and strategy, things like that, to get to that demo day deadline where they're ready. So that was all pre pandemic. And if that really shaped how I work today. And the reason also was if you wouldn't move if you didn't want to turn your life upside down for five months in order to have a shot at achieving your dreams. I'm not sure the dreams are really what mattered to you. Right. So it was a forcing functions test. Right? Do you really want it because of the pandemic indiebio When remote for the first time and it turned out that Poe was able to figure out how to get me to run by even better through zoom. So both sides work for me the reason it was it was so important, impactful is now it's series A I focus on Bay Area companies because it is that that very tight involvement and that that mind share with a founder and that really roll up your sleeves and work with them and help them in any way shape or form. I find that a high valence and low latency type of relationship can only happen if it's local. I shouldn't hesitate to say early but I'm worried that I can't do that. If it's like someone in Boston, it's a bias that's been built into me because the bio is better for us. So that's the answer to the location question.

VC: Yeah, and I'm seeing a bit more of a reversion back to the core after COVID. Now it's real. It's not just, you know, corporate real estate lobbying, but like, it just seems to be. You've seen the money coming back to certain areas that get the stats recently, but the number of venture deals done to Bay Area companies is further separated from all other cities in q1. And maybe that was part of opening I don't think that still seems like there's a reversion back to core locations for deep tech.

AG: It will be much harder to move to places like non-traditional tech centers, because the talent is way sparser. So like in Austin, it's easier to find a front end web developer, even in Ohio, whatever, you know, you could find front end web developers. It's gonna be really hard to find a metabolic engineer in some place random like you're going to they're gonna be associated with the top universities in, you know, San Francisco, LA, New York, Boston, right. So I think, you know, for deep tech, that's all it's gonna stay near these universities for a very long time. But Tel Aviv, right, like, and traditionally you've seen that and I think it'll continue.

VC: Let's talk about sort of, you know, milestones now for the sort of set the series A right so are you doing any seeds as well? How are you doing now?

AG: I've done seeds. I'll do all right, checks from 2 million, 3 million from 3 million to 15 million. So if it hasn't been de-risked very much, then you lower the amount of capital at risk, right? Because you're managing the cost of risk, not the chance of risk, right? Or the cost of failure, not the chance of failure. So all things can fail. But if you can show that, hey, it's less likely to fail. It'll be a larger check. Anyway, continue, please.

VC: No, that's really helpful. But I like this cost of failure because customers will tick tock for sure.

AG: Well, it comes from Bass jump, right. So like, you know, when I was a bass jumper, or a rock client, you know, I climbed El Cap, I've done you know, I've managed to risk my whole life. And so, you know, in bass jumping, you know, to the outside person, it seems very binary. Oh, you know, you live or you die. Well, it's actually not true, right. There's a lot of variables that happen when parachutes are made to open like your parachute is generally not going to just not open. So what is it that you're that you're managing, okay, what's the wind like, right? What are all these other factors? And variables that you pay? Do I make the jump or not? That's just like making an investment. The differences between the chances of outright failure and BASE jumping is a lot higher than in the chance you know, but ya know, in Series A, you know, if you don't, if you don't, if your companies don't do well, eventually you will have a job.

VC: Are there different goalposts now, where you're like what, like what will be investable this year versus adsorptive?

AG: So I'll answer your question with a preface. The goalposts are the same. In other words, my goal posts are to invest in radicalized founders with a unique insight into a problem that, if solved, will make World History. That's what my goalposts are. So that hasn't changed. Again, everything I've invested in has high technical risk in my managing about risk because it changes my decision making. I think I've always been of the mindset of reality, and not being taken up by the FOMO that swept the valley in the last two, three years. So nothing has changed for me. I think everything has changed for everyone else. And so you've been out and I think like so because we're an ecosystem. Venture capital is an ecosystem of all these different investors. They are doing investments at different stages. The goalposts for the companies have changed, right, in terms of what the milestones they need to hit in order to hit a certain valuation. Right. So that has definitely changed for everyone else, but mine has always been stringent.

VC: What's happening in the venture market on your side?

AG: These are but right now, I mean, you know, the market is fairly frozen. I don't know if that'll change in the near term or not. But it's very difficult out there. From what I'm hearing none of my companies are raising right now. If you're a high capital cost company with years away from revenues, I think it's gonna get a lot harder. What's changed in the world is interest rates went up so the cost of capital went up. So other investment opportunities are more attractive. So therefore, venture capital sees less right of the overall pie. Another way to say it is if interest rates are zero, then your future returns expectations are zero. So any risk is worth the reward. Right? That's, that's, that's changed. So. So yeah, I think that's the mechanism by which things open up a little bit. I think also the other thing that opens it up in the other direction is everyone starts making money, right? Like, the economy continues to go extremely well. Or like, you know, the economy gets better than it is today. Without inflation and we stick around like this three or four and we hit this Goldilocks sort of situation where everyone looks around and says, Okay, well, carrying cost of capital is higher, but, you know, everyone's generating revenue so we can look forward again, and we want to invest in these technologies. Those are the two ways I see it happening.

