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Kenneth Aldrich: Funding Startups, IPOs & Dream Toolbox

We are talking to Kenneth Aldrich. He is the Cochairman and Cofounder of the International Stem Cell Corporation, a publicly-traded regenerative medicine company. He is an active member of the Tech Coast Angels, the largest Angel investment organization in the United States. He’s a graduate of Harvard Law and has founded over eleven companies, invested in early-stage financing in 50 of them.

In this episode, if you love startups, if you like talking business, if you like talking money, you're in for a treat because that's what we are talking about. We are talking about IPOs, funding startups, the Dream Toolbox, the commonalities and patterns he's seen in over 40 years of doing this in founders that are successful and not so successful. We also talk about how timing is everything and his insights on that and how you can set yourself up to succeed by putting yourself in a different atmosphere. If that sounds good to you, let's get to it.

Dustin
Ken, it's the 1980s and you had finally found something that was working. It’s the real estate. Having done houses, apartments and building a 30-storey $100 million high rise, but then Reagan signs the ‘86 Tax Reform Act and it completely changes everything. You find yourself needing to reinvent yet again. Take us back to that moment in your life.
Kenneth
It was a very interesting time because to put it in context, in the early ‘80s, financing was even easier to get, particularly for commercial than it probably was in the years that lead up to the 2008 crisis. As a result, we were able to get remarkable financing and there was a remarkable amount of money available from large scale private investors coming out of Japan and elsewhere. What we were able to do when we built our building was we were able to get so much financing from a combination of bank debt and equity investors. Out of roughly $100 million budget, the most money we ever had in the property was about $100,000. We took $3 million out of the first construction draw.
The collapse of the SNL market in the mid-‘80s and the changes in the ‘86 Tax Act knocked that whole business model on its ear. We found we could no longer get financing at anything like 100% financing, which we had been doing. I realized that I was going to have to either find another way with significant built-in leverage or I was going to have to go out and create a fund. Quite candidly, I didn't think I had the temperament to go out and hobnob with institutions and try to get investors to put money into venture funds. The net result was that I looked around for an alternative and concluded that the best alternative available that would enable me to use my own capital and perhaps a small amount from friends and family, would be then the early stage venture capital world. Venture capital was just taking off.
I didn't want to try to form a venture capital firm, wisdom of hindsight, I might have been wise to do that. I noticed my friends who did it are much wealthier than I am, but that at the same time was not something I wanted to do. I got involved in Angel investing and there the theory was that you could get a very large return if you invested right and sure enough, it proved true. One of the early investments that I made took quite a few years, but ultimately it returned over a hundred times the amount of money I invested. Not 100% but a hundred times, whatever that percentage is, I'm not sure. That's how that all happened and took me from the real estate business into the venture capital business.
Dustin
As I've matured, I feel like everything is cyclical. I'm talking about the housing market. There are rises and there are falls. Fashion was now out of vogue and in vogue. Even what the doctors tell us to eat: eat chocolate, don't eat chocolate, drink coffee or don't drink coffee. I feel like there are these cycles and I've only been walking this earth for quite some time. I know you have a lot of experience in many different areas. Did you believe this to be true? The events may change, there may be a crash or there may be a Tax Reform Act, however, there's always this cycle. Is that a fair statement?
Kenneth
It's a fair statement up to a point. Certainly, in all of the large investment classes, there are clearly cycles. There are cycles in the real estate business and in sub-segments of the real estate business. Sometimes housing prices are not a good investment in apartment buildings and office buildings are and vice versa. Also, there's a shift from time to time in terms of what asset classes make the most sense, whether it's venture capital, real estate or something else. There are cycles in that sense. On the other hand, some things change and made cycle eventually but probably not soon. One of those is the commercial financing that we were experiencing in the ‘80s with real estate. I don't think we're going to see the days of 100% financing for real estate soon, but it could happen.
I see it already in some of the trends in single-family housing where people that I know, particularly the younger generation, are able to get essentially 100% financing on their first home. As that moves and progresses, we may find the same thing develops in the real estate market. We will definitely see different trends in the venture capital world. One of the trends that are probably going on or cycles, if you want, is all of the stories that we all read about the so-called Unicorns coming out of Silicon Valley. The private companies with $1 billion or more valuation. The disappointment that came out of Uber and Lyft IPOs, in which the late stage private investors saw shares sold to the public at a lower price, are going to perhaps signal a trend away from hyper valuations in the Silicon Valley type of venture capital. It’s too early to tell on that. Those may be anomalies but in general, I think you're correct but it's very hard to predict those cycles.
