Episode 104: Key Lessons from North Carolina’s Thriving Biotech Startup Ecosystem

What do unicorns and vibes have to do with investment in North Carolina? Find out today.

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Serving the entire Gulf South, but recorded in the heart of New Orleans.

Welcome back to Bio from the Bayou. I'm your host for today, James Zanewicz from Tulane Medicine. And today's guest is Dave Osterhout. He is the co-founder of and general partner at Cape Fear BioCapital, a venture fund that invests in emerging biotech companies in the North Carolina region. So he's very much in the network of the broader Gulf South, as we like to say, and one of our friends of the podcast. We want to say welcome to the show, Dave.

Well, thanks y'all very much for inviting us on to share a little bit about what we're up to here in North Carolina. And let's get into it.

Now, super excited. And we got connected through LinkedIn. So it's the magic of LinkedIn because you reshared a different version of the podcast that we had with a really nice intro. And I was like, hey, we should be friends and you should come on. So I just wanna point that out, that this does work and it can get you a guesting spot on the podcast when you reshare our content. It's great.

Yeah. Yeah. It just comes with a little bit of the, oops, I forgot to tag y'all. Oops. Do that quick ninja edit.

No one cared about that.

And, uh, it was just perfect, right? It was such an interesting concept that you talk about with Travis. I just couldn't help myself and post it. Just try to get that stuff out there, right? Like we need to elevate all the different people in the South that are working in biotech. I really appreciate what you all do.

And now you have to top Travis. So let's see how that goes.

That's legitimately impossible.

All right, well, let's dive in because before you worked in venture capital, you were an entrepreneur yourself. So can you give us a bit of a rundown of some of the companies you worked with and founded, and then what led you to want to make the transition?

Yeah, I think I'll just start off. I had no idea I would be an investor. I think it's come through a piece of necessity and a desire to grow things here in North Carolina, right? I got my start in academia. I came here to go to Duke. I went to McKinsey, lovingly call it the dark side, and that was in Atlanta for a couple of years. And then had the opportunity to come home and co-found a company here called Locus Biosciences. And I did that for 6 years. So I was the founding chief technology officer and then the CSO. And we built that out of NC State. It was a really impactful time for me in my career, learning to grow as an executive, a lot of learning by doing. Along the way, I did a lot of company building and I got to work with different groups, another couple of local ones, Kinetikos Ventures, which is a VC that works a lot on the CDMO and actually in cancer cell gene therapy and antibiotics space. So they do a lot of different things. Um, one of those companies was Inceptor Bio, which works on a cell therapy for cancer. Really awesome story there. They're in the clinic for kidney cancer now, which has a lot of family history for me. So really proud of what they're doing, working with a couple different groups like CED, which is a local ecosystem, like nucleation point here. And, you know, at the end of the day, just got done with my spot at Locus, which was in 2022, and asked what a lot of people do in RTP after departing their startup. Next, can I find something here? Do I need to move? And I sat down with Ed Field, who's one of my other partners at the firm, and told him this. And he looked at me and just said bluntly, you can't move. We have to find you something. Started picking up phones and one thing led to another. And he asked me, do you think we need more capital here? Of course. I said, yes, that would be awesome. Do you want to go start a fund? Sure. That sounds like a great idea. I'd love to operate a company in the fund. And then that became a, now I'm a partner in the fund. And then we recruited Jimmy Melton, and then we have the really good fortune of having an incredible anchor LP behind us in strategic ventures. And that's how we landed here. Wasn't by design. A lot of my career is on vibes, figuring out what I don't want to do, not doing it, and then chasing the things I might want to do because it could be good. And I think this could be great. So I'm pretty excited.

So you're saying the investment vibes were good?

Yeah, truly though, right? I mean, you know, I know we're going to get into this, but you need a group that's kind of crazy and obsessed with North Carolina and wants to make it happen, right? It's not going to just be here. You can't just pick things. You have to build them.

I love that.

All right.

So I want to dive back into entrepreneurship again for a second and ask you what lessons you learned from being an entrepreneur that influence how you support the new startups you invest in today.

Yeah, it's a great question.

Ian wrote it. He gets the credit.

I appreciate it. Nailed it. So I think nothing replaces experience, and if you don't have experience, you go get it. However, from whomever, wherever you can. And I think that that's something I'm forever grateful for is just 6 years on-the-job training with Locus. I mean, we saw everything, right? We, by the time I had left the company, we had brought in over $150 million. We did the trinity of venture, pharma, government. We built out a totally novel platform based on CRISPR. We took a lead asset that went from concept into the clinic. We built not just one, but 2 manufacturing suites to support that. We pioneered regulatory paths, and now we're running some of the first clinical trials in the space under the FDA. And at the start of it, I would've never dreamed that's all the things I would've had the chance to do. On the other side of it, it made me appreciate, and this is the second piece, right? It's not just about vision, it's about execution. Took a lot of different things to come together and really fortunate to work with a great team and another great founder in Paul Garofalo, who really knew and understood how to build all those parts of the business. Got to see it firsthand, right? It takes people, it takes money, and it takes relentless focus. Last thing I'd say is just really applying that investor lens, right? It takes a lot of money to do this, right?

