Stephanie Sirota - RTW Investments - Part 2

Jon - 00:00:00: This episode is brought to you by Excedr. Excedr provides life science startups with equipment leases on founder-friendly terms to accelerate R&D and commercialization. Lease the equipment you need with Excedr. Extend your runway, hit your milestones. Request an estimate today at www.excedr.com. 

Intro - 00:00:24: Welcome to the Biotech Startups Podcast by Excedr. Join us as we speak with first-time founders, serial entrepreneurs, and experienced investors about the challenges and triumphs of running a biotech startup, from pre-seed to IPO, with your host, Jon Chee. In our last episode, we spoke with Stephanie Sirota about her early years, her time at Columbia University, and how those experiences helped to shape her approach to firm building. If you missed it, be sure to go back and give Part 1 a listen. We continue our discussion in Part 2, diving into Steph's journey from investment banking to the buy side, her time at Lehman Brothers, her transition to Valhalla Capital Management, and her entry into the biotech sector.

Jon - 00:01:19: Totally. And I actually, in my free time, I always like reading and listening to the folks who've made it and done it and their experience and what their backgrounds are and lots of biographies. But I think a very common discipline of study for very successful investors are journalists or formerly journalists. And I can't imagine that's a coincidence for how many there are. That totally makes sense to me. And I'm assuming it was right out of your master's going to iBanking. And did you know that that was next? How did this opportunity come about to join Lehman? And how did that opportunity present itself?

Stephanie - 00:01:55: So actually, I did the analyst program at Lehman right after undergrad, realized I wanted more education. And instead of going to business school, I went back to Columbia's campus and I was walking around and I went to, I really was just there open. I did pick up the application, which was paper application at the time. I did go to the B school. I went to the law school and I went to the journalism school. And, you know, I think I kind of thought about like, what did I learn and what can I do well? And I liked the idea. I mean, we were in the beginning of the age of information. And so the journalism track really appealed to me. And I thought I was going to be like a journalist with this degree. I thought this was setting me on the right path. Then I realized, actually, I think I can use this and go back to banking. So that was my B2B. I went back to banking. Lehman invited me to go work in London, UK. So that was a wonderful opportunity. I loved it. I moved into M&A, which was great because this was where I felt like I could really shine in spite of the long hours and the endless kind of spreading comps and working on pitch books. You know, it was really kind of a magical time. Like, I loved the idea of using my journalism training. You have to become an expert in something very quickly. You know, there's just not. There's not a lot of time. And so this was also right around the time that .com and the genomics bubble burst. So there wasn't really any, like, tech or biotech deals going on. So I ended up spending most of my time working in consumer. And I became an expert. And I had to know everything about the industry. And I loved that. I loved all of the different elements of developing a pitch, the rationale, understanding, you know, a particular sector. Understanding all the players in there, connecting them, making sense out of it. And then I really actually really enjoyed the process. I loved the deal process.

Jon - 00:03:59: And I didn't do eye banking, but I had a lot of colleagues that did So I have a general kind of understanding of it. But for the scientific listeners out there, could we do like a quick, what is investment banking? And how is that different than buy side? And what is that?

 Stephanie - 00:04:16: Yeah. So this is strictly advisory. So investment banking, and I was in an M&A group and we did M&A and the focus really was on consumer companies. So I'll tell you, like our clients at the time were L'Oreal, Nestle, and PepsiCo. And then we would look at their business and then advise them on, we'd say to Pepsi, Coca-Cola is buying up all of these bottled water companies and they're consolidating the bottled water in Europe. And we think that you should think about soft drinks and snack and expanding outside of just Pepsi, right? And so it's really kind of understanding a company, their competitors, and then having that relationship with the company, bringing them ideas. Look, you should get rid of this piece of your business because it's non-core. You should use that capital to go out and acquire something else. So it's... It's strictly advisory. Buy side is when you are acting in your own right, right? You're the principal. You are not an agent on someone else's behalf. You are taking positions and you are making investments directly for your own or your underlying investor's benefit. So at RTW, we're fiduciaries of other people's capital and we make investments. They entrust us with that limited partner capital. And then we make investments on their behalf.

