Investing in Tech That’s Worth the Wait
Liquid separation wouldn’t top most people’s lists of world-changing technologies. But consider this: every day, US companies tease apart chemicals in billions of reactions to make food and beverages, drugs, and fuel. In fact, this process is so common in industrial settings that it uses as much energy as all US cars and trucks combined. “It represents 12 percent of all US energy consumption,” says Shreya Dave, cofounder of the year-old startup Via Separations. “It’s 80 percent of the cost of making a chemical, 75 percent of the cost of making a pharmaceutical.”
That’s largely because separation technology relies largely on a wasteful and time-consuming procedure that’s hardly changed in 100 years: using heat to boil and condense chemicals into a pure form. Filtering liquids with a membrane is more efficient, but it’s difficult to find one stable enough to avoid reacting with the chemicals it’s supposed to filter, or fine enough to filter nanoparticles. While doing her doctoral research on water desalination in Jeffrey Grossman’s lab at MIT, Dave helped develop a membrane that’s both pliable and chemically stable. The key was oxidizing graphite—the same stuff used for pencil lead. And by precisely tailoring the structure of the graphite, Dave and her colleagues optimized the membrane to filter chemicals in the sweet spot between one and 100 nanometers, as many industrial processes require. Dave and her business partner, Brent Keller, hope their membranes can transform a large sector of our economy and our environment—and potentially provide a bonanza for investors as well.
That’s the kind of idea MIT had in mind in 2016 when it launched The Engine, a new venture fund–slash–accelerator–slash–laboratory to help early-stage startups negotiate the chasm between a promising technology in the lab and a world-changing business. “We go after things that we think can have huge impact in the world, and help them shorten their path to market,” says CEO and managing partner Katie Rae. The Engine invests in what it calls “tough tech” startups—those that require expensive specialized equipment or longer time frames than is realistic for most venture capital funds, which want their investments to pay off in 10 years or less. While it pursues big ideas that might take more time, Rae adds, “the trade-off is that the markets have to be enormous.”
Located behind an unassuming storefront in Cambridge’s Central Square, The Engine’s 26,000-square-foot headquarters is home to seven startups, including iSee, which is working on artificial intelligence to make self-driving cars more practical, and Analytical Space, which is planning to launch a network of low-orbit satellites to transfer large amounts of data from space using lasers—at speeds 10 times faster than radio for about the price of a cellular data plan. The Engine provides resources to help these startups develop their technologies, with investments to date of between $500,000 and $2 million and use of dedicated office space and shared lab and fabrication space for as long as they need it. Rae and her team also offer business advice and connections to help them find customers.
With this support, Dave and Keller have figured out how to make their membranes 25 times larger over the past year, expanding them from the size of a poker chip to the size of a pie. But the bigger challenge is to create something reliable enough to use in a chemical plant or petroleum refinery. In the meantime, Rae and her team have helped Via Separations approach customers in the world of food production. “We are getting our prototypes in the hands of customers so we don’t spend the next two years developing the perfect membrane that doesn’t solve any of their problems,” says Dave.
The idea for The Engine emerged as MIT was finalizing real estate developments in the biotech and software hub of Kendall Square. “We were focused on what MIT could do that would be additive and beneficial,” says executive vice president and treasurer Israel Ruiz. In conversations with scientists and engineers, he learned that the biggest need was in bridging the “valley of death” between producing an innovation in the lab and getting it to market. That is particularly difficult in industries that require sophisticated hardware, such as alternative energy, transportation, space, and medical devices, and thus may need more capital investment up front than digital ventures. “They said, we need money, but we also need access to infrastructure and specialized equipment, and we need to create a community,” Ruiz says. “Those elements got put together in The Engine.”
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The concept dovetailed with MIT president Rafael Reif’s vision of “innovation orchards,” an idea he expressed in a 2015 op-ed in the Washington Post. Such environments, he wrote, could “provide what universities alone cannot: the physical space, mentorship, and bridge funding for entrepreneurs to turn new science into workable products.” He added: “This would make investing in tangible or tangible-digital hybrid innovations no riskier than investing in the purely digital.”
Investors who fund these kinds of technologies might have to wait longer to see a return, but that doesn’t mean they’re performing acts of charity. Joe Lassiter, a Harvard Business School senior fellow who has studied alternative models of venture capital, thinks many investors are perfectly happy to wait for a company to develop so long as they feel they’ll get a greater payoff in the end. And Lassiter thinks the payoffs could be sizeable. Because many of these ventures have had trouble getting funding in the past, they represent “untapped reservoirs of solutions,” as he puts it. “Many of them are to some extent undervalued.”