Yes, it does.

When we talk about it, people talk about $1 billion in 10 years, but when you're on the other side of the line, you're giving 10 years of your life if you're an entrepreneur to try and find that answer. You're trying to convince others to go on that 10-year journey with you and put a lot of money at risk to do it. Right? So they gotta know that you're gonna get to an answer and they gotta know that answer could be really, really impactful for patients, right? Because you gotta reward investors and patients. It has to be both. It's how things are set up for this type of work. And I think as an entrepreneur, forever grateful to the people that backed us at Locus and really excited that we actually got to patients. Something I try to never forget is there are people out there who have received this drug.

Their lives have been changed by what you did.

Yeah. Yeah. And same thing with Inceptor. They're now in the clinic working in kidney cancer and people's lives are changing and you can never ever change that. Like that part is just something we all chase, right? That's what makes us get up.

Well, that may lead into my next question. It may be one of your reasons, but what inspired you and your co-founders to create Cape Fear BioCapital other than there wasn't enough wanting to help patients. I guess phrasing it a different way is what problem in North Carolina's biotech funding ecosystem were you really trying to solve?

Yeah, maybe I flip this back on you. You do the tech transfer side of the world. Surely you want to start more companies and have them be as high quality as possible and do that again and again, more and more, right? I mean, I'm sure that's something that you work on every day.

Yeah, I think every academic institution wants that to happen. Our tech transfer team, which is separate from us at Tulane, but they do amazing work in that. Then we help support those companies once they're formed and really go out and help do the BD for them when they can't, which is something interesting that most places don't have. And it's where I think we really set ourselves apart, which is the fun bit.

Yeah, you kind of touched on it, right? There's gaps, right? And you have to fill the gaps that your ecosystem needs. In North Carolina, we had these really good stories, right? AskBio, gene therapy pioneer, bought for $2 billion upfront, $2 billion on the back end. just dramatically changed the workforce landscape here, put us on the map, right? It proves something that I think a lot of ecosystems have a challenge with. We can produce unicorns. We've done that with Precision Bio and some of the first gene editing technologies. We had G1 Therapeutics out there, which just got acquired, and they were pioneering new oncology therapies. We can do it, but you got to do it right from the beginning and you got to pull all the pieces together. And someone needs to relentlessly do that with innovators. And I think that's the role we want to do. Like, we often hear you should expand your thesis, you should go beyond North Carolina, there's not good enough quality deal flow, to which our answer is that's because we need to build, not pick. And that's the key, right? Like, we're going to build that deal flow. We want to work and meet entrepreneurs where they're at. So we look for— we'll get into this next part, You know, like 6 different general areas. But at the end of the day, can we help you? Because we don't want to just invest, we want to build. All 3 of us are operators turned investors. It is a happy coincidence someone gave us a check to invest in others because we feel like that's the difference, right? Not only can we just help you and actually build with you, we can write the check. And that's what KPIR wants to kind of Focus on North Carolina, seed stage therapeutics, and where we can make that difference.

You've already led into my next question, which I love. It's like we had a plan. Um, but, but you talked about how you want those North Carolina-based companies, seed stage therapeutics. What traits do they have when you're looking at that sector that make them a great candidate for your portfolio at Cape Fear? What things do you want to see in those therapeutic startups?