Jon - 00:05:46: I appreciate that too. Because I think sometimes the sell side and buy side and investment banking kind of get co-mingled. So I just think it's important for everyone to know kind of exactly what is the lay of the land there.

Stephanie - 00:05:58: As a hedge fund, we also deal with the sell side on a daily basis, right? And it's not investment banking necessarily, although it can be some capital markets activities that we might get involved in and occasionally a banking-like transaction. But for the most part, we're dealing with prime brokerage areas. So we're dealing with the trading and we're dealing with financing. So we too, we are, in that regard, we are the client of the investment banks.

Jon - 00:06:26: And so while you're at Lehman, I've heard that like it is truly like kind of what you described. You learn on the job and it's a baptism of fire. Kind of like, you know, I know you spend a decent amount of time there, too. What was your experience and like the things that you learned probably like in the first half of your time at Lehman, would you say? 

Stephanie - 00:06:42: I would say that I was a pretty lousy junior investment banker. But what I learned was, and this was actually, I think, some of the most important lessons I got during my time in London, UK. And I had a managing director that I worked for quite a bit. And he actually gave me feedback one day and basically told me in a much sort of more eloquent way that I was a lousy junior investment banker. And I was just embarrassed and I was profusely apologetic. And I told him I would talk to the staffer and I would make sure, because I was staffed on like all of his deals and all of his pitches. And he said, no, no, no, no, no, it's OK. It's OK. I want you to continue working for me, maybe because he was being protective. But he also told me that he recognized that I saw things and I had skills would make me a very strong senior banker. And the role dramatically. Changes when from when you're a young junior banker and you've got to like crunch numbers and you have to put pitch decks together. And it's a lot of the gathering information and no one really wants to hear. You don't talk in meetings. You don't have an opinion. You're just there to like number crunch and grind. And I was not good at that. But I didn't have views and I had opinions. And he was nice enough and generous enough to at least listen to these and also teach me about like how, you know, he would view the world. And I learned about that sort of strategic big picture thought process. And you have to give yourself the space to think about it, because when you're an individual contributor and you have your marching orders, you don't have often the time to think about, wait, but what about this? What about that? You don't have time to be creative and you can't really assimilate some of these creative ideas. And think about like, what if you just don't have time for what ifs? And I think that he saw me through that experience lens. And he said, you should pursue this, but know this about yourself. You see things that others don't. And you're a great young strategic thinker. And he said that he had a lot of hope for me down the road. 

Jon - 00:09:03: It reminded me of what we were just talking about, about having like a coach or a mentor or someone who's there to take you under their wing and kind of call you out. To call you out and keep you honest. It certainly sounds like your supervisor did that for you. And it sounded like it was a massive inflection point. So you go from junior banker, less strategic, grind it out, execute, data gather, synthesize, present. You get a kind of like a rude awakening from your supervisor. How did that transition work for you when you went from junior to senior banker? And what were the things that you were doing from that point on after that inflection point?

