Peter Thiel’s Breakout Labs Shows A New Way Forward

The traditional seed funding model rule-of-thumb, at least according to legendary tech investor Fred Wilson, is about discovering *product market fit*.

“The first step is building a product, getting it into the market, and finding product market fit. I think that’s what seed financing should be used for.”

This is one reason why existing seed funding models tend to be tech-centric. In the *fail-fast* world of software development, early-stage costs are low, iteration is rapid, and valuation multiples may explode as soon as a product (even a free product with no immediately obvious revenue model) finds a user base and shows rapid growth.

Tackling the most difficult and seemingly intractable human problems — for example treating or curing disease, scaling alternative energy solutions, environmental remediation and so forth — requires a different approach than that of software development. To build a viable business in these hard-science areas often requires a material degree of technology validation work. This is one reason why the first step in tackling the great challenges of our day often involves university research. Because the critical step between the university research lab and the “seed” round, where important experimental and validation work is accomplished, typically requires alternative capital resources, such as grants or venture philanthropy. This technology validation stage is perhaps the highest risk part of the discovery process and unfortunately where few seed or venture funds participate.

Tremendous opportunities often lay in blazing new trails. That is exactly what Peter Thiel, of Paypal and Facebook folklore, is doing by taking the path less traveled with his San Francisco-based Breakout Labs. Thiel has attracted philanthropic sources designed to support early-stage hard-science companies in areas ranging from food science and biomedicine to clean energy.

The incubation program offers its portfolio companies $350,000 in non-dilutive capital to advance their proprietary technologies along with access to strategic mentorship and networking opportunities. As a nonprofit, Breakout Labs leaves all intellectual property to its beneficiaries, taking instead what it calls “a capped royalty stream and a small percentage of equity” while introducing each company to a syndicate of potential follow-on investors. All of Breakout’s revenue funnels back into its general fund for future investments

Theil’s approach of a capped royalty, small equity percentage and evergreened revenue is a creative way to tackle problems that are often not amenable to traditional seed funding models. If the seed-stage model pioneered by Breakout Labs works, and spurs other novel approaches to seed funding and accelerating the incubation of hard-science, humanity will certainly be the long term beneficiary.

On Tuesday, September 9, 2014, our friends at Janssen Labs will be hosting a meetup with Peter Thiel’s Breakout Labs.  If you are an entrepreneur with scientific research or technology that improves human life, you should attend. Details and RSVP HERE.
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We are lucky to know Breakout Labs portfolio company, Siva Therapeutics, quite well, CEO Len Pagliaro shared his view with us,

“Breakout Labs, and the Thiel Foundation, have the foresight and risk tolerance to take bets on early stage, promising, but “out of the box” technologies that have great promise. They are providing leadership in early stage, hard science investments, and their vision has been critical in moving Siva and the other Breakout Labs companies to the next stage in development. What may be less visible is the strong network that Breakout Labs is creating among its awardees and more broadly. It is much needed and very productive in the current life science investment environment.”

At Collective IP we look at university and research institution innovations on a daily basis and recognize the inherent challenges and long-term promise of ushering innovations into the hands of driven entrepreneurs. Of critical importance is keeping those entrepreneurs housed and fed through the critical early-stage. We hope to see more labs following Thiel’s “breakout” model come into being. They are desperately needed if we are to grow startups that address serious human and planetary needs, and not just the latest mobile app or cloud software.

 


  • David Poticha

    I for one hope more models like this develop, but it takes great risk tolerance and tremendous patience. The hard sciences are not about rapid returns, and the failed investment models of the 90’s and 00’s which saw investors flee biotech en masse failed for those two reasons. You have to go in knowing many expensive and time consuming ventures will fail at the very last moments (i.e. Phase 3 clinical trials), and that even when you’re successful it could be a decade before you see a significant return if you’re in one of the more slowly developing arenas. I applaud what Breakout Labs are doing and would love to see more such funded companies and research emerge (especially here in Colorado).

    • http://collectiveip.com Adam

      You nailed it @disqus_aOlqAPSKkj:disqus