Dustin
I'm curious as to what your thoughts on timing are. You founded a lot of different companies. Does timing matter to you in terms of trends or when you've got a deal, you just got a deal and it doesn't matter what's going on around, a winner is a winner? What's your thought around timing?
Kenneth
Timing does matter. I will give you an example. Probably a decade ago, I was presented with a proposal to fund a company that was going to produce meat in a petri dish. They were going to grow beef steak in the laboratory. It was a very intriguing idea and had the technology been fully developed, it probably would have worked. We looked at it and I and the partner of mine at the time said, “There's no way that the public is going to accept this even if we create the greatest product in the world. It wasn't the right time.” A decade or so later, a company went public or is about to, that's producing artificial beef. You definitely can have things that are ahead of their time and so that is a factor. The real question, is there a market or need for whatever the product is that somebody is trying to bring to market? Is the infrastructure around it sufficient to support it?
We couldn't have handled even iPhones, for example, had they come on the market a few years early. I don't think we had the bandwidth. We didn't have all of the things that make the iPhone or the smartphone as valuable as it is now had it come to market earlier and it didn't probably for that reason more than technological problems. Timing does matter and it makes a great difference in whether a company can be successful. One of the ways you find out about timing is to talk to your potential customers, create a prototype and if possible, test it. If it's an internet-based company, there are things that you can do to test more easily than where I usually put my investments these days, which is in biotech and medical devices. Those are hard to test but it's not that hard to find out if there's a demand or a need in the medical marketplace. Timing matters a lot but it's not the exclusive thing.
Dustin
I want to definitely come back to biotech and medical devices but first, I want to go to your roots. You were a farm boy from Oklahoma City studying to be in the seminary, but you ended up into Harvard Law School. I'm always curious for those that go to law school, the story and what prompted you to leave the seminary and go to law school?
Kenneth
I can’t claim that I was a farm boy in Oklahoma City at that time. I was definitely an urban kid, but Oklahoma City only had about 100,000 people when I grew up. I lived within a block of vacant land that my family farmed during the war as a victory garden. I had a lot of farm type roots, but I can never claim that I walked behind a plower or drove a combine. The story though is important of how I got where I got to in school because it illustrates something that is important. That is the value and importance of mentors and their ability to change the vector of somebody's life. The normal pattern was predominant where I went to high school was I would have graduated from high school. I had good grades. I would have probably gone to the University of Oklahoma or Oklahoma State University, gotten a degree and gotten a job somewhere.
Fortunately, I had a family friend who said, “You should get out of here and try the bigger world. I think you could get into Harvard or Yale or one of the Ivy Leagues schools or somewhere else. It would take you out of the atmosphere that you've grown up in.” There’s nothing wrong with where I grew up but it was a small town mentality at that time. He said, “Why don't you apply?” Had he not given me that push, it would never have occurred to me. I applied to Harvard, Yale, Princeton, Stanford and Berkeley and I had a couple of backup schools that I was pretty sure I could get into that would still take me back to the East Coast.
I got in and I managed to get a scholarship, but I still had this implant in my brain that I was supposed to go to seminary and be a preacher. I was fortunate enough to get a scholarship when I graduated from Harvard. It was an odd scholarship. It was designed for people who could honestly say, “I'm willing to go to seminary and consider being a preacher or a minister as they call it, but I probably wouldn't if I didn't have the benefit of the scholarship.” That was me exactly. I went to a very good theological seminary in New York for a year. I realized that it wasn't for me. I'd been pre-admitted while I was at Harvard, I filled out the IBM card and went to Harvard Law School. All of it started with a mentor who said, “You can do that. You can do something greater than what you think you can.”
Dustin
Your mentor steered you on that path. You graduated from law school. You ended up working for a prestigious firm, O'Melveny & Myers, for about four years. I imagine you started making a name for yourself, but you decide this isn't the path for you and you leave. Why did you leave after four years?
