June 29, 2010

Introducing the Kauffman Fellows Report


Eric Müller

Welcome to the inaugural edition of the Kauffman Fellows Report, an annual, journal-style compilation of executive reports authored by members of the Society of Kauffman Fellows and examining aspects of the innovation process.

We are pleased to circulate these ideas for consideration and comment to our extended community of innovation practitioners. From investors and limited partners to entrepreneurs, engineers and scientists, from corporate development groups to university and government policy experts—we look forward to the conversations that these articles will trigger.

The simple charter governing the Kauffman Fellows Report is as follows:

We aspire to advance the art of capital formation and fuel innovation around the world. To that end, the Kauffman Fellows Report will share the latest findings from across the Society of Kauffman Fellows. The focus will be on applied, industry solutions that foster the vital process of new business creation. Contributors will examine trends with a pragmatic eye and propose original yet practical approaches that may be adopted and embraced in the years and decades to come. We invite each of you in the community to engage with us in this critical evaluation of real-world challenges and opportunities in front of us all.

The context in which we publish this first edition is challenging. The conventional wisdom tells us we are in the early days of a multi-year phase of correction and contraction. The size of funds can be expected to continue to ratchet down in a steady, discomfiting compression. The LP base—the sources of capital that fuel the industry—remains depleted compared to recent historic norms. Limited public market returns and IPO appetites continue to put downward pressure on M&A valuations. In short, everyone in the food-chain has been forced to improvise and will continue to have to cope with these ill effects. To this sober conventional wisdom we submit one small proviso: Beware the monolithic consensus, as it can often outlast its explanatory value.

Countervailing trends include the emergence of thriving new regions (both on the supply side in engineers, scientists, entrepreneurs, and inventors striving to build new businesses; and on the demand side in the up-and-coming middle classes with the means and freedoms to purchase and improve their living standards). There also appears to be broad corporate and governmental conviction about the importance of innovation in achieving economic growth, and a recognition that the best method for stimulating breakthrough innovation is the startup model (independently-financed, complementing and challenging incumbents).

We hope you enjoy this first report from some game-changing players working in the innovation process. We look forward to hearing your ideas on new models and approaches for start-up investing and capital formation. Please share your thoughts on these articles with us, and consider submitting an abstract of your own for an innovation-centric article for the next issue of the Kauffman Fellows Report.

To introduce you to this first edition of the Kauffman Fellows Report, we would like to share the story of Jeff Stein (Class 10). It is the story of one Kauffman Fellow’s success, but it is also the story of the Kauffman Fellows network in action and illustrates well the vision we are working to fulfill.

Lessons from the Front Lines of Innovation: Jeff Stein and the Story of Trius Therapeutics

The Kauffman Fellows Program curriculum is continually refined and updated to incorporate the latest thinking from the field, direct from leading practitioners. Our goal is to envision how innovation investing will be conducted 10 or 15 years in the future, and help assure that the best new ideas are circulated and become fully absorbed across the industry and around the world.

The story that follows exemplifies the value of the Kauffman Fellows network, with its blend of international, interdisciplinary diversity and intimate, trust-based relationships. When goals and values are aligned throughout a global network, people are suddenly able to converse and share ideas efficiently and productively. Connections that would otherwise be unlikely or impossible become low-cost and natural.

For Trius Therapeutics, five Kauffman Fellows at four different firms came together to invest in two rounds of funding. Although it was certainly not the only reason, we do believe that their Kauffman connection helped accelerate discussions. We hope this type of collaboration (much like the early days of venture) is a harbinger of how things will be done again in the future.

The story of Trius Therapeutics is one of the discovery, development and commercialization of new antibiotics for the treatment of virulent, drug-resistant pathogens (a.k.a. “superbugs”). It starts in the fall of 2006, when Kauffman Fellow Jeff Stein—a proven biotech startup executive and UCSD- and CalTech-trained microbiologist

and biochemist—took his first steps down the path that would lead to the formation, funding, and growth of the company. Today, not quite four years later, Trius is preparing to conduct double-blind, Phase 3 clinical trials. They have filed their S-1 registration statement with the SEC in preparation for an initial public offering to fund these more wide-scale Phase 3 trials.

