20/20 GeneSystems (October 2018)

Deal

https://www.seedinvest.com/2020.genesystems/series.b

Decision

Yes.

Calacanis

CheckPass/Fail
1. Ssyndicate lead has >5 years investing and >1 unicorn investmentFail: Uncertain, this question may be defunct for all SeedInvest deals
2. A startup that is based in SVFail: Based in Rockville, MD (e.g. NIH, Bethesda, government $$$ land)
3. Has at least 2 founders Fail: No. One founder. But founder doesn’t seem to be going anywhere.
4. Has product in the market Pass: Yes, $313k in revenue 2017
5. 6 months of continuous user growth or revenue.Pass: Has years of revenue
6. Notable investors?Pass: Ping’an Ventures 中国平安
7. Post-funding, will have 18 months of runway Pass: Yes, $107k in burn a month from 2017, $3.4MM raised, so 34 months of funding at current burn (though burn will increase for growth.)

Why Investing

  1. It’s hard not to resist the hard, unequivocal impact that early stage detection of cancer would have for the world. In addition, the science of using biomarkers instead of genetic code makes sense. Looking at Ian York’s answer here the biggest cause of cancer was smoking, which would highlights that external factors have more impact on getting cancer than genetic predisposition.
  2. Having Ping’an money is an enormous deal in a “Chinese” partner. The Chinese play—partnership with Chinese investors, access to Taiwanese patients data for building the AI/ML modelset for detecting cancer—makes sense though is high risk, high return. Not only is East Asia a better market for getting raw datasets, the regulations of entering the market, leveraging an American brand, and willingness to pay may be different. 
  3. Has more revenue than four competitors in pre-revenue, public cancer detection companies. Immunovia is $18k ($321MM cap) and OncImmune is $250k ($96MM cap.) 

What the Risks Are (Thiel)

  1. Valuation risk
    • Pre-money valuation is $26MM, roughly $3MM raised. Even if grows to the size of largest competitor to penultimate customer, that’s only 11x or 3x return.That being said, I see now that Thiel’s attitude is fundamentally different than Calacanis. The former believes in making as few deals, poring as much capital into those deals. I believe Founders Fund makes less than a dozen deals a year. Jason Calacanis believes in investing $250k in 50 companies over 3-5 years to have an outsized chance at a unicorn. If you invest in a company valued at $5MM that turns into $1BN, then you 200x your investment. In addition, every decision is always in comparison to its alternative.Low fee index funds offer 7% annually. This translates to doubling one’s money every 10 years. Well-executed real estate can achieve 10%-20% annually. Assuming the best case case scenario of 20% returns, that’s doubling one’s money every 3.5 years. In 10 years, that’s 7.25x your money in a decade. With angel investing, assuming worst case scenario of 2x-3x your money every 5 years, that’s 4x-9x your money in a decade. Specifically with what I’m doing on SeedInvest, it seems the unrealized net IRR of 17.4% seems to put it into the same average/”worst case scenario” outcome: https://www.seedinvest.com/returnsThis portion of the deal memo ended up running longer than expected, but worth translating into an expanded “risk vs. return” of investments section. 
  2. More risks in the Peter Thiel 7 questions section.

What has to go right for the startup to return money on investment

  1. Our success depends heavily on our cancer screening tests.
    • patient acceptance of and demand for our tests;acceptance in the medical community;successful sales, marketing, and educational programs, including successful direct-to-patient marketing such as online advertising;the amount and nature of competition from other multi- cancer screening products and procedures;the ease of use of our ordering process for physicians; andmaintaining and defending patent protection for the intellectual property and our ability to establish and maintain adequate commercial manufacturing, distribution, sales and CLIA laboratory testing capabilities.
  2. The success of our tests depends on the degree of market acceptance by physicians, patients, and others in the medical community.
    • its demonstrated sensitivity and specificity for detecting cancers;its price;the availability and attractiveness of alternative screening methods;the willingness of physicians to prescribe our tests; andthe ease of use of our ordering process for physicians.
  3. In short, the product needs to work, at the right price, where 20/20 needs to execute one of the four markets (US, CN, TW, HK) well. In addition, as the company scales, it needs to build a serious data team for the machine learning value it’s trying to make. 

Thiel

Seven Questions

  1. The Engineering question
    • Risk: what if the product isn’t 10x better? Is biomarker cancer screening a breakthrough technology as opposed to incremental?
  2. The Timing question
    • Boon: The convergence of cheaper storage, data processing, and the competitors, makes the timing seem good. 
  3. The monopoly question
    • ???: Screening for cancer early seems like a niche to me, but unsure what it actually is in the greater health sphere. 
  4. The people question: 
    • Risk: at the moment, this seems like the Jonathan Cohen & Friends show. That being said, Mythical Man-Machine and solopreneur doesn’t mean badness, but would need to see some VPs in the future.
    • Only one founder. Seems to have demonstrated ability to fundraise, get government contracts, and establish interesting partnerships. Biggest most immediate shortcoming I can see is no technical cofounder who is a ML/AI whiz, as the company appears to be selling its data play as well.
  5. The distribution question
    • Tremendous risk: trying to distribute to the U.S., CN/TW/HK all requires government approval of some kind. That being said, unsure if this is any individual firm risk so much as market risk in general. 
  6. The durability question
    • Boon: if the engineering and distribution question are both solved optimally (able to test for cancer early very well and can get it in customers hand), 20/20 would become the gold standard for a long time. 
  7. The secret question: 
    • Risk: 20/20 thinks biomarkers are the way to create breakthrough technology. We shall see. 

Four Characteristics

  1. Proprietary technology: 
    • Is biomarker detection 10x better than genetic testing?
  2. Network effects: 
    • Yes.
  3. Economies of scale: 
    • Yes.
  4. Branding: 
    • If this works, then the brand will be great.

Updates

05/22/20: Investor Update

May 22, 2020
Dear Muhan,
Earlier in the week we issued this press release announcing that we are now offering in our CLIA Laboratory a new FDA Authorized coronavirus antibody test developed by Roche Diagnostics. According to the manufacturer the test has a specificity greater than 99.8% and sensitivity of 100%.
The product, which requires a tube of blood to be collected and sent to our lab, is an addition to the rapid COVID-19 antibody blood tests that we have been distributing since late March. We have sold approximately 75,000 such rapid tests over the past 60 days (at an average selling price of about $17 per test).
Antibody tests measure prior virus exposure. While not yet fully proven to guard against re-infection for an extended basis, past experience with similar viruses suggest that immunity may last a few months to several years.
Companies are beginning utilize these tests to assist in making decisions about bringing staff back to the workplace, while public health departments are using them to assess the regional spread of the virus.
Please introduce us to your employer or local health department and receive a free early cancer and COVID-19 test for you and a family member. 
In addition to reporting the presense or absence of these antibodies we are collecting clinical and demographic information that will be combined to build one of the first machine learning algorithms to help predict individuals’ risk of re-infection.

08/11/20: Series C Update

https://www.seedinvest.com/2020.genesystems/series.c/capitalization

Raising a new round at $38MM valuation, an increase of 46% on a $26MM valuation when I invested in Oct 2018.

Review these deal memos every time the startup raises a new round

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