Kenneth
I left for a fairly basic reason, but I can illustrate it easier than I can articulate it I suppose. I remember sitting in a meeting. I was in securities law. I primarily did some real estate. In those days, you had these all-day long meetings with the underwriters, the underwriters’ counsel, the company and the company counsel. You drafted a prospectus which went on for pages and pages that probably nobody ever read. I’ll tell you an anecdote. Years later, we always had to send twelve prospectuses or eight then, a large number anyway and they would always get handed to the most junior associate who would take the red-eye special back to Washington so that they could be filed first thing in the morning. It was a giant pain in the neck. Years later, I went back to the SEC. I walked into one of the offices of the SEC and I found out what they did with the extra copies of the prospectuses. Several prospectuses of some company or other were piled up and they made a wonderful doorstop.
We finished one of these long sessions and the underwriters and the company said, “We're going to go off to dinner.” It was a very prestigious restaurant in LA. They turned to the senior partner for whom I was working and said, “Can you guys have the next draft of this prospectus ready for us in the morning?” He said, “Yes,” and we did. I said to myself, “That's okay when I'm a twenty-year-old kid, but this guy is in his 30s or 40s at that point.” I don't want to be there at that time. I want to be on the other side of that table. What I didn't realize was the guys on the other side of the table were paying the bills. When I started paying bills, I realized there was some downside as well as the upside. I committed myself at that point. I said, “I'm going to get in the business side of this and find a way to do it,” which ultimately I did.
Dustin
I wanted to take us back. You came up with this idea of the real estate market was collapsing around you. You say, “I'm going to get into Angel investing.” You did have a background with numbers but that still doesn't seem like a common thing. Generally, you go start a business. You cash out and you've got some funds and now you deploy it into other. How did you make that transition from the real estate business to now looking at deals and investing in people’s businesses?
Kenneth
Probably it was mainly that I was too dumb to know any better. I knew that the real estate business was not what I was enjoying anymore. The rules had changed but I had made some money in the real estate business. I was not by any stretch of the imagination wealthy, but I had enough money to live on for a period of time and some money to invest. What I did is I went out and I found one of the early-stage Angel investment groups called the Tech Coast Angels, which at that time was probably about 30 investors based in Orange County. I would drive down to their meetings and see the pitches made by the various companies. I would put my money in and it would get pooled with other money from other investors. I was able to start out in a small way.
That was fortunate because some of my early ventures were not very profitable as I lost all my money. I gradually began to get better and better at separating the winners from the losers and started making money at it. I would have had a hard time starting as an investor without having a little bit of capital to work with. The other side of it, which you alluded to, is that I often see young investors who have no money, but they have an idea and they are committed to founding a company and making it work. Those are the people that we funded in the early days with the Tech Coast Angels and I still do a fair amount.
What happened in my case was I took a little different route and didn't start any company until I had a little bit of experience. Through the chain of circumstances and opportunities, people brought stuff to me and I discovered that I had a knack for understanding the biotech world and the medical science world. I had a couple of chances to partner with a founder who had no concept of finance or business or how to make it happen but had great ability to do the science. That led me to form the first of several companies that I ended up being the cofounder of. That's how I got into the entrepreneurial side as opposed to the investor side, but I still play in both sandboxes.
Dustin
I would like to do this for the people that are here in this conversation for the first time. Will you break down a little bit the different forms? We've thrown out Angel investing, we've said seed capital, and then there's also venture capital. Will you talk about the nuances or the difference of those?
Kenneth
Let's assume that we have a young entrepreneur that has a great idea for new technology or a new medical device and he goes looking for money. The first level is usually what we call somewhat unflatteringly, friends, fools and family. To the extent that the founder can cobble together enough cash to maybe build a prototype or get some proof of concept that's a beneficial thing to do. The first institutional level is usually Angel investing. It may be an Angel group like Tech Coast Angels or there are Angel groups all over the United States. They can be found with a search on Google on the internet. I've figured there is a website that lists them all. Angel groups will typically be a group of individuals who usually put relatively small amounts of money, $25,000 to $50,000 each, and you pool enough of those people to create the funding that the founder needs to get started. That's the second level.