Without delving too deeply into the science of Trius Therapeutics, this article touches on the Kauffman Fellow connections and collaborations that Jeff Stein was able to tap in his pursuit of new treatments that combat serious, multi-drug-resistant bacterial infections, such as those caused by methicillin-resistant Staphylococcus aureus (MRSA).

Lessons from Trius Therapeutics

Three key lessons surface from Trius. They are generalizable and echo similar findings that have been resonating across the Society of Kauffman Fellows from a spectrum of IT, Cleantech, and Life Science startups.

Lesson 1: Startups Need Both Global Reach and Intimate Trust

The world of funding and building innovative new technology companies has truly become a global endeavor. Success demands international awareness, reach, and sensitivity—at the same time, it is an intimate experiment requiring openness, risk-sharing, information-sharing, patience, and agility.

Lesson 2: Venture Firms that Embrace Flexible Investor/Operator Roles Reap Rewards

The investment that firms make in treating individuals—their own staff and the entrepreneurs they back—with respect and career-path flexibility fosters loyalty and can generate returns, frequently far beyond the scope of the project or engagement at hand.

Lesson 3: Formal, Outside-the-Firm Apprenticing and Networking is an Investment that Should Deliver Measurable Returns.

Committing the necessary time, resources, and energy—relatively early in an individual’s investing career—toward fulfilling a formalized curriculum and apprenticeship such as the Kauffman Fellows Program, delivers measureable advantages to both the individuals who participate in such a program and their investing organizations. Specifically, participation in a proven, specialized network like the Society of Kauffman Fellows allows an expansive scaffold of familiarity and trust to develop. This translates to improved access to dealflow, trend-awareness, syndication opportunities, and shared best practices.

Each of these benefits accrues not only to Kauffman Fellows, but to the representative firms in the form of ever greater visibility, credibility, access, and expertise. Ultimately, all of this drives success in business-formation and bolsters a fund’s return on investment.

The Story

Jeff Stein (Class 10) made his first connection with a Kauffman Fellow while at Quorex Pharmaceuticals, a San Diego-based pharma company that Jeff co-founded in 1999, where he served as Chief Scientific Officer until shortly before they were acquired by Pfizer in 2005. The Series B round of venture capital for Quorex was led by Prism VentureWorks, with Kauffman Fellow Brendan O’Leary (Class 8) eventually taking over that investment for Prism.

As Pfizer’s acquisition of Quorex was finalizing, Brendan O’Leary encouraged Jeff to consider applying to the Kauffman Fellows Program so that he too could become a Kauffman Fellow. The idea appealed to Jeff, and he was accepted as a Kauffman Finalist. However, he still needed a venture investing job to matriculate into the program. Through the Kauffman Fellows network, Jeff was introduced to Mike Powell of Sofinnova Ventures. Sofinnova was looking to bring an anti-bacterial expert on board and, as it happened, they knew Jeff because they had earlier considered investing in Quorex. They were pleased to be able to bring him on board as a Kauffman Fellow and Venture Partner in their San Francisco office.

The fit when an individual joins a firm is always an important issue, and the role of Venture Partner turned out to perfectly match both Jeff’s and Sofinnova’s ambitions. Jeff’s goal was not at all to pursue becoming a general partner. Rather, his desire was to prepare the way for the founding of a company that he would ideally lead. Jeff knew this was not the norm and so he was clear about his intent from the start.

The explicit plan that Jeff and Sofinnova sketched out was for Jeff to scan, worldwide, for in-licensing opportunities that could be the basis for a new company. Once identified and secured, Jeff would transition and join and help build the new company on a full-time basis. Sofinnova was entirely comfortable with this investor-entrepreneur-operator approach and it also suited Jeff well as a Kauffman Fellow, allowing him to structure, refine, and report out on his 12-18 month worldwide scan as part of his required Kauffman Fellows field project.