You know, it's funny. So we're a year in and like any startup, we're figuring it out ourselves. And I think we know at the core of it, you gotta be in North Carolina, right? It's not Duke or UNC or State Technology that gets licensed and goes to Boston. We don't do that. We recognize there's virtual companies here, but your leadership should be here, right? The whole point is we are contributing to those that live in our communities. We are creating jobs for others that live here, work here, want to stay here. So it's got to be that first. And that's number one. You got to be in North Carolina. And then, you know, I'm hesitant to put it this way, right? But it comes from 2 sides of the coin. On the one hand, I do think our science that comes out of our universities, that comes out of the state in general, is world-class. It can stand up to others, right? We pioneer all sorts of different areas, right? So we don't have a Lack of quality science, but it can't all be science, right? So I think there's an aspect here of thinking science carries the day. I mean, that's true to an extent, but it's almost the expectation and the norm, right? You have to have it. That's what everyone expects. And so how do you turn that science into medicine? That's where all the rest of it comes from, right? Are you ready to spin out? Is this far enough along? We go pretty early and we're happy to advise and coach and counsel people. Even if it's still too early for us, right? But if it's too early for us, we're pretty confident it's going to be too early for most. And we want to change that, right? Like, we want to be there, even if we're not investing, to get it ready. As it spins out, we can step in and help be leaders in the company. But I think what we want to do ultimately is do that matchmaking, right? If we know and are dedicated to North Carolina, we're looking for gaps in the team that you're trying to build, and we're trying to help you get the right people. Competent, experienced, willing, ready. You know, that kind of brings the other parts, right? Like, this is about development. To me, I look at this all through the lens of you got to develop drugs. That's what we came here to do. And they have to be great investments for investors. And when you develop them, they have to be a huge impact on patients. And there are so many things underneath how all that works, right? So you want to put great teams under that management. You want to get the right capital. And we look at ourselves as catalytic capital. It turns out We write up to a half-million-dollar check, but that allows us to get things started. Like, you need to bring on someone that's a CEO, you need to get your company formed, you need to do those initial experiments others won't fund, or frankly, sometimes putting your hat in the ring gets others to come along with you, right? So we want to be that nucleation point. We want to make sure that that's pointed in the right place. So we like when people come to us with an idea that they have a plan, And they want to evolve that plan, not just check out this platform, it could do anything, but here's what we think it should do. And so again, there's sort of those criteria, everything from team to, is it ready? Do you have the IP? Do you have a plan? Do you understand how much money and how much time? And we're not looking for all the answers. We're looking for a willingness to work with us to figure it out. I mean, that's really the end of it, right? We hope we have something valuable to offer besides money. And we hope that helps move the needle in the area. It's what we're here to do.

Yeah. Do you have that grit and that determination really to have that impact?

Right.

Yeah.

You just don't get into starting anything if you don't have that. Right. And we'll see.

I've seen some people who do, and then it's like, oh, there's a reason you're not raising money. People can tell.

Yeah. You get into this business because you love it. Yeah. Whether you're starting a company, starting a venture fund, starting whatever, right. You gotta love it because it's on you to make it happen every day.

Yeah. Well, you've talked about a lot of what goes into these companies. Obviously, you have found some to invest in. Can you share a couple examples out of your portfolio of companies that you're particularly excited about?

Yeah, absolutely. We've seen a lot of interesting stuff happening in North Carolina. We've looked at 150+ companies, probably half those in good detail, another half of those in the diligence. And so far, we've invested in 2 companies I'll get into and are hopeful to write another couple checks and I think the take-home message, because we've gotten this question, I'll call it before, are you actually writing checks? Yep, we're out there, we're doing it. It takes a second to start a company like anything else, and I think we've gotten better for it, right? We know what we're looking for, we know what we can add value to. So the first example is a really cool one out of Duke. It's called Thoracic Innovations. It's an innovator, Dr. Luis Maricaja. He's anesthesiologist, works in the world-leading cardiothoracic surgery unit there. key surgeon there, Dr. Carmelo Milano, one of his colleagues, and together they started this basic concept called BlueBridge. It's a medical device, something we didn't think we would do originally. But long story short, what happens when you have open heart surgeries is some percentage of the time you can't close the open chest. And so what do you do? And usually you actually fashion something out of a syringe in the OR, live action. while the patient's out and use that to create support between the startup, right? And that's kind of a wild concept. And they just sat back and said, well, what if we did something different and actually created a for-purpose use product that could do that? You know, that's an interesting one for a fund of our size. And the fact that our, one of our GPs, Jimmy, is really, really well connected and understands that space. In fact, it's kind of perfect for him to step in And really help this innovator grow that business. And he's got a whole— he's just one of those innovators you love backing. He shows up at the FedEx box, got all his new trinkets and prototypes. You know, it's not even doing him justice. These things are ready for primetime, and he's got all sorts of different ideas, and they're born out of practicing medicine in the best clinic in the world for it, right? How could you not help him? And that, I think, was really, for us, eye-opening, right? We really wanted to do that, really excited about it. Feel like they're going to get a place in just 12 months because they're on market where they'll draw some serious interest. Our second one is called 1063, another one out of Duke, just happenstance. Love this. They're the flagship AI drug discovery company in North Carolina. If AI is taking everything by storm, they've been doing it since before it was cool. I think their tagline now is until no patient is out of options. It's an incredible tagline that speaks to founders here who care about curing cancer and are using their technology to do what others want to do, but maybe shy away from. They picked like 7 really high-risk targets and are getting traction on small molecule chemistry where others don't. And their whole bet is everyone else talks about AI. We're going to prove ours works by not doing it just once. But 7 times. And they've got a strategic partnership in tow to go do that from Barrick and AngloGold Ashanti. So we're really excited about them. I think they're primed for a breakout in 2026 as these programs mature. And Marcel and team, you know, they're backed by Yosemite and Hatteras Venture Partners here locally. That's a rockstar team that can take them the distance. We are very fortunate to be a supporter of them, helping them. I think, including if you guys want to have them on your podcast, I think he could talk your ear off about where AI is going.