The next level above that has historically been the early-stage venture capital firms. That game has changed a little bit. It's much harder now and sometimes except in the high-tech area, to find a true venture capital firms in the Silicon Valley model that will fund early-stage startups. We've developed this interim group. There are so-called accelerators, which are sometimes sponsored by a company. There are what we call Super Angels, which is nothing more than Angels like me who are willing to write a bigger check if they believe in the company. That interim phase is often one of the more difficult because there's not an organized way of getting that interim financing that's between the first round of Angel financing and the first VC round.
I see more and more companies, although it's a difficult pattern, some companies have the ability to go public very early. Over the past several years, I've invested in or at least half a dozen companies that were sponsored by a boutique investment banking firms that I know. Their model was we will put in $5 million to $10 million typically of early-stage investor money from their own fund, as well as from a stable of investors like me who will invest with them, to be followed by an IPO within 12 to 24 months. That's becoming and will continue to become an alternative to venture capital financing. It usually comes as common stock. There are a lot fewer restrictions on the company. It however often comes with a lower early money valuation. There are trade-offs on it but that's one of the intermediate rounds. The ultimate goal is either to build the company up to the point where it's salable to a major corporation or that you can take it public, the so-called exit strategy. Probably eight out of ten companies that I’ve founded percentage-wise end up being sold rather than taken public.
Dustin
With your level of success, I would have placed you more in the venture capital realm, just put your money into a fund and have that deployed. What attracts you to Angel investing? That's a greater risk but if you're there earlier, there's a better reward. What particularly attracts you to be more of an Angel or a Super Angel?
Kenneth
It's hard to say exactly but the basic is I enjoy getting involved in the companies when they're very early, when the founder if he's smart, will take some advice. The possibility, if you get in very early, that your potential to have many-fold returns on your money is much greater. All of those factors enter in but the biggest part is it's simply more fun. For me, to put my money with a venture capital firm, I'm a passive investor, plus the fact that if I make my own direct investments, I don't pay 1% or 2% advisory fee and I don't give up 20% of the profits, the so-called carry that the venture capital firms load onto the deal. That's legitimate. When I was raising money and doing private equity for early-stage, I didn't charge a fee to my investors, but I did take a percentage of the overall profits once they had gotten their money back in a preferred return. I prefer to be more active and the only way I can be more active is to either be in the Angel world or would be to form or join a formal venture capital firm. I like being a lone wolf operator. It feeds my ego.
Dustin
Talk to us a little bit about, I don't know if psychology is the word, but you're an Angel. If you are investing in a company, are you coming to give advice? Are you not investing if the founder won't take your advice or have more of a proactive role in the company? How does that relationship work in terms of giving that advice?
Kenneth
I don't make a decision based on whether or not the founder needs or wants to take my particular advice. What I and everybody that I know that's been successful in this game does do is try to pay a lot of attention to whether the founder is open to advise and suggestions or whether the founder knows it all. One of the most dangerous things you can have is a founder who thinks they know it all because we don't, none of us does. That personal element becomes important. I by and large don't try to give a lot of advice to the companies unless they ask for it or unless I see a very obvious need for some input that I can make. I'm much more interested if they put together a management team. Is the management team receptive to the advice that they get, whether it's from lawyers, from me, from investment bankers or whatever?
One of the realities of a startup company is you have to have a flexible mindset because things change. Every company that I've ever been involved in that's been successful has had at least one, what I call near-death experience, which is the product wasn't working, it wasn't selling and cash was running out. Something bad was happening and the management had to make a shift in their strategy. If you don't have a management that's flexible and able to do that, you're very likely to have a failure. On the other hand, the company that I invested in that was the most successful of all the ones that I've done as a passive investor, went through two or three shifts in their business strategy before they found the one that turned them into a multibillion-dollar company.
Dustin
You founded over eleven companies and just as impressive funding over 50 more. Have you identified commonalities and patterns? You talked about founders with the right mindset and flexibility. Are there any other patterns that you've identified over your years in terms of successes over the failures?
Kenneth
Probably the most significant other than the temperament and the skill sets of the founders. Obviously, you want founders who know what they're doing in their area. The most significant that I can think of is founders who've taken the trouble to figure out what their market is. I can't tell you how many founders have come in looking for funding either to me directly or through Angel organizations and they've fallen in love with their idea, whether it's usually a piece of technology. I said, “Who are the potential customers?” They will give me some very broad description like, “There are 30 million people who have this particular need and all we need to get is 1% of it.” The minute they start talking like that, I know they've not studied their market.
