Case Study: Kleiner and Genentech (2012): When Venture Capital Met Science

IHP 600 Module Five Case Studies Guidelines and RubricOverview: Critical thinking is a habit of mind characterized by the comprehensive exploration of issues, ideas, artifacts, and events before
accepting or formulating an opinion or conclusion. Case studies are meant to connect real-world scenarios with theoretical teachings. Students
are expected to test assumptions and find creative ways to consider all the facets contributing to analysis of the case.
Prompt: To begin, read the case study: Kleiner-Perkins and Genentech (2012) When Venture Capital Met Science.
Once you have reviewed the case study and researched the main points, write a paper that addresses the following:
 Summarize the scenario in which you identify the key points, the stakeholders, setting, and situation.
 Discuss the specific issue and secondary issues, and explain how they relate. Explain your reasoning and support your analysis with
research from journal articles.
 Describe a solution to address the issues, explaining who should be involved in the solution, and identifying strengths and weaknesses of
the solution. Be sure to analyze your own assumptions, and others’ assumptions, when considering the strengths and weaknesses of the
 Describe at least two alternative solutions to the issues, and analyze their pros and cons. Consider why the solutions would or would not
be effective, and the assumptions that are made in reference to the solutions.
 Explain how to evaluate the effectiveness of the main proposed solution, once implemented, and discuss the implications of the
Guidelines for Submission: Your paper must include a title page, 2-4 pages of writing, and a reference list. Double-space, using Times New
Roman 12 point font, one-inch margins, and APA style of writing and citations. You will submit your case study report as an attachment to the
assignment box.
Critical Elements
Needs Improvement
Not Evident
Summarizes the scenario and
identifies the key points, the
stakeholders, setting, and
Does not summarize the scenario and does
not identify the key points, the stakeholders,
setting, and situation
Discusses the specific issue
and secondary issues, and
explains how they relate,
explaining reasoning and
Summarizes the scenario and
identifies the key points, the
stakeholders, setting, and
situation, but with gaps in
detail, clarity, or accuracy
Discusses the specific issue and
secondary issues, and explains
how they relate, explaining
reasoning and supporting
Does not discuss the specific issue and
secondary issues, and does not explain how
they relate
7/17/2013 cma
supporting analysis with
research from journal articles
Describes a solution to
address the issues, explaining
who should be involved in the
solution, identifying strengths
and weaknesses of the
solution, and analyzing one’s
own and others’ assumptions
Alternative Solutions
Describes at least two
alternative solutions to the
issues, analyzing their pros
and cons
Explains how to evaluate the
effectiveness of the main
proposed solution, once
implemented, and discusses
the implications of the
Articulation of Response
Submission has no major
errors related to citations,
grammar, spelling, syntax, or
analysis with research from
journal articles, but with gaps in
detail, clarity, accuracy, or
Describes a solution to address
the issues, explaining who
should be involved in the
solution, identifying strengths
and weaknesses of the solution,
and analyzing one’s own and
others’ assumptions, but with
gaps in detail, clarity, or logic
Does not describe a solution to address the
Describes at least two
alternative solutions to the
issues, analyzing their pros and
cons, but with gaps in detail,
clarity, or logic
Does not describe at least two alternative
solutions to the issues
Explains how to evaluate the
effectiveness of the main
proposed solution, once
implemented, and discuss the
implications of the solution, but
with gaps in detail, clarity, or
Submission has major errors
related to citations, grammar,
spelling, syntax, or organization
that negatively impact
readability and articulation of
main ideas
Does not explain how to evaluate the
effectiveness of the main proposed solution,
once implemented
Submission has critical errors related to
citations, grammar, spelling, syntax, or
organization that prevent understanding of
9 – 8 1 3 -1 0 2
REV: MARCH 31, 2022
Kleiner-Perkins and Genentech: When Venture
Capital Met Science
When we hit a home run it’s a big one.
— Tom Perkins 1
Market risk is inversely proportional to technical risk.
— Perkins Law
Established in 1976 by Herbert Boyer, a biochemistry Professor at the University of California at San
Francisco and Robert Swanson who had been a venture capitalist at the firm Kleiner-Perkins, the idea
behind Genentech was to develop the new science of recombinant DNA into viable therapeutic
products with mass market appeal, something that most scientists agreed was at least a decade away.
It presented an opportunity to make one of the most significant advances in biological science since the
1950s when James Watson and Francis Crick built on Rosalind Franklin’s discoveries relating to the
double helix structure of DNA. It also represented a chance for the venture capital industry to influence
the structure of financing in this industry (Exhibit 1). 2
Boyer and Swanson had limited financial resources, so venture capital backing was required for
experimentation and commercialization. Swanson turned to his previous employer for seed money.
