“It’s been a long, a long time coming. But I know change gonna come, oh yes it will” -Sam Cooke
During this past summer, I noticed a resurgence of Sam Cooke’s “A Change is Gonna Come” on news broadcasts and in social media – and appropriately so. What a fitting ballad to capture the essence of struggle, pain, and optimism associated with the widespread protests, civil rights discussions, and, of course, the “COVID moment” our country has been enduring.
Now that we’re in the midst of the release of very promising COVID-19 vaccines, however, I find the song taking on a different meaning for me. Does this other meaning have to do with alternative investments? You bet! While on the surface, the developments of Pfizer and Moderna’s mRNA vaccines have happened at “warp speed,” there is a much longer history behind these beacons of hope that makes for a captivating tale loaded with setbacks, perseverance, and – yes – investment lessons. Here we go.
Rather than early 2020, our story begins in the 1990s, when Katalin Karikó first worked on the idea of using messenger RNA (mRNA) to fight disease. A more detailed history of this discussion can be found in this fascinating STAT article (which I encourage you to read), but the following quote sums up Karikó’s premise very well:
“It all made sense on paper. In the natural world, the body relies on millions of tiny proteins to keep itself alive and healthy, and it uses mRNA to tell cells which proteins to make. If you could design your own mRNA, you could, in theory, hijack that process and create any protein you might desire — antibodies to vaccinate against infection, enzymes to reverse a rare disease, or growth agents to mend damaged heart tissue.”
What a great idea! And just like that, Karikó pitched her concept to some Silicon Valley venture capitalists, she became uber-wealthy (a term that I just realized has taken on an entirely new meaning since the creation of actual “Uber” wealth…and, yes, it takes me years to pick-up on very obvious concepts), and synthetic mRNA has been curing people globally ever since! The End.
As I tried to lay the enthusiastic sarcasm on as thick as possible in the previous paragraph, you’ve hopefully realized that’s NOT how the story goes. It’s not even close. Although she believed very strongly in the idea, Karikó received little financial or professional support for synthetic mRNA development. She applied for grant after grant but was denied continuously, and, in 1995, UPenn even awarded her efforts with a demotion. “She had been on the path to full professorship, but with no money coming in to support her work on mRNA, her bosses saw no point in pressing on.”
“Somebody keep tellin’ me don’t hang around…But I know change is gonna come. Oh yes it will.”
Despite the roadblocks and lack of recognition, Karikó kept the faith in her idea. But it wasn’t until after ten more years of trial and error – in 2005 – that she and a colleague, Drew Weissman, finally solved the problem of suppressing the body’s negative immune response to synthetic mRNA and were able to publish their success in scientific journals. THAT’s when the “vaccine sprint” really began. The eventual cofounder of Moderna (a name that is a play on “mRNA” or “ModeRNA”) and BioNTech (who has partnered with Pfizer) took notice and continued developing the idea from there. But there are a few more plot enhancements we need to add to the story:
- Although Karikó & Weissman’s papers were published in 2005, Moderna wasn’t founded and funded until 2010.
- Moderna raised $40M in venture capital in 2012 and a total of $2 billion before it went public in 2018. At that time, it raised $600 million of additional equity, at a valuation of $7.5 billion, and set the record as the largest biotech IPO.
- BioNTech went public in October of 2019 at a valuation of $3.4 billion, raising $150 million in the process.
- While they were undoubtedly making progress, both companies raised all of that money and went public before they had a single approved product. The COVID vaccine would be the first (currently just an “emergency use authorization”), finally solidifying the merit of mRNA technology in a big way.
- As Wired magazine points out in their take on the same story, mRNA was first discovered in 1961; the scientific community was already wondering about its healing abilities in the 1970s, which led to exposing Karikó to the notion in 1976, in Hungary.
The world certainly owes the nine scientists who discovered mRNA back in 1961 an immense debt of gratitude, as they kicked off a series of events that may ultimately prove to save an unknowable amount of lives, businesses, and wealth in 2021. But our 2021 gratitude certainly isn’t filling their 1961 passbook savings accounts. While they ultimately did something truly great for the world, it was not necessarily an investable idea on which they could capitalize at the time.
More Than Just an Idea
Thanks to the hard work, dedication, and ingenuity of Karikó, Weissman, and many others in this story, the application of synthetic mRNA has become one of the greatest investments of our time – at least for those involved at the right stage. The people who have already garnered uber wealth in this story fall mainly into two groups: those who founded the companies to apply the science and those who funded them. Founders and funders. Entrepreneurs and venture capitalists.
Officially, venture capital (VC) is “a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential.” For practical purposes, it’s the realm of funding early-stage companies by providing resources or money. VC situations can range from you taking an ownership stake in your sister’s new business idea to large venture capital firms injecting funds into what they hope will be the next Google.
From an alternative investment perspective, this story is useful to help illustrate the struggles, fortitude, pitfalls, abject failure, and (sometimes) incredible successes that are a part of the world of venture capital:
- VC investments can take a very long time and be very illiquid. While it was clear that mRNA was a “great idea” back in 1961, it took many years of research and development to harness that greatness. And there was no real way to invest in this for decades, other than funding developmental research. Also, even just the investment phase can easily take over ten years (Moderna was relatively short-term, going public only six years after the initial VC investment), during which time there is no way for investors to get their money back.
- “Failure” is expected. Our mRNA story is essentially forty years of repeated failure, followed by extremely successful investments over the past ten years. Venture capital funds typically make many investments because most are expected to fail; they rely on just a few companies to pan out well and bolster overall returns for investors. It is highly speculative, risky, and commonly results in a total loss. At the same time, a failed investment can be an essential learning experience that leads to an exceptional investment opportunity in the future.
- A groundbreaking concept can make for both a profitable business and a lucrative investment; it can also be either of these things or neither. While Moderna raised a lot of money, it generated $1.5 billion of losses through 2019. For early investors, it created massive wealth. A success story and a good investment? Absolutely. A profitable business? Not yet.
- In terms of investment analysis, startups cannot be viewed in the same way that established businesses are. VC investors have to believe in the idea and believe in the team (and perhaps hope that other investors will be willing to buy shares at higher and higher valuations in the future), as there may be little financial data or track record to incorporate into their decision.
- It’s highly risky, and there are many unknowns. Profitability can often be irrelevant for early-stage companies. If a business is already profitable, then much of the exponential (aka “hockey stick”) returns that tend to occur early on have likely passed.
In a pessimistic sense, the idea that early investors can benefit significantly from other investors piling-in and pumping up a company’s valuation sounds very much like a Ponzi scheme (minus the “premeditated ill-will” aspect). However, this is arguably true of many investments. If the price doesn’t rise perpetually, and especially if an enterprise goes bankrupt, someone will eventually bear the loss. More realistically, investors assume investment risk, and that includes the risk of loss. And more optimistically, VC fuels a culture of innovation by allowing entrepreneurs to survive while pursuing the next great idea.
The in-progress synthetic mRNA vaccines may prove to help hundreds of millions of people in the coming months, and the potential application of this technology for the future may be far more impactful still. I, for one, am thankful for the dedication of the many scientists, researchers, entrepreneurs, and, yes – venture capitalists – who played a role in this incredible fifty-year “overnight success” story that now offers a light at the end of the COVID-19 pandemic tunnel. “It’s been a long, a long time coming, but I know a change gonna come. Oh, yes it will.”
Until next time, this is the end of alt.Blend.
Thanks for reading,