If they can't tell me where their competition is coming from and where their potential customers are, it means they haven't done their basic homework. Very rarely will those companies ever get funded, certainly not by me and generally, by nobody. The ones that do sometimes will say, “We don't know yet. We need to figure this out. We think we're right, but we want to do some test marketing. That's part of what we're using the money for.” Those people sometimes get funded. One of the most telling questions that you can ask any startup company is, “Who's your competition?” If they say nobody, you know they haven't done their homework. Everybody, if it's a decent idea, there's already competition somewhere. There's something that you're trying to replace with your new product or there are other people trying to do what you're trying to do and you're doing it better.
Dustin
I've always come from the world where they call it affectionately sing for supper which is essentially going out and killing what you need to eat that day. Meaning that I've never taken funding for businesses. I've always had either leverage credit cards and do it the old-fashioned way. This world of funding and being unprofitable for quite some time is a new thing for me. I've always had to be profitable, otherwise, the business is going under. Talk to me about that mindset that some companies do need funding. They do need a runway to get it off the ground, yet at some point, you're an investor, you want a return. How do you think through that? How much time does a company need to get to profitability?
Kenneth
That's the ultimate question. I and most everybody that I know that's been successful in what I do looks very carefully at what the exit is going to be and what the probable exit is. There are certainly a lot of companies that don't lend themselves to doing what you have done. I admire you for being able to do that because it takes a lot of guts and it's tough to bootstrap something up from your own funding, your credit cards or whatever. A lot of companies, particularly biotech companies and the internet so often where they have to build out a user base before they can monetize it. There are a whole variety of companies that simply require capital either for equipment or early-stage marketing or technology development. What I try to do is look at the time that it's probably going to take them to get to some event that will enable me or enable the company to be sold to be taken public or start generating cashflow that it can distribute. Usually, it's one of the first two and sees how long is that going to be? How much capital do I think and the company think is it going to take to get there?
Usually, there is more than one round of financing. Ideally, what you want to do is raise a relatively small amount of money at the beginning to do your proof of concept because you know that's going to be at a pretty low valuation of what you have. The trick is most entrepreneurs don't raise enough. They get a little bit too greedy and they say, “I don't want to give up more than X percent of my company at this low valuation,” and they run out of money and then they often have to give up even more at a lower valuation. That's a trap and I always try to get investors that come to me to make sure they raised enough money to get to that next flection point. The point where new investors can come in and say, “They've proven this. The original investors put their money in a pre-money evaluation of $1 million. I'm willing to value it at $5 million or maybe further down the road, even much more than that.” They see that it's beginning to succeed and the patterns are there.
Ultimately, you've got to say, “I think it's going to take five, six years or ten years,” whatever you think it is and what's the exit going to be? You can go to the market and look at companies in similar areas and see what a comparable company is sold for as a multiple of revenue or a multiple of whatever the market is using as a measuring stick. If my company reaches that, what's my return going to be? Sometimes the answer is if this company is as successful as it can hope to be, the rate of return is going to be crummy. You try not to invest in those. Usually, the founders have thought about that and they will come to you with a wonderful hockey stick that says, “We will spend money for the first two or three years,” and then suddenly, revenues, users or whatever will soar and you have to evaluate that. The ultimate is when am I going to get my money back if things go well and what's my profit at that point based on the data that I have? It's a lot more art than it is science but that's the basic approach.
Dustin
You were instrumental in providing funding for Green Dot. For people that don't know, that's the world's largest issuer of prepaid debit cards. For those that don't traditionally use banks, the unbanked as it's called. Green Dot is listed on the New York Stock Exchange. What did you see in Green Dot when you first started? What was the opportunity there?
Kenneth
Before I do that, I'm going to give a small commercial for Green Dot because they've gone way beyond debit cards and now have a bank. They are a bank holding company. They have a bank called GoBank and that's important not because they need the business but because they have evolved as a company. Almost every successful company does evolve, expand or contract as the markets adjust. They have done that with great skill. What I saw at the beginning of that was a founder with an unusual amount of enthusiasm for general knowledge about the business. He didn't know much about the debit card business. He'd come out of the radio business. He had great enthusiasm, had done his homework, had done some basic early stuff, and he had some money of his own in the deal. He had skin in the game. His name is Steve Streit and he's still one of my favorite people. I'm still on his board.