Tom Perkins, the co-founder of Kleiner-Perkins, agreed to buy 25 percent of the equity for $100,000 to
fund a pilot study with a view to investing more in the event of a successful outcome. Four years later
an IPO valued Genentech at $300 million. In 2009 it was fully acquired by the Swiss-based healthcare
company, Roche, for $47 billion. Roche had held a majority stake in the company since 1990.
Genentech was one of Kleiner-Perkins most successful investments and Boyer became one of the
first “star scientist” multi-millionaires. How could the commercial development of DNA result from a
strong union between ostensibly contradictory scientific and venture investment mindsets? How did
Boyer, Swanson and Perkins achieve what most biotech startup firms struggled to do—create and
capture value by balancing the objectives of basic and commercially viable research? 3
Professors Felda Hardymon and Tom Nicholas prepared this case. This case was developed from published sources. Funding for the development
of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion.
Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2012, 2019, 2021, 2022 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call
1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to This publication may not be
digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
Kleiner-Perkins and Genentech: When Venture Capital Met Science
Boyer, Swanson and Perkins
Herbert Boyer
Boyer was born and raised in Derry in western Pennsylvania. Following studies in biology and
chemistry at St. Vincent’s College in Latrobe, the University of Pittsburgh and Yale, in 1966 he took up
a faculty position at the University of California at San Francisco and became a full Professor in 1976.
There his research focused on Escherichia coli bacteria, more familiarly known as E. coli and specifically
why it was so resistant to viruses. Scientists had observed that E. coli either replicated by splitting in
two, or by the exchange of genetic information between cells. Boyer conjectured that if different genes
could be introduced into E. coli cells then he could gene-engineer the bacteria. This idea would later set
the stage for genetic engineering and the harvesting of human proteins. 4
The first step in this process related to Boyer’s discovery that E. coli enzymes were able to cut DNA
into smaller fragments with “sticky ends,” a necessary precondition for DNA splicing, which had first
been discovered by Stanford University scientist Paul Berg. The next step was developed by Stanley
Cohen, also from Stanford, who was working on small rings of DNA called plasmids that helped to
pass genes between bacteria. Boyer and Cohen met at a conference in Hawaii in 1972 and together their
joint efforts were integral to pushing the research program forwards. Boyer’s DNA fragments could be
joined together with Cohen’s plasmids such that genetic material could be manipulated and
reproduced with the structure of the new DNA. The upshot of their findings was the basic science
underpinning the biotechnology industry. 5
Robert Swanson
At the time Herbert Boyer was experimenting in his San Francisco laboratory, Robert Swanson was
employed by Kleiner-Perkins in Silicon Valley where he began thinking about entrepreneurial ideas
and pursuits, especially in relation to microbiology and the newly emerging field of gene technology.
Swanson was educated at MIT in the late 1960s and graduated with degrees in chemistry and
management. Prior to his career in venture capital he worked for four years as an investment officer in
New York with First National City Bank (later Citibank).
Swanson met Boyer by way of an informal interview in January 1976, which he had arranged to
inquire about the commercial opportunities of genetic engineering. Most academics in the field
Swanson had previously spoken to had suggested that a marketable product was at least a decade
away and Boyer was only somewhat more optimistic about applications stemming from the nascent
science. Yet, he admired Swanson’s energy and enthusiasm and together the two decided to sketch out
the outlines of a business plan for using gene engineering to produce biological products. 6
Tom Perkins
Tom Perkins, the venture capitalist that first provided Boyer and Swanson with funding, was born
in Oak Park Illinois in 1932. He graduated from MIT in 1953 with a degree in electrical engineering and
worked for Sperry Gyroscope until 1955. Perkins then entered Harvard Business School, graduating in
1957. The same year he joined Hewlett-Packard and then worked for Booz Allen Hamilton from 1959
to 1960. Between 1960 and 1963 Perkins worked at Optics Technology Inc., a startup in which David
Packard and William Hewlett had a personal investment interest.