Stephanie - 00:09:44: So that was the last big bear market. So I mentioned that I went over to London, UK, I think in early 2001. By 2003, this was just, it was pretty tough. Like we were fighting for business all the time. And still, biotech, that was the last big bear market. It was a three-year bear market that lasted through March 2003. So Lehman went through a number of rounds of playoffs. And for those of us who were left, it was extraordinary. We were working all the time. And there was sort of a, you could elect to take a severance package and leave. And so I ended up doing that in 2003 and using that as just a pivot to come back to New York. And I think I just needed a break. So you're absolutely right that it was an inflection point. And then I was just given this sort of golden ticket to, you know, an idea, an idea of like what my future could look like. And I just felt like it was, it was too physically and emotionally draining to stay in banking and in London, UK at that time. And so I made a move. I did interview, and I interviewed at some private equity firms and a hedge fund. And I ended up getting an offer, but it was a three-year commitment. And it was also in the financial institutions group. And I really knew nothing about Fig, as it's called. So I decided to just come back to New York. So in a way, I was starting from square one yet again. And I, maybe there was this, this was a recurring theme, but I've always felt like, ah, I have to play catch up again or I have to figure out what I have to do next. And now I sort of appreciate that I've always had this opportunity to reinvent myself because it's given me a chance to explore new things. You know, the key though, is that you lived it right another day. That's exactly what you have to do. Like you've got to wake up and you can't get done on yourself or the situation. It was what it was. So I finally then had an opportunity and I joined, I went to the buy side, but I made the move to the buy side. So now I was on the other side. I had an offer to join a macro hedge fund that was managing maybe just shy of about $800 million. And they didn't really have anyone that was kind of running the business. So the founder was talking to investors and there was a CFO, but there was a whole kind of business around it. They weren't really thinking about, and I joined this firm and I did all the investor relations and I talked to people and I really kind of brought some kind of institutional organization to this business. I institutionalized it, like I developed relationships across a few of the banks that were our prime brokers, started to create real sort of operational policies together with our CFO. And it was an interesting time. And that was my first, opportunity to actually start building something. It was already there, it was established and they had quite a bit of money under management, but it wasn't really institutionalized. And so I brought that to that firm.

Jon - 00:12:56: So the first thing that comes to mind is that there's a lot of folks who listen to the podcast, too, who are not in the lab necessarily, but in on the buy side or aspiring to be on the buy side and even just starting their own funds. But I think oftentimes being an investor is kind of like, hey, like I just get capital. I write a check and then, you know, support the company. But there's like also the like aspect of like firm building, which is kind of overlooked and not really talked about. I don't know why. It almost reminds me of like it's like a startup. And I'm not to say Valhalla was a startup by any means. Eight hundred million is a lot of capital. But there's like that like institutionalizing a firm is kind of like the same way as you go from in any kind of startup business, whether it be biotech, software, whatever, of going from zero to one and then one to N. Where to get one N is like you can't just like wing it. You know, everything will break if you just wing it. So I guess my first question is like. Did you learn this institutional know-how how to build a well-functioning institution from your experience at Lehman? Like like seeing something obviously Lehman's massive institution. And then you're like, OK, here are the things here, the best practices. Here's what I saw worked. And then you kind of implemented on the buy side.