What Steve had done was he'd gone out and found the first user or the first distributor, which was Rite Aid, who would sell his cards. He'd found a bank that would be the processor for the cards. He'd put the pieces together so that when he came to us, he said, “I need money for this. This is how I want to spend it. This is my plan.” We looked at it and I funded it. I twisted arms and got a number of other people in the Tech Coast Angels to also jump on board. It was not an easy sell because there was no industry there. To the extent, there were a couple of big companies, Visa and maybe American Express at that time had a debit card that you could get. The banks had their own debit cards that debited against the bank account, but this was prepaid and nobody was doing all that well.
Steve's original concept was teenagers can't buy on the internet. Unless they can get their parents' credit card, how can we give them access to this new world of the internet? The thought was to let them take their allowance, go into Rite Aid, buy a debit card and it will look like a Visa or Mastercard and they can play like the big people. That market never developed into anything significant and he had to make several pivots and ultimately, turned out that their real market was the same market demographic as Walmart. It was people earning $50,000 to $100,000 a year without extensive bank balances and for whom banks were expensive. That was the background but what started it was the enthusiasm and the knowledge of the founder. The fact that he'd thought through where he wanted to go and had a very clear pattern for how he was going to be successful.
Dustin
I think of myself when I was younger and doing eBay. I'd never thought of that as an idea, that I could take my allowance and get a credit card because I wanted to do things online. That's pretty fascinating.
Kenneth
Nobody did until Steve and a few others decided to do it. It's now a multibillion-dollar industry.
Dustin
I want to talk about the advice you have for the entrepreneur and their mindset around how much equity should a founder be willing to part with to get to that next level. What's your advice there?
Kenneth
There's no easy formula but clearly, in the first round of funding, you want to keep as much control as you can because you know there's going to be subsequent funding and you want to keep voting control as long as possible. Eventually, as you get bigger or as you go public, you're going to have a minority interest probably. Very few managed to maintain a majority interest all the way through multiple financing. You want to keep as much as you can early on. That's a negotiation between you and the investors. Most people will come in and say, “My idea and the work I've done so far is worth $1 million or $5 million or whatever.” It's usually in that range if it's a true startup. The investor will probably go do his own math and come back and say, “I'm willing to value it at X.” The founder's value is Y and there's a gap.
That's where I tell people to take a good look at that. Realize that this is early money. If it's a question of whether I give up 10% or 20% to get that capital that gets me started, don't be foolish and don't be greedy. If you've got a good investor who's likely to be able to put more money in or help you raise more money if they get a little extra benefit by taking that early risk, they've earned it and you haven't hurt yourself any. I see more founders get in trouble because they get enamored of the fact that they have this wonderful thing. They don't want to give up any amount of equity or any meaningful amount. Investors like me will say, “It's great. I wish you well but I can't make any money on that deal and so we pass.” If you show me as an investor how I can make, depending on the timeframe, five to ten times my money, if everything goes right, then I don't care what the percentage is.
Dustin
I want to ask about the next one, International Stem Cell Corporation. You founded it in 2001. What opportunity did you see in the marketplace at that time? Now, stem cell is all the vogue, but this was back in 2001. What's the story there?
Kenneth
The story behind that was that we were just beginning to see the potential of using what was then called embryonic stem cells, which are the cells in the body that can become anything. Depending on the signaling they get from the other cells, they can become heart, liver, leg and arm, whatever at that early stage. Those are only embryonic or technically, they're called pluripotent stem cells or omnipotent, some people use. We saw that work being done. It was started by a gentleman who's still a friend of mine, Dr. Mike West, who now runs a company up in San Francisco and he is still working with stem cells.
Our first thought was that you might be able to use stem cells to treat diabetes and so far, that's been an elusive target. I don't think anybody's succeeded at it yet, although there's still work going on. Beyond that, we realized there was huge public hostility in one segment of the population to using the embryonic stem cells. If you have certain religious beliefs, you believe in the moment of conception, which is when you get an embryonic stem cell, you have a living human being and that you were killing babies by using embryonic stem cells. The logic was flawed in that case because of the way in which they were derived. You were going to lose that argument because there was too much emotion involved. The two scientists that help me found it, found a way to create cells that functioned like embryonic stem cells but never involved the use of a fertilized egg. It was a process called parthenogenesis.
