Dr. Ali Behbahani, General Partner at NEA, on evaluating and investing in cutting-edge life sciences

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Ali Behbahani, M.D., General Partner at New Enterprise Associates

In this episode, we spoke with Dr. Ali Behbahani, M.D., General Partner at New Enterprise Associates. NEA is a global VC firm investing across technology and healthcare verticals; with ~$25B in AUM and over 300 active investments, NEA is widely considered one of the largest leading VCs in the world.

Dr. Behbahani has been with NEA since 2007 focused on the life sciences sector, spearheading over 40 investments including Adaptimmune, CRISPR Therapeutics, Nevro, and many more. Prior to NEA, he held positions at The Medicines Company, Morgan Stanley Venture Partners, and Lehman Brothers, and conducted virology and proteomics research at NIH and Duke University. Ali earned his bachelors in biomedical and electrical engineering and chemistry from Duke University, his MBA from Wharton, and MD from the UPenn School of Medicine.

In our discussion, Ali and I covered:

• The balance between investing and operating experience in order to break into life sciences venture capital
• His framework for evaluating promising life sciences investments, deep-diving into unmet need, technology, and the management team
• Trends around the current life sciences investing landscape, with a view on private vs. public biotech markets at the moment
• Advice for early-career business-minded professionals seeking to break into VC

Start to 7:10: Following passions and seizing the moment

• On growing at the intersection of biology and business: Ali’s love for biology materialized early in his childhood to become a physician, and manifested in the study of biomedical engineering at Duke. During college, he began conducting basic science research, and became fascinated by the potential to spin discoveries out of the lab into a potential medicine for patients. In tandem, Ali’s interest in business grew, and he decided to take a year prior to medical school to join healthcare investment banking at Lehman Brothers. These confluence of passions piqued an interest in VC; in a similar ‘why not?’ decision, Ali deferred medical school for two more years while combining finance and medicine at Morgan Stanley Venture Partners. Ultimately, Ali attended UPenn for his MD/MBA and transitioned to NEA upon graduation.
• On balancing investor vs. operating experience in creating a path to VC: Ali believes there is no prescriptive path or recipe to breaking into VC, acknowledging that great investors can come from a variety of backgrounds and experiences (whether that be developing operating nous or retaining scientific experience via an M.D. or Ph.D.). Instead, great investors focus on the right skills: building an intuition around investments and teams, and spotting scientific trends ahead of the curve.

“I found I was always doing what I was passionate about, and not being afraid to go off the beaten path… There is no right resume or path. I always believe that [having] more varied and different experiences is a good thing.”

7:10 to 24:00: Ali’s approach to evaluating life sciences investments

• On his high-level investing approach: Broadly, Ali seeks out transformational drugs or devices that solve a key unmet need and have the potential to change standard of care. Viewing the financial side of investing as more a ‘means to an end’, life sciences VCs more often focus on finding game-changing technologies that could be opportunities to change the practice of medicine and transform patient outcomes.
• On gauging unmet need and market potential: A key challenge in evaluating an unmet need’s market potential is the competitive whitespace element: how many other early-stage companies are targeting the same area (e.g., CD19 CAR-T). The key is spotting such areas and ‘blazing the trail’ before others, despite imperfect information around the need and technology. Viewing biotech investing akin to a poker tournament, Ali feels key VCs implement their own strategies, but all retain an intuition about the underlying science. Similarly, Ali’s investment decision is often guided by whether he believes a drug or device intervenes in the right place within the disease pathophysiology; the difficulty in biotech VC investing, however, is making such decisions with insufficient information.
• On evaluating risk and probability of success of an early-stage biotechnology: The challenge in investing solely in game-changing technologies is the greater levels of risk that accompany them. An investment diligence typically looks to baseline the available information (e.g., preclinical vs. clinical data), characterize the target and mechanism of action within the disease biology, and hypothesize whether such a drug or device will show impact in a future clinical trial and ultimately the practice of medicine. Therefore, the diligence process seeks to understand the risks involved in these steps, and the appetite to take such risks.