Engine CEO Rae got interested in developing early-stage ventures while working at Microsoft Startup Labs in Kendall Square. “In late-stage investments, you are looking at numbers and scaling,” she says. In early-stage investments, by contrast, your money goes to developing the product itself.
She left Microsoft in 2010 to run the Boston office of Techstars, an accelerator program that gives startups $120,000 and three months of mentorship. Later, she raised her own early-stage fund, Project 11 Ventures, with colleagues. Then MIT called. The Institute put up $25 million to seed the fund, and Rae helped raise $200 million overall with contributions from private investors and large family funds.
“We are boldly moving into this world with a lot of resources,” says Ruiz. “We are not going to be a small player.” By design, however, MIT is leaving the investment choices up to Rae and her team, which includes her former Project 11 partner Reed Sturtevant, now general partner of The Engine. She admits they are exploring uncharted territory by taking risks on unproven technologies, but she insists that’s by design. “We are like, ‘We have no evidence this is going to work, but we’ll figure it out,’” Rae says. “For a lot of people, that causes extreme anxiety, but for Reed and myself, that is just our comfort zone.”
The Engine’s First Startups
Here’s a rundown of the first seven startups funded by The Engine, which aims to support 50 to 60 companies in various stages at any one time.
The Technology: Using lasers to transmit data from space
How It Could Change the World: Developing a network of data-relay satellites for remote sensing data could allow planet-level analytics.
The Technology: Next-generation sulfur-based batteries
How It Could Change the World: Enabling renewable energy to replace fossil fuels for the baseload on the power grid.
The Technology: A digital “nose” using gas-sensing technology
How It Could Change the World: Making a dent in the $1 trillion a year lost from wasted food, and connecting the real world of smell to the digital world of data.
The Technology: Artificial intelligence for self-driving cars
How It Could Change the World: Giving self-driving cars the ability to make common-sense decisions about how to navigate.
The Technology: Automated cell engineering platform
How It Could Change the World: Allowing faster development of bioengineered chemicals for drugs, biofuels, and more.
The Technology: Membranes to filter nanoparticles
How It Could Change the World: Dramatically reducing the energy costs of a process crucial to producing food, pharmaceuticals, and fuel.
The Technology: Low-frequency ultrasound for drug delivery
How It Could Change the World: Rapid, targeted delivery of drugs for hard-to-treat conditions like diseases of the gastrointestinal tract without injections or pills.
The trick to investing in unproven technologies, Rae says, is to methodically remove as much risk as possible. So a venture must check a series of boxes before The Engine will consider investing. First, she says, “there has to be an entrepreneurial team that believes this is their life mission.” Second, she looks for an idea that has the potential to create a huge impact. And third, she looks for evidence the company has a clear plan. “They say, we can do any of these eight things, and we chose the third one, and here’s why. They can tell the logical story of why and how it gets them systematically from A to B,” Rae says. “If it’s the right team, the right plan, and it seems to be on the right path, then we start to get super excited.”
Rae and her colleagues are helping create a new model, similar to the way a few VC pioneers recognized 20 years ago that biotech required a different funding model from high tech, says Amir Nashat, of Polaris Partners. “You can think of investing as pattern recognition software,” says Nashat, who is on The Engine’s Investment Advisory Committee. “We know biotech. We’ve learned all the lessons about how to deal with the risk. We would never invest in early-stage space technology.” It takes someone familiar with that industry to recognize the opportunities.
The Engine isn’t the only organization courting investors for such startups. Another is Propel(x), a San Francisco–based investment platform that Swati Chaturvedi cofounded four years ago. The group grew out of an angel investors’ group for MIT alums that Chaturvedi began after graduating from Sloan. “We know from experience that companies developing new breakthrough technologies can have a lot of impact and offer huge returns in the long run,” she says.
Among Propel(x)’s investments is a company that’s also part of The Engine: C2Sense, an MIT spinoff working to give computers a “sense of smell” through gas-sensing technology that can detect, say, hazardous fumes or spoiled food. “The Engine is uniquely positioned because they have introductions to every lab and new technology at MIT,” she says. “Therefore, they have access to resources and information many investors don’t.” The Engine’s seal of approval can help startups attract more traditional venture firms, such as Polaris, which is already investing in Suono Bio, an Engine startup creating technology to deliver medicines using ultrasound.
Suono Bio cofounder Carl Schoellhammer initially worked on the principles behind the technology as a doctoral student in Robert Langer’s lab at MIT, using low-frequency ultrasound to physically push molecules into tissues—and even pieces of DNA directly into cells. The technology could be crucial for treating diseases of the gastrointestinal tract, where medicines can quickly degrade. “There are a tremendous number of medicines that sit on pharmaceutical companies’ shelves, and can’t be worked on because they can’t get them where they need to go in the body,” he says.