Stephanie - 00:14:15: That's right. I went from a large, bold bracket firm. I left Lehman before the firm went under. So it was still in a good place when I left. But that's exactly right. I think the key thing, though, when you are on the buy side and for hedge funds is hedge funds, they don't have that sort of corporate architecture. They're not layered like a big bank would be. There aren't multiple layers of management. They do feel like, your words, they do feel like a startup because it's a very flat organization with individuals who act as individual contributors. We like to use the term, you know, we say like we've got athletes, right? And so you think about like a firm that is designed to have all of these individual athletes like winning, right? And that's not a team sport, right? These are all individual folks taking, you know, actions. That is very different than the concept of firm building and putting in layers within an organization and, you know, making sure that you're thinking about everyone's best and highest use and creating efficiencies of time. And that's a very different proposition. And, you know, I think we've actually now gone through that. And I think about it a lot because, you know, I started an RTW in 2012 and Ron , our founder, you know, he had a CFO and one analyst and then I joined. And there's a couple of things that I'm actually really grateful. I know that I've had a very non-conventional path to get to where I am. But I want to say for anyone out there that thinks that, you know, they may be an out of the box. Like are not just a non-conventional choice or they might want to break into something where they have a very different story. Like don't give up on that. Like use that richness of your own experiences and your own skills because that can be incredibly helpful and incredibly enriching to the right people in the right environment. And it certainly has like in my life. But I would say that I was the fourth person at RTW. 11 years ago, we were managing some 30 million at the time. So this really was for all intents and purposes, you know, a startup and really captivated by RD and what moved him and why he was doing. I think we also kind of bonded. I remember the first time I met him, like he went to medical school because he also wanted to. He that was his sort of humanitarian path. Like he wanted to help people. And I thought I wanted to do the same thing with journalism. Right. And but then RD realized that actually he might be able to reach more people by helping advance science and investing in the companies that are developing these transformational drugs that will reach more people than if you were a clinician, you're meeting patient after patient. And so I think we both sort of found our way into finance, thinking that this is actually the way that we want to express our true passion. And, you know, I think. We've thought a lot about company building and adding those layers in the organization and giving the chance and the opportunity for decision making. Right. I mean, I think normally, like in hedge funds, you've got, you know, the top person or a couple of people that have to make all of the decisions on everything. Right. And you don't want that. That's not going to create an efficient or successful organization because you can get decision fatigue and you might have then made too many decisions for unimportant things. Right. Right. Right. And really important thing, you just don't have time and you're like, yeah, whatever. It's fine. So, you know, thinking about the architecture of a firm is something that, you know, I've spent a lot of time on with RD and our partners. So that's been been great. It's a challenging, but it's a wonderful cycle to live through 

Jon - 00:18:17: Absolutely. And I'm again, just like so many directions I want to go. And because in a similar way, RD, I'm not an MD, but I was a lab rat at one point in time. And I had that same. Kind of like thought where I was like, I think I could have more impact on the finance side. We're in credit. So kind of weird world. But I was like, and it kind of came from the just like the experience of like, it is really hard to get equipment in the lab. Like these are incredible. And so it was kind of like a scratching my own itch kind of thing. And then I quickly did a survey. I was like, would this be helpful to you? Would this be helpful? Would this be helpful? And it's like, yes, yes, yes. Okay. There's something here. And like, instead of just me just slugging. It out underneath the hood. If I can like enable this group and this group, that's like three X, the impact of me just being by myself. And so you go from Lehman to Valhalla, you start bringing in the kind of you're professionalizing the firm. And then you mentioned you met RD about 11 years ago. How did that come about? And also, I know you mentioned that obviously there's like a pivot to science. When did you know that you wanted to pivot to science as well and join RTW?

