The OSF Playbook: A Journey to Investing in Future Sci-Tech

Authors: Randal A. Koene, Lily Kim, Lisa M.P. Munoz, Jeff Klunzinger, Bryan Johnson

Executive Summary

Investing in complex science and technology is hard, with higher risk and longer time horizons for returns. This is a mantra too often heard in venture capital (VC).1 For futuristic science and technology, the playing field is even more challenging. Unlike Internet technologies, emerging domains such as synthetic biology, artificial intelligence, and space exploration lack a vibrant ecosystem of competing and complementary investment playbooks. Yet these domains are rapidly growing and are already working to address some of humanity’s most promising opportunities and vexing challenges.

OS Fund, which aims to fund the best sci-tech start-up companies working on quantum-leap discoveries, wants to improve the landscape for VC science funding. We set out to demystify the due-diligence process for science startups in emerging domains by creating an open-source decision-analysis model. The goal was to learn, share with others, and collaborate with the broader community.

We started with one playbook, synthetic biology, and one company to test the model. The power of the model is in identifying the right questions to ask and in iteratively capturing interactions between multiple, often interdependent factors. Using such a quantitative method takes us beyond the capacity of human working memory.

The model maps through various possible outcomes rather than only focusing on risk and reward. It estimates a multiple on investment for different scenarios. This “expected return multiple” measures the overall attractiveness of the investment.

Despite the quantitative nature of the model, we gained the most insight from the process of building the model, not from an absolute output number. The decision model produced insight both at the individual company and industry levels. It is thus a powerful tool in tackling emerging domains where there is little past guidance on investment evaluation and strategy.

We consider this work our initial contribution to the increasingly open and collaborative culture in emerging science and technology investment. While many firms have been investing in biotechnology for decades, a fewer number have invested in emerging science and technology such as synthetic biology. We hope that our approach, detailed in this paper, will be helpful to others in their own decision-making processes and spark interest from investors new to the space.

We also recognize that many investors have given these issues thoughtful consideration, and we believe that understanding, insight, and expertise comes from many iterations across different companies and situations. By openly sharing our methodology, we want to encourage other science-focused funds to share their thoughts and methodologies. Encouraging investment in emerging science and technology to create a viable path for its growth is key to rewriting the operating systems of humanity.

  1.  Despite evidence to the contrary in some science sectors, such as biotech. Bruce Booth, March 2015. “Buying Time in 2014: Comparative Holding Periods For VC-Backed M&A Events”