Perkins returned to Hewlett Packard from 1963 to 1972, first as an administrative manager of HP
Laboratories, second as General Manager of HP’s nascent computer business reporting directly to
Packard and finally as Director of Corporate Development reporting to Hewlett while Packard was
Kleiner-Perkins and Genentech: When Venture Capital Met Science
running the Department of Defense in Washington DC. Notably, in 1965 Perkins established his first
startup, University Laboratories Inc., (ULI) in Berkeley, at the same time as he was building HP’s
computer business. Packard had strongly encouraged Perkins’ entrepreneurial ambitions. ULI held
intellectual property rights on lasers Perkins had developed and it became immensely successful. ULI
was acquired by Spectra Physics in 1970 giving Perkins a net worth in seven-figures. 7
In 1972 Perkins established a venture capital firm with Eugene Kleiner who had worked at Shockley
Semiconductor Laboratory and was one of the “traitorous eight” who left to start Fairchild
Semiconductor, an innovator in transistor and integrated circuit technologies. 8 By the following year
Perkins and Kleiner had raised an $8 million fund. Their second fund, of $15 million, was raised in 1978
by which time they had added two additional partners, Frank Caufield and Brook Byers. A third fund
was raised in 1980 amounting to $55 million and at the time of the fourth fund of $150 million in 1986,
Perkins made the decision to retire. Kleiner-Perkins became one of the most successful venture capital
firms in Silicon Valley as a consequence of investments in firms like Genentech. Perkins was Chairman
of Genentech between 1976 and 1990. 9
The Early Years of Venture Capital and Biotech
During the early 1970s, venture capital was a much smaller business than it is today. Venture capital
commitments amounted to around $10 to 20 million dollars per year and the total pool of funds was
no more than a couple of hundred million dollars. The supply of funds into venture capital increased
during the decade because of success stories like Genentech and also due to government reforms
affecting the supply of funds into alternate assets classes. Specifically, a 1978 reform to the Employee
Retirement Income Security Act in effect permitted 10 percent of the capital in pension funds to be
invested in venture finance. By the late 1980s commitments of pension funds to the venture industry
exceeded $4 billion dollars each year. 10
By the mid-1970s Kleiner-Perkins was still a small concern, composed of the two founding partners
plus Swanson, a secretary and a bookkeeper.11 With limited capital from other investors available for
funding startups, Kleiner-Perkins was frequently the sole investor in the first phase of financing
rounds. Unlike many traditional venture firms, they took an active role in managing the firms in which
they invested. They were also typically concerned with early-stage investments compared to many East
Coast firms that tended to invest in later-stage enterprises.
Biotech did not become an industry until the late 1970s and early 1980s when the first wave of
companies, including Genentech, was established. Opportunities for venture capital investing in the
related pharmaceuticals industry were non-existent due to the preponderance of large established
firms, some of which, like Ely Lilly, could trace their origins back to the nineteenth century. Most of
these had their own internal cash flows or “deep pockets” with which to fund research and were fully
integrated operations (Exhibit 2). Pharmaceutical companies made profits by using intellectual
property rights to protect and license their inventions, and they also made simultaneous investments
in R&D, organizational, production, marketing, and regulatory capabilities. 12
Although science was being conducted extensively in universities and not-for-profit foundations
there was little interaction between proprietary and “open science” worlds. In the not-for-profit sector,
scientists focused on grant-funded basic science and research output was disseminated through peerreview publications. Few patents were ever filed. 13 Companies such as Genentech in the emerging
biotechnology industry offered the promise of challenging the “Big Pharma” model. They would do
this principally by changing the structure of the industry by inducing interactions between large
incumbents, entrepreneurial entrants and not-for-profit enterprises.14
Kleiner-Perkins and Genentech: When Venture Capital Met Science
Kleiner-Perkins and Biotech
Genentech was not the first biotech venture in which Kliener-Perkins held an equity stake. Cetus
Corporation, a start-up company established in Berkeley, California in 1971 proposed to automate
certain functions that laboratories performed. Nobel Laureate, Dr. Donald Glaser, had developed a
machine capable of simultaneously screening large numbers of microbial cultures, which offered the
potential to revolutionize productivity in the pharmaceutical industry. Glaser headed a prestigious
scientific advisory board that included Stanley Cohen. Ronald Cape and Peter Farley acted as CEO and
President respectively.
Perkins recalled investing approximately $500,000 in the company and soon thereafter having
significant reservations about the direction in which Cetus was moving and its governance structure. 15
Consequently, Swanson was given the task of ensuring that Kleiner-Perkins would receive a
satisfactory return for its investment, which also involved exploring alternate revenue development
possibilities to Glaser’s machine. Notably, Swanson offered to set up a separate division of the company
to develop recombinant DNA technology, but the proposal was rejected unequivocally by Cetus’
eminent board of scientific advisors. Kleiner-Perkins became disillusioned with their investment in
Cetus. They also counseled Swanson to seek employment elsewhere.
Emerging Regulation Issues
Concurrently with these commercially-related events, a fierce political debate emerged with respect
to the safety of experimenting with gene technology. The National Academy of Sciences established a
committee headed by Paul Berg to advise them on potential concerns. Some scientists were alarmed by
the use of viral genes in recombinant DNA experiments and the susceptibility of laboratory workers
and the environment more generally to biohazards. In 1974 Berg’s committee produced an open letter
to the scientific community urging a moratorium on experiments with potential transmission risks.
Guidelines for DNA recombinant research were established by the National Institutes