Patients suffering from inflammatory bowel disease, for example, can experience debilitating pain and chronic diarrhea that makes daily tasks impossible. Currently, they are often treated with medical enemas that require them to hold medicines inside for more than 10 hours to be absorbed, Schoellhammer says. “If you have frequent bowel movements, trying to retain something for that length of time is impossible.” By contrast, his technology would allow patients to self-administer medicines in a matter of minutes.
While the funds The Engine has provided have helped the company hire three full-time employees, the more important resource for Schoellhammer has been the physical space. Upstairs from The Engine’s offices and conference rooms is a prototyping space, where Suono Bio’s employees can build the metal shell and electronic guts for the devices that use ultrasound to deliver medicines to targeted tissues. Then the researchers can take their creations next door to a wet laboratory, where they can test them on pig intestines to judge how well they work. Down the hall is a machine shop full of every tool and piece of hardware imaginable, as well as machines for 3-D printing.
Having those facilities readily available has accelerated the development process, says Schoellhammer. Without them, he would have had to sign a contract with a manufacturer to work on the device, potentially waiting weeks for each small change, and paid thousands of dollars to rent and furnish a lab that fit the startup’s needs. “To have all of this under one roof is just incredible,” he says. Thanks to that rapid prototyping and testing, the company is planning to submit the technology for regulatory approval by the end of 2018. “That wouldn’t have been possible outside of this space,” he says.
“The very cool thing MIT did is say, hey, we know they need access to equipment, so this is the concept of the Engine Room,” Rae says of the on-site lab and R&D facilities. “Instead of a startup having to buy the equipment themselves, they can rent it by the hour or piece.”
Other business incubators provide elements of what The Engine offers, says Lassiter, the former faculty chair of the Harvard Innovation Lab. Accelerator programs like Y Combinator and Techstars have funds to provide capital, as well as mentoring, but they are time-limited and don’t have specialized facilities for research and development. “When you are working with hardware, $100,000 in funding and three months of time are not sufficient,” Lassiter says. On the other end of the scale, Harvard’s Innovation Lab has a wet lab but no fund. Breakthrough Energy Ventures, an effort led by Bill Gates to develop new energy technologies, has a huge fund and works with various labs to provide facilities to startups, but it puts less emphasis on profitability.
“We kind of throw away the preconceived notions of what an ‘accelerator’ would be and really say, what are the needs of founders like this?” Rae says. “We know their inventions are incredible. We know the world needs those inventions. So let’s invent how to truly help them at the earliest stages.”
While six of the seven companies funded so far have a connection to MIT, the eventual plan is to draw startups from Boston University, Harvard, Northeastern, UMass, and other area universities as well, with a goal for the first fund of supporting 50 to 60 companies in various stages at any one time. The Engine won’t put an official time limit on how long it will allow each venture to stay in its Cambridge facilities, but Rae guesses that companies will typically stay for a year or two before transitioning to larger spaces. At the same time, The Engine is already starting to think about how to expand its space in and around Kendall Square as more companies come on board.
MIT will benefit like any other investor from the fund’s returns. Ruiz also sees other, less tangible benefits: new opportunities for collaboration, research, and education. An even bigger goal, though, is to get research that could have a major positive impact out of the lab and into the marketplace. “The driver is really to change the world,” he says.
Yet another aim is to seed new industries that can diversify the Boston area’s portfolio of tech companies beyond biotech and medical. “Boston has had a seat in what we would call transformative technologies for a long time,” says Nashat. During the 1970s and 1980s, New England got an apparent head start in the electronics industry, only to see Silicon Valley become the center of that world. “To put it bluntly, the East Coast needs to up its game if it’s going to attract top young talent and industrial vitality,” Lassiter says. “We have that in biotech and the medical area, but we need more of it in more areas if Boston is going to be as important in the next 50 years as it was in the last 50. Ultimately, you need an economy that is more than professors and Uber drivers.”
Finally, Rae hopes The Engine will make entrepreneurship accessible to more people, including women and underrepresented minorities. “We’re on a mission to create more important companies in this region—more analog devices, more incredible biotech companies, more advanced manufacturing,” she says. “I want their home to be rooted here.”
As The Engine continues to develop, Rae says, it is applying a startup mentality to itself, experimenting with the model as it goes along. “We consider these first investments our pioneer group,” she says. “They are breaking all of these systems in—so we are teaching them, and they are teaching us.”