Stephanie - 00:19:29: So Valhalla was run by Brian , who is a great guy. Actually, you know, I'm still in touch with him. And his daughter is now in law school and has interned for my team at RTW. And we love her as well. So Valhalla did great. And we actually, we were up 10% in 2008. But, and this was a huge kind of learning experience, I think for all of us, but we had a lot of fast money. We had Swiss money. We had fund of funds. We had a lot of investors who were, and kind of wiped out by Madoff. And so we faced a ton of redemptions in following, you know, the end of 2008. And that was really tough. And also, I think we continue to do well, but we also learn that when you do, when you're up in a down year, if you have easy liquidity, people will take it. And they will treat your fund like an ATM. And it became very, very challenging to manage the liquidity with the duration of some of the longer term investments that we had. And we had some big relative value trades on. And it was just a bad time. Like it was the global financial crisis and times were not great. And Brian and team decided to wind down fund and we returned capital to investors. And it was right around that time that I just had my second child. So I had a little bit of a break. And then I realized, actually, I do want to go back to work. It seemed easier than raising two boys. And I just put my feelers out and I started, you know, I had at this point relationships across, you know, Wall Street. And I remember I got a call one day from someone at Goldman Sachs and they said, you know, we've got this client startup. And I said, you know, we're going to start a new hedge fund. He's a legacy client because he spun out of Davidson Counter, very large, established, one of the best asset managers out there, like 30 billion plus dollars. And they said, you know, one of their former portfolio managers is starting this biotech fund. And. $27 million under management, small team, but it looks interesting. So they sent me the deck and I thought, wow, it's actually pretty fascinating. But I knew like I hadn't been able to do anything. I mean, I've never worked in science. And the last thing in science that I had done was like a psychology course where we studied like brain and did experiments with mice in Columbia's lab. And so that was my last connection to anything in science. And there was part of me that actually felt like even in banking, I had gotten cheated out of doing something in tech or something really like innovative. So I was very open to the idea. But I said, you know, I don't really know anything about biotech. I met RD. I really, just from the moment I met him, from the moment I actually walked into the office, and actually it was a packed office, even though he had only two people working for him, I later found out, you know, he had sublet the space to another firm. So we did have pretty humble beginnings. But I remember asking someone like, where is Ron ? And he was in the corner office. And I liked him immediately. And there was just this kind of sense of like, I am in the presence of greatness. I really felt that. And we had that first conversation that one day, and of course, I told him, I don't come with a science background, but over the course of several conversations, we discovered what I did bring. And I think one thing that... I really lucked out on, well, a couple of things. One is I do think I was really lucky to meet RD at that time. But I think the bigger thing is getting involved and learning about science 11, 12 years ago, things were much slower then. And so much of what we invest in today was not even part of the conversation like a decade ago. So many of the modalities that have been since validated, and we know work in humans, I mean, they weren't ready. But it was an interesting time and things were slow enough that I could actually really get a handle on... RNA interference. And this was like pre-gene therapy, you know, and we were still even like looking at interesting companies, but it was not the volume of things that are under development today is far greater than what it was then. And so I think that kind of gave me really an opportunity to sort of learn the basics during that time. And now, I mean, it's hard to keep pace, but I, you know, even from a business perspective, Rob used to go to probably like a dozen medical conferences every year. One person could not do that in 2023. You know, we have a team of people, we have technology that we throw at this solution and we're attending, you know, over 200 medical conferences around it, you know, throughout the year. So it's a different time, but I am very fortunate that I was able to actually start my career in biotech and I fell in love with it. I mean, what's not to love? It's extraordinary. It is the most important innovation that is going to impact every single one of us. It's incredible what's happening. So it is the future and it's the present. So I feel very fortunate that, you know, I got involved in the time.

Jon - 00:25:04: That gets me fired up because I feel the exact same way. And I can tell by your excitement that you're also fired up too about it. And it reminds me when you're talking about at one point in time, you were playing tennis and in the, your one true love that is all, but has to get you out of bed and wanting to like get to work, which it does for me. Absolutely. The life sciences is definitely that. And I was thinking about like, you know, I'm trying to envision that that first conversation with RD, thinking about it and kind of just like piecing together the time periods, like you saw the .com and things were probably going crazy. And then you also kind of saw the 08 era because you were cycle tested, tested, truly cycle tested. So I would imagine RD does like, hey, like you've seen some shit, for lack of a better word, this could be incredibly valuable. And I guess kind of when you think about these cycles, what are some like, I guess, takeaways for you that you are cycle tested and you've seen it from sell side by side and also like firm building and various nature 

Stephanie - 00:26:20: Yeah, that's a great question because right now we're deep into a biotech bear market. In two and a half years in, even some of your most diehard and steadfast and committed investors start to lose faith. And they start questioning, you know what, maybe this sector is never going to see bright days again. And maybe none of this is going to work. And maybe The FDA is not going to ever be friendly. And maybe gene therapy is dangerous. And maybe the FTC is not going to allow for mergers. And so what's biotech going to do then? Like, how are they going to sell their drugs? I mean, there's so many questions that you would say and use kind of real life, you know, situations that have brought us here. And these are like legitimate concerns. But I remember actually one of my first conversations with RD. And I remember sort of walking away that first day after my interview with him. And I thought to myself, if. A fraction of what he believes is going to happen over the course of the next 10, 20 decades to come. Like if a fraction of this comes through, like this is the best and most important sector that anyone should consider and that anyone should invest in. And if you think back. So let me just give you a little bit of like perspective at the time, the early kind of 2010, 11, 12 post global financial crisis. All of the U.S. Investors were happily invested in some of the, you know, the household names, like the big hedge funds that many of them had a lot of technology exposure. But they were generalists and they were good. You know, they made a lot of money. That was their time. No one was invested in sector specialists like that just didn't really exist. And certainly no one was invested in a biotech fund. Not no one. Not no one. There were a couple of biotech funds that existed and they're still around today. But it was very rare. It was niche. It was super niche. So that's how we got to where we are.