That was the genesis for us to create the company. We said, “We can do something that nobody else is doing in a field which has already proven to be fertile for investment as well as potential.” We did that. We developed the parthenogenic thing. The company itself got caught in the 2008 collapse. At the time I left, it was public and doing pretty well. I think they've had some rough times since then, but the concept was there, and we raised quite a lot of money and we hit the high point. I had several hundred million-dollar market cap on an initial investment of the less than $5 million.
Dustin
It blows my mind. I haven't been in this field of biotech and medical device. I'm fascinated like you're bringing new science to the marketplace. How could you even begin to know how much money it's going to take to get to that level? Do you have any insights there? It is unfathomable to me. It seems like it would take hundreds of millions of dollars to get something like that out to the market.
Kenneth
It can take hundreds of millions of dollars, but the startup company is very rarely going to be the one who spends those large amounts of money. In the biotech world and to some extent it’s the same in the medical device field, there are stages in it. You can look at what it's cost other companies and do your homework online on their websites to get to phase one trial, which is the earliest. You've done the animal work and phase one is the earliest human trial, which is a safety trial, “Is this thing going to kill people?” That's usually measured in a few million dollars, not hundreds of millions. You can look at other companies, you can get some idea and there's a range, depending on the disease and what you're trying to treat to get to phase two.
Phase two is the first one where you begin to test, “Does this stuff work?” You're also testing the dosage if it's a drug. What's the optimal dosage? What dosage doesn't work and so on? Those are more extensive trials and they can cost at the wide range, $20 million to $30 million or something like that. If you have good animal data early and you go through each of those steps, it becomes relatively easy to raise the money for the next stage if you're having success. I have what a friend of mine calls the Aldrich Rule for investing in early-stage biotech, which is I look at what's likely to happen, what are the events, particularly if it's a company that's going to go public because that's often the exit.
What events are likely to occur in terms of clinical trials, animal data, etc. before there's any major risk of something bad happening, like the FDA saying, “You flunked your phase three trials.” I like to get in early and support the company through the early phases. When you get to phase two trials or you get at the beginning of phase three trials, that's when either you have to raise a lot of money from the public and be public and say, “I'm going to go for it,” which becomes at that point fairly high risk. That's also the time when you are likely to attract investment from a Merck or a big pharma company that will buy your company at a big premium.
Dustin
Your mission now is helping the youth build an entrepreneurial mindset and lead them to lives of financial abundance, which is right in line with what we do here at WealthFit. I'm curious, how are you going about this?
Kenneth
I will go back one step if I may. I started out being a mentor and a teacher in entrepreneurial classes in inner-city charter schools. I realized that I was having an effect, but it was one or two students out of a class of 30 or more that would see the light in the course of a semester, and I was never going to reach very many people that way. I started a blog that is still up. It's a website with 21, I think it is, five-minute audio blogs about various parts of entrepreneurship and that's at DreamToolbox.com, if anybody wants to check it out. That had some success but I realized and all of my friends who were knowledgeable said, “Ken, if you want to reach kids, you've got to write a book.”
I was beginning already at that point to realize that a lot of people were listening that weren't kids and that was fine too. I spent more time than I would like to remember writing a book. I'm proud of it. I think I did a pretty good job with it. It's called Dream Toolbox: Building an Entrepreneurial Mind and Financial Abundance. That was launched. It was officially published. It's on Amazon now, just type Dream Toolbox in the Amazon search. The goal of that is not to be a how-to book on starting a company, but more a book of how to go about changing core belief systems from “I can't” to “I can.” There's an old saying of Henry Ford that I've quoted more than once in the book, which is “Whether you believe you can or you believe you can't, you're right.”
It is about belief systems and it's about seeing obstacles in the path of whatever you want to do, not as barriers, but as puzzles to be solved. Almost every obstacle that an entrepreneur has is usually a puzzle to be solved. Many give up or keep banging their head against the same obstacle without trying to figure out how do we get around it? How do we get through this maze? What else can we do? If I can change those mindsets for people so that they believe that they can fulfill their dreams, then I've met my goal whether it turns out to the young people as I hope it will or people who feel stuck in their careers and in their life.