“[In VC investing] we will always be taking some risk. But the worst risk to take is one you didn’t know before you make the investment. So the whole diligence process is to basically figure out what are the risks you are taking and are they ones that you are willing to take.”

• On assessing the founders and management team: Admittedly the most challenging and least quantitative aspect of the diligence, assessing the management team boils down to answering “Is this the team you are willing to back to take this drug or device to market?” — particularly tricky to evaluate in just a one-hour presentation. Despite the conventional wisdom of backing serial, experienced entrepreneurs, Ali enjoys supporting passionate first-time founders who he believes often offer a greater sense of urgency, drive, and determination for success. Despite the difficulty in finding such entrepreneurs, Ali often relies on his “gut feel” for an individual.

[Evaluating management] is inherently even more of an art than a science [than other aspects of diligence]. But I have found that my gut feel on interacting with a person is often good — your gut feel for a person is usually right.

• On Nevro, an example showcasing the investing approach: Nevro is a device company in the spinal cord stimulation (SCS) space for chronic back-pain, a multi-billion dollar sector initially dominated by large MedTechs. Nevro’s innovative technology utilized high frequency (vs. typical low-frequency) stimulation to offer pain relief without numbness or tingling side effects. As per Ali’s framework, such an opportunity highlighted a key unmet need & market opportunity and a potentially game-changing technology whose data “looked too good to be true”. Ali’s investment decision was solidified by Nevro’s management team, led by Wharton classmate Rami Elghandour, who Ali felt was an exciting first-time entrepreneur who had the right sense of urgency and passion to realize Nevro’s ambitions. Despite the low probability of success, Ali led NEA’s Nevro investment, and the company has since IPO’d with an approved SCS device, $350M+ revenue, and ~1000 people!
• On common mistakes made by early bioentrepreneurs: Although most early-stage life sciences ventures tend to focus solely on R&D, the typical pitfalls that sink a start-up center around the company leadership and culture. Given the ups-and-downs of early-stage life sciences, start-ups without a strong team and culture often dissolve and lose talent, whereas companies with strong human capital find ways to overcome such hurdles and achieve success.

24:00 to 31:30: Trends in the biotech investing landscape

• On the recent explosion in biotech VC activity: Recent biotech innovations over the last decade— generating novel therapeutic modalities and targets — have been a key driver of recent biotech VC activity, motivating new investors to rotate into biotech VC. While he does admit there is a potential risk of ‘irrational exuberance’ around valuations, Ali feels there are fundamental reasons of innovation to justify the recent capital inflows in early-stage biotech.
• On the separation between public and private biotech markets: By comparison to other, more transient periods of biotech market softness, the current downtrend of the biotech public markets seem more sustained. However, it is difficult to predict any potential bubble, given the cyclical expansion and contraction of capital. Public markets are often a good indicator for investor sentiment, while private markets typically lag public counterparts by 6–9 months, suggesting a closer alignment between the two in 2022. However, Ali feels that the future for early-stage life sciences investing remains bright.

“There is going to be continued need for drugs and devices to change standard of care. Maybe the massive capital inflows [we see today in biotech] are too much, so maybe that scales back, but I don’t think that means the right companies and technologies don’t get funded. It might not be as easy [to raise capital], but good technologies and teams will still get funded.”

• On how NEA is adapting to these trends: As NEA is stage and therapeutic-area agnostic, NEA partners are able to shift their investing focus depending on where they believe optimal returns lie. Due to NEA’s capital base, their investors can fund start-ups across stages and sectors, and able to support companies across their life cycle — a key differentiator, Ali feels, that separates NEA from some other VC firms.

31:30 to End: Advice to those seeking to break into VC

• Don’t give up: Ali advises everyone to remain persistent in their desire for VC. Recognizing that the journey can be challenging, and opportunities few and far between, Ali believes that with the right level of determination and patience, individuals can find opportunities for venture capital investing.