Jon - 00:28:30: And do you see similarities to this kind of cycle or this down market? Like you're referencing like kind of like right after 08. And then now we're kind of like in the kind of the, we're feeling we're in the trenches right now.

Stephanie - 00:28:42: What I bring to RD, and we talk about this a lot, I do bring a steady hand. I do bring someone that has lived and seen the other side. Look, I wasn't in a position that I was managing money. I wasn't a fiduciary for anyone's capital. I was like a junior, not-so-great investment banker the last time when the .com burst. But what I do know is that having lived and worked through these cycles is that they are cycles. And things don't last forever. I think that coupled with if you know and you are confident in the fundamentals of what you are investing in and what you are studying, if you know enough to find your conviction, even when the generalist capital or when the haters will hate, if you can find your conviction and not lose that, then you can endure whatever. Fair market that you're in. I actually just read this really interesting book called legacy, and it's about this legendary New Zealand rugby team, the All Blacks. And there's something that has actually now stuck with me. It says that when you're at the top of your game, you have to change your game. And so I think, look, I live and work in companies that are constantly innovating with this great purpose. They want to really leave a legacy to humanity and change lives. They want to bring hope and cure terrible diseases. But I think we have to think about that innovation ourselves. Because I think it's sometimes hard in a bull cycle. How do you know when it's going to end? Because they can last for years. How do you know when to change your game? But I think that has also been sort of a very introspective moment that I've taken recently to really kind of think about, you know, we're in this cycle, pretty confident that we're going to get out of it. This is not going to last forever. Capital will come. And we've got some really exciting investments in our portfolio. So I'm really excited about some of the companies that we're backing. And I'm also really excited about some of the ways that we're thinking about backing companies. And it's not just, you know, with equity capital, right? Like we're starting to do other things. We launched a royalty fund. So we're providing other sources of funding to companies, which is great. It's non-dilutive. It's not as burdensome and onerous. You know, totally. We're a non-revenue generating company or maybe a company that's about to launch a drug. You know, taking on debt can be a big burden. You know, we sort of found our niche in the royalty space. So I'm really excited about the innovation that we ourselves are doing. I can't wait.

Outro - 00:31:28: That's all for this episode of the Biotech Startups Podcast. We hope you enjoyed our discussion with Stephanie Sirota. To learn more about her journey, tune in to part three of our conversation. If you enjoyed this episode, please subscribe, leave us a review and share it with your friends. Thanks for listening. And we look forward to having you join us again on the Biotech Startups Podcast for part three of Stephanie's journey. The Biotech Startups Podcast is produced by Excedr. Don't want to miss an episode? Search for the Biotech Startups Podcast wherever you get your podcasts and click subscribe. Exceda provides research labs with equipment leases on founder-friendly terms to support paths to exceptional outcomes. To learn more, visit our website www.excedr.com. On behalf of the team here at Excedr, thanks for listening. The Biotech Startups Podcast provides general insights into the life science sector through the experiences of its guests. The use of information on this podcast or materials linked from the podcast is at the user's own risk. The views expressed by the participants are their own and are not the views of Excedr or sponsors. No reference to any product, service or company in the podcast is an endorsement by Excedr or its guests.