The best trades in history… a punt on genetic engineering

Kleiner Perkins was founded in 1972 as a venture-capital firm led by Eugene Kleiner and Tom Perkins. Kleiner was an engineer who worked with Nobel Prize winner William Shockley before becoming involved with Fairchild Semiconductor, which made his fortune when Fairchild’s owner exercised his option to buy the firm from its employees. Perkins played a major role in the rise of HewlettPackard before earning millions through an investment in startup University Laboratories. Both believed there was unmet demand from tech companies for early-stage funding.

What was the idea?

In 1976 Genentech was founded by Herbert Boyer of the University of California and Robert Swanson of Cetus Technologies. Their idea was to use the newly discovered technique of genetic engineering to produce human insulin and other therapies. Swanson wanted $2m to invest in the necessary technology. Kleiner Perkins turned down the offer but invested $200,000 for a third of the company on the condition that Genentech would first focus on producing the hormone somatostatin, as a proof of concept.

What happened next? Genentech was able to start producing somatostatin within a year. As predicted, this proved that their technology worked, and facilitated a partnership with drug company Eli Lilly, which provided funds for further work, and to market and distribute the products. By 1978 Genentech made headlines around the world when it produced the first synthetic human insulin. By October 1980 interest in Genentech was such that it was able to list on the stockmarket. KP’s stake quickly rose to $32.5m in value. By 1986 it had risen to $160m.

Lessons for investors

Along with Tandem Computers, Genentech was the main driver behind Kleiner Perkins’ first fund growing from $7.5m to $346m in just 13 years: 95% of this value came from the investments in Genentech and Tandem Computers alone, illustrating the venture-capital adage that one or two successful investments can pay for a large number of failures. The decision to focus on the stepping stone of somatostatin, rather than immediately trying to produce insulin, was a sensible strategy to reduce risk for both Genentech and Kleiner Perkins.