At about this time, Jeff was recruited to become Chairman of the Board of Rx3 Pharmaceutical—a 7 person SBIR grant pharma research firm based in San Diego. The Rx3 team represented an up-and-running, accomplished research and discovery platform. What Rx3 lacked was just what Jeff was seeking: a promising pipeline of compounds.

Enter Kauffman Fellow Goro Takeda (Class 11, the following year of the Kauffman Fellows Program), who was also at Sofinnova. Goro was someone who brought deep relationships within the pharmaceutical industry in Japan and Korea, and he was happy to survey possible in-licensing opportunities for Jeff. As Goro recalls:

Jeff’s commitment to building a world-class antibacterial company was very exciting and motivating to me personally, and I was willing to pay significant attention to this project and leverage my personal network to find and introduce potentially interesting opportunities from Asia.1

Over time, Goro was able to surface a handful of promising leads for Jeff to consider. Again, from Goro’s perspective:

Cross-border licensing discussions—particularly those occurring between Asia and Europe or the United States—can be challenging due to differences between cultures and differing business practices. I was very comfortable introducing potential Korean and Japanese partners to Jeff because I knew Jeff would take good care of each company. Jeff really brings a global mindset and is sensitive to cultural differences and nuances.”2

The opportunities surfaced by Goro triggered a substantial follow-up of due diligence including recruiting advisors familiar with the particular molecule classes. The results were particularly intriguing from a South Korean drug developer, Dong-A in Seoul, and Jeff began discussions to in-license the Dong-A molecule to San Diego-based Rx3 (which would be renamed TriusRX), where Jeff knew he already had a great Chief Science Officer and Chief Financial Officer, as well as ready labs and infrastructure. Rx3 also had no existing institutional capital so it was an ideal platform for getting the Dong-A pre-clinical molecules in the clinic.

As Jeff was coming to the end of his two-year Kauffman fellowship, he was proud to be able to share the substantial progress he had made with his Kauffman Fellow classmates. Sofinnova would be leading a milestone-based $20M Series A investment in Trius, with Jeff coming on board at Trius as CEO. Nina Kjellson at Interwest and Brian Atwood at Versant would also be investors. Kauffman Fellow Brendan O’Leary and Prism VentureWorks (Jeff’s early investor from Quorex Pharmaceuticals) would also participate as co-investors in the Series A, as would Kauffman Fellow Goro Takeda—who by this time had established the Tokyo-based venture fund FinTech Global Capital (FinTech was Goro’s Kauffman Fellows field project, but that’s another story).

With a first round of funding secured, the focus for Trius was to build up their clinical, regulatory, and manufacturing expertise while commencing Phase 1 trials by January, 2008. Their plan was not to fund-raise again until fall of 2008. However, wider investor interest was sparked by a presentation at the JP Morgan Life Sciences conference in January, 2008. The idea of conducting a “pre-emptive” Series B quickly took shape as three firms issued term-sheets to Trius. One of the firms was Kleiner Perkins.

The Kleiner bid had the sponsorship of two more Kauffman Fellows: Risa Stack (Class 2) and Jessica Owens (Class 12). As Risa Stack recalls:

We were looking for a late-stage therapeutics opportunity for the Pandemic and Biodefense Fund. When Nina told me about Trius, I thought it would be a great fit. I had met Jeff when we looked at Quorex some years before and thought highly of him. After our first meeting with Trius, I wanted to invest; Jeff had a compound, Torezolid, with a lot of promise, and he had recruited a great development team. It was one of those opportunities where everything felt good—the management team, the compound, the market, and the co-investors.3

And so, in March, 2008, a $30M Series B round of investment was led by Kleiner Perkins, drawing on Kleiner’s $200M KPCB Pandemic and Bio Defense Fund, and with all of the Series A investors maintaining their participation.