Send them over Ian's way.

Yes.

Yes, please.

Yes, please.

He's a And I love that about him. It's not just hype. He's going to really get that to patients.

Yeah.

And I love that you mentioned that Boehringer is their partner because Boehringer Ingelheim has been a tremendous friend to Tulane too. We know several startup companies who have worked with them, and even when the deals haven't worked out, those CEOs have spoken very highly of the collaborative nature and how they really truly partner. They're a very interesting large company in that sense that they approach it not like they're David and Goliath type thing, but they're actual equal partners in a way. So I want to turn, I guess, back to a broader vision now and looking ahead as a final question. What is your vision for North Carolina's biotech ecosystem? A couple of questions there. What do you think it needs to build on from capital to talent to research infrastructure to really help it continue to excel as a national leader?

Yeah, well, first, thanks again for having us on. It's wonderful, this platform, a chance to kind of share all these different things. I'm a talker, so thanks for bearing with me.

I love it.

On the vision side, I think it's not unlike what you all are doing, right? You see something there, there's a there there, and you see that it can do more and you just want more of it. At the end of the day, I think we've had like $20 billion plus in the last 5 years come in the biomanufacturing side, which is fantastic. They're high-paying jobs, skilled stuff that people can do as a career. They can bounce between these groups, creates a sustainable way for us to grow as an ecosystem, right? But it just like tugs at us. Duke, UNC, and State pumping out all of this medical innovation, right? It's a shame if it doesn't stay here, if that talent that built that didn't stay here. And we keep asking ourselves, not how do we make ourselves like the number one ecosystem? I worry less about that, right? It's more about how do we get more, right? Like we need to start more companies and they need to be really high quality companies. ones that we call investible, which isn't in our eyes as much as it is in the eyes of national venture and pharma that want to do this with you, right? They look at it and say, not only is that science amazing and could be transformative, wow, this is a rocket ship we need to be a part of. This team is going to get this to the clinic and we want to take that bet with them when they turn that card, right? I think we can do that. We've done that with Ask. We've done that with G1. We've done that with Precision. We've got TUNE Therapeutics. We have these stories. People can raise big money, they can do big partnerships, and they can exit for big money. And we just need to do that again and again and again. Right. And I think it takes relentless focus. So my vision for this is a little bit like the late, great Charles Hamner passed away this year, and he had the vision 40 years ago for NC Biotech and biomanufacturing.

Yeah.

You know, that foundation paid off over decades. I think we've got that foundation 20 years in, in R&D. We'd love to be a part of actually accelerating that and getting it to that promise of more R&D than we do today. But really, again, this isn't putting RTP on the map. It's realizing the potential that's been sitting underneath us this whole time by being just crazy enough to focus on this and only this. When everyone else is distracted by something else in a different ecosystem, A changing thesis, something else that hits them in life. We're the steady eddies in the middle saying, don't care, only care about North Carolina. We're just crazy enough to get it done. I hope we find others that join us in that journey. I think there's tons of us out there. We just need someone in the center sitting there going every time, hey, do you know this person? Hey, have you met that company? Did you know this is happening? Are you interested in participating? Relentlessly, over and over. Borderline obsessive.

Yeah. Relentless relationship building. That's what it all comes down to, right? It's what Elaine and I talk about all the time is if you don't treat this like a relationship industry, if you treat it like a transaction, you're doomed to failure. And I think it's a perfect ending.

Yeah. Yeah. I'll end it on this, right? Like, sure, that happens between us. I would love to make sure we provide other avenues for you to meet other people. And I hope to come to your event.

Bio on the Bayou, October 28th and 29th. Thank you so much. So I didn't get in trouble with Ian. Love the plug.

I'm really looking forward to it. And, and this was just awesome. And again, thanks for listening to us and letting us have a chance to share your platform.

No, it's been fantastic. I want to thank you again for making time to come on from a random LinkedIn message where I'm like, thank you for sharing the podcast. Do you want to be on it? We're going to be sure to keep an eye on Cape Fear BioCapital, some of the companies you've invested in. Ian took a lot of notes, so they'll be all linked in the show notes where anyone who wants to learn more about them can go click. find it, dig in, get more information. But thanks once again for taking so much time out of your day. We really appreciate it.

Absolutely. Thank you.

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