Dustin
I understand you have gone into inner cities with this message. You go all over wherever the youth are that are receptive to this message. What has surprised you the most? Talking with kids and getting them at that level where they're not an entrepreneur, they are not a founder, they haven't been exposed to that. What's been the most surprising to you?
Kenneth
The most surprising to me has been that what motivates and changes lives for these kids is not necessarily a body of information. It will sometimes be and often is one off-hand comment that I will have made in the classroom or I will have made online or in a phone call, that suddenly triggers something, some spark in the student who says, “I can do that.” I will never forget I was on a panel for a group called Academy of Business Leadership, which are young kids, mostly inner city. I was talking about something related to entrepreneurship. Afterwards, one young girl, about sixteen or seventeen, came up to me and she said, “You said,” and repeated some phrase that I had made, “That's changed my whole way of looking at this. Would you be willing to help me? I've got a business idea and I want to start a company.”
Fast forward a year or so. I did give her some help and some advice, but she did all the hard work. She got funding from an incubator in Orange County, California and the last I heard was she’s on her way to starting her business. Those things can happen and they're always a surprise, but the biggest surprise is the students who suddenly realize, “There's a world out there that's bigger than I thought it was.” My job future is not defined by, “Would you like fries with that?” Instead, it can be anything. That's what thrills me.
Dustin
I'm excited that you've done so much. You're paying it forward, back to that mentor that altered your destination or your journey. It's incredibly humbling that you are paying it back forward and doing that in the lives of many others now. What else are you working on? What's the future look like for you? What are you most excited about?
Kenneth
I'm still doing deals. I still invested in two biotech companies that are in the early stage. I will probably never quit doing investing because I love it. When I was a kid, I loved to play Monopoly and this is Monopoly with real money. I'm not going to give that up. I'm looking for ways to expand what I was trying to do with Dream Toolbox. The thing I'm thinking about is that there's a stage that's almost earlier than the entrepreneurial stage or maybe they're in parallel, but we have a lack in our school systems of financial literacy being taught to the students and a lack of financial literacy among the teachers who are teaching the students. I think we have to address that. My project, which will probably change before it gets completed is Financial Literacy in 30 Minutes.
You can reduce down the key elements that someone needs to know about finance and business and how it works and where they fit in it, into a very condensed, whether it's a lecture, a blog, a podcast or a pamphlet. I'm not sure yet, but it can be done. It's critically important because if the teachers don't understand the basics, they can't help the students. If the students don't understand it, nothing is going to change. When people don't understand the basics of financial literacy and entrepreneurship and how capital markets work, they're going to make bad decisions both personally and bad decisions in government that they vote for. It's a tragedy waiting to happen, but we can change the vector of that. An educated population on finance and financial literacy could help to change the world. That's what I'm hoping for.
Dustin
I love what you're up to. I love the message and taking it to the youth. It's something that we're doing here at WealthFit as well. We want to support you. If people want to keep tabs with all the projects you're up to, maybe pitch you an idea or two or help you further with the Dream Toolbox message and other things that you're working on, what's the best way for people to reach you or find you online?
Kenneth
The best way is to go to DreamToolbox.com. We have links on there that would enable people to get to me. That would be the easiest and best way. I don't have a website for purposes of incoming requests because they were overwhelming. Most everything comes by way of referral, but people can reach me that way and that's the easiest. You can also Google me and I'm sure that that will give you all kinds of other information but it's not as direct as going to DreamToolbox.com and roam around there. I wish I could tell you exactly where on the site the link is. I have someone who maintains that site for me because I'm semi-computer illiterate when it comes to doing it. I can fund companies, but I sometimes can't run the computer.
Dustin
That will be a true test for the motivation of the person looking to get ahold of you. If they're motivated enough, they will be able to find you with what you've given them.
Kenneth
I urge them to read the book. All the proceeds from the book or any profits from the book go straight back in one form or another to youth education. I'm not trying to make money from it, but I do urge people to squander a few dollars and buy it and read it because it could change their lives.
Dustin
Ken, thank you big time. I encourage people to do that as well. I appreciate you being on the show and what you're up to in the world. Thanks for sharing your wisdom with us.
Kenneth
Thank you for letting me join you.

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