VC: What are areas you want to invest in right now that are gonna help reverse climate change or cure disease like specifics, though, you're excited about what you're learning about you're reading about and then like, what kind of traction do you want to see right now?

AG: You know, right when Chat GPT was released, I was using it and I had known some people on the red team for what GPT was. Four was being developed and spoken with some of the people at open AI about various things, but that was obviously an enablement it was like as obvious to me back in when I was doing genetic engineering. I was like, This is so obviously a society changing technology, you know, have to become part of it. It took me 20 years, but here we are. I had that same feeling when I started to use chat GPT four and I think, or three when it was released and it continues to go. So I'm looking for companies that are using these new large language modeling techniques to reverse climate change and cure disease in any way shape, or form. Some areas are by and large. I don't really care about technology. I don't care about anything. I care one that you're a founder that some event in your life has radicalized you to solve the climate change problem or a specific disease problem, where you will work to no end to solve that. Problem. Not necessarily for financial gain, but because you have a personal relationship with that problem. And it manifests in you wanting to solve it through business. And I will support that person with the same passionate fire because that's my mission in life. Generally I want them to have a unique insight into a very specific problem, right, like I said before, and that means they have an angle okay, everyone thinks this, I see this, then, that problem has to be a keystone to a larger industry problem that if you solve that, everything changes, right. So all risks are like let's, let's make it worth something. Let's go try to truly move the needle on history. So I have a list of problems that I have on my phone, that I'm constantly looking for solutions to right. So waste, taking waste products and making them circular. So windfall that I just did with Josh Silverman is a great example of that taking Westman waste methane from farmers, and using that to convert it into organic fertilizer, and creating a franchise business model where that becomes a windfall of cash for the farmer so they can have a new source of income to help make farming profitable. Right like that, in the meantime, if every farmer starts to implement this, you have a decentralized manufacturing network for organic fertilizer to promote food security in the country. To these are like that's a specific problem. But it ladders out into this really interesting change if you play chess moves out.

VC: You have a PT icon, talk. What is this? What does that mean, and how do you do it?

AG: The short story is for us to reverse climate change or cure disease, you have to be a business that disrupts the status quo. Because the status quo builds things sustainably. So if you can't build things in a way that's sustainable for the planet, and also sustainable as a business, then you're not going to create any change. Okay, great. So, how do you do that? Well, you know, I've identified a bunch of financial metrics that you could use as a lens into the viability of your business over time, relative to the public markets. And, you know, at every stage, the private investors are looking towards the public markets for guidance on what they care about. At seed stage. It's so far away that you're kind of like it could be big, like Series A, you know, like a good team, it could be big. Series B, okay, give me some financials. Really give me some series D and E. They're talking about IPO rounds, right? IPO they're talking about okay, quarterly revenues, right? So, it always goes that way. When you think about it, great. So what drives everything on that end? And then how do you bring it back? And so you could structure the beginning of a company in the inception stage, with those destinations in mind, and that's what I do. Some of the principles like what can i give you in a short amount of time would matter. Okay, here's one. So one of the fundamental laws of the physics of business that I think about daily with the companies I work with, is the physics, velocities of cash flow. So all businesses have cash in a bank. They spend that cash to turn it into inventory. They spent more cash to turn that inventory into accounts receivable, and then the accounts receivable turned into cash in the bank. So that's a loop that all businesses have. I think that the companies that can move through that loop, the fastest in any given sector generally have the highest multiples and the winners. So it comes back. How do you improve the velocity of cash flow through a loop through loop, thinking of all ways, and that leads you to fundamental business model design and that's like things like Tesla's you know, having recurrent fees and their navigation system, right? So it's not that I'm not just buying a Tesla. I'm also going to be paying you for other stuff right? So I think there are these little things that can improve their velocity of cash flows on something that you would think is slow a car. So not only is their velocity cash flow higher, but the car market is giant, right? So their team is huge, and they're getting good penetration and good velocity. penetration. So they become the most valuable car company in the world very quickly. That's what I'm talking about.

VC: I know we're up at our time. I could talk to you for hours and days, and I will in the future, and we want to thank you for being on our podcast Arvind.

Thank you so much for reading our latest update from VSC Ventures Fund I. We're in the early days of our long and healthy partnership with all of you, so please reach out to us with additional questions on anything above. Thank you again for your support for our vision and our fund!

Vijay Chattha & Jay Kapoor

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