Trius’s lead product is what is called a second-generation oral oxazolidinone antibiotic, which is an antibiotic that treats so-called Gram-positive bacterial infections, including methicillin-resistant staphylococcus. While these serious, life-threatening infections are typically associated with hospital-based domains, Trius believes that they have recently begun to spread to the community at large, mutating into hyper-virulent strains, heightening the need for effective antibiotics. According to Trius Chief Medical Officer Philippe Prokocimer, M.D.,

The increasing prevalence of bacterial infections caused by MRSA in our hospitals and communities [is an indicator of] the potential for an oral drug to confront this epidemic. Over 90% of the pathogens infecting patients enrolled in our Phase 2 trial were Staphylococcus aureus, of which nearly 70% were MRSA. Oral torezolid appears well tolerated and effective as a once-daily therapy to quickly eradicate MRSA and other Gram-positive bacteria causing complicated skin infections.4

One of the clinical investigators of the Phase 2 study, Dr. Joseph Surber, Chief Medical Officer, Southeast Regional Research Group, Columbus, GA, commented,

I was impressed by the rapid clinical effect of oral torezolid in curing severe skin infections caused by MRSA and other gram-positive pathogens. The nature of such infections usually warrants use of an IV antibiotic, but the trial results indicate that oral torezolid successfully treated these severe infections quickly and effectively.5

As Jeff completed his Kauffman fellowship, Trius Therapeutics had initiated its first Phase 1 clinical trial of Torezolid. The 88-subject single and multiple ascending dose trial would test tolerability, safety and pharmacokinetics of the oral form of the drug and compare its properties to those of Zyvox®, the only marketed drug in the oxazolidinone class. Jeff described this early clinical trial at the time:

Our goal is to demonstrate the potential of Torezolid to provide patients and clinicians with more convenient dosing and a broader safety margin than the current standard of care. Torezolid’s potential for once-daily dosing, supported by results of prior exploratory human testing in Korea and preclinical animal data, is expected to translate into an increased therapeutic index and thereby provide an important option for the treatment of serious infections caused by drug-resistant bacterial pathogens.6

As of this writing, with Phase I and Phase II trials completed, Trius is now making preparations for Phase 3 clinical trials for their lead product: torezolid phosphate (TR-701), an IV- and orally- administered second generation oxazolidinone, for the treatment of serious gram-positive bacterial infections, including those caused by methicillin-resistant Staphylococcus aureus (MRSA). According to Trius, the continuous increase in bacterial resistance to currently marketed drugs means that serious infections are becoming more difficult (if not impossible) to treat, which has led to a clear need for novel therapeutics to treat multi-drug resistant bacterial infections. Trius hopes that (TR-701) will be able to treat multiple clinical indications, including acute bacterial skin and skin structure infections (ABSSSI), community acquired bacterial pneumonia (CABP), hospital acquired pneumonia (HAP), ventilator acquired pneumonia (VAP), bacteremia, and osteomyelitis.

Trius’s potential market share is striking. There is currently only one approved first generation oxazolidinone, linezolid, which is the leading branded antibiotic for serious gram-positive infections, with reported worldwide sales of $1.1 billion in 2008. As a second-generation oxazolidinone, the Trius compound is chemically differentiated from, and designed for improved potency, resistance and spectrum of activity over, the first generation of clinically developed oxazolidinones. The specific potential advantages that Trius believes torezolid phosphate (TR-701) offers include: greater potency, once daily dosing, a shorter course of therapy, in vivo bactericidal (i.e., bacterial killing) activity, lower frequency of resistance, activity against linezolid-resistant bacterial strains and an improved safety profile.


Building new technology companies has never been easy. Rarely are the obstacles fully anticipated, or the costs fully apprehended. Often the finish line is not even visible from the starting blocks. Given the gauntlet of challenges that each new founding team will face, there is precious value in the ability to nurture collaboration partners, to strategically mitigate risks, and to access experienced, independent-minded counselors.

Jeff and the Trius team were able to combine trust and global reach within Sofinnova Ventures as well as across several Japanese and Korean labs and several participating global venture firms (see Lesson 1). From Nina Kjellson’s perspective, the opportunity just felt right:

While InterWest had been looking for an antibiotic company to invest in for some time, and while we had known Jeff Stein from his Quorex days, it was the coming together of all the critical pieces: a strong discovery engine; a lead candidate ready for clinical trials; the beginnings of a capable management team; and the strong rapport among the several investing venture firms that led to the leap of faith that a biotech start-up inherently requires. It would make us very proud to see Trius become the poster child for a Kauffman Fellowship success.7

In addition, Jeff and Sofinnova Ventures and the founding team at Rx3 were able to embrace flexible roles, allowing Jeff to smoothly transition from Venture Partner and Rx3 Chairman to CEO of the renamed Trius Therapeutics (see Lesson 2). And, finally, Jeff also benefitted from the encouragement of Kauffman Fellow Brendan O’Leary to consider the program in the first place, which served as a powerful stepping-stone to his current role running Trius (see Lesson 3), a company that enjoys the support of four Kauffman Fellows in addition to Jeff.

At each step of the way in company formation—conceiving, researching, vetting, validating, launching, funding, recruiting, announcing, adapting—there is a need for grounded, informed decision-making. Trusted colleagues must be able to be open and forthcoming across firm boundaries. The best venture capital organizations routinely draw on the wisdom and judgment of their veterans, and temper this with the vision and enthusiasm of their emerging generation of leaders. Because they are vested in each other and open and clear about their goals, such firms can empathize with the entrepreneurs they support. Conversations can be honest and direct, and priorities can stay tightly coupled to results. These attributes have benefited Jeff Stein and Trius Therapeutics, and they are equally applicable across all innovation sectors, stages, and geographies.

Brendan O’Leary reflected,

Trust is the crucial ingredient. We all see such wonderful opportunities and interesting people, setting the right filters can be extremely difficult. Through my work with Jeff at Quorex I’d come to really know and respect him as a scientist, as an entrepreneur, and as a person. When he called with the Trius opportunity, he didn’t have to say it twice. I knew what he had been trying to do and I dropped everything—and had my partners drop everything as well, so we could give him our full attention.8

From our vantage point at the crossroads of the Society of Kauffman Fellows, we have the opportunity to be in dialog with each of the fifty to sixty funds that are actively sponsoring Kauffman Fellows in the two-year program. We also maintain formal and informal contact with the entire diaspora of fellows, mentors, partners, and friends of the program who have taken part in the Society of Kauffman Fellows over the years. This set of connections forms a steadily humming grid of feedback and ideas—a magneto of insights, opportunities, and resources that get dispatched and shared.

This journal is one way for us to broadcast results and proposals with the larger innovation community. We hope you will connect with us and evolve the discussion forward.

Eric MullerEric Muller

As Entrepreneur-in-Residence and previously Chief Operating Officer at the Center for Venture Education, Eric works closely with the venture capitalists who make up the Society of Kauffman Fellows. A veteran of several startups, Eric currently serves on the Board of Vancouver-based portal company The Level. Eric was CEO of the Java performance company Optimizeit, which grew to thousands of customers before being acquired by Borland. Earlier Eric worked with Guy Kawasaki at Garage Ventures, investing in the founding teams of Pandora, Psionic, and Gravitate. Previously, at Andersen/Accenture and Arthur D. Little, Eric worked with a range of technology firms on new product efforts, marketing and sales. Along the way, Eric’s views have been published in the New York Times, the Washington Post, and MIT’s Sloan Management Review. Eric earned a BSEE from Carnegie Mellon and an MBA from Yale.

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1 Pers. comm., 6 April 2010.

2 Ibid.

3 Pers. comm., 5 April 2010.

4 Quoted by Trius Therapeutics, Inc., “Trius Completes Enrollment In Phase 2 Clinical Trial Evaluating Torezolid (TR-701) In Patients With Complicated Skin And Skin Structure Infections,” 2009.

5 Quoted by Trius Therapeutics, Inc., “Trius Announces Positive Results From Phase 2 Clinical Trial of Torezolid in Patients With Complicated Skin and Skin Structure Infections,” 2009.

6 Pers. comm., 23 March 2010.

7 Pers. comm., 30 March 2010.

8 Pers. comm., 1 April 2010.

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KFR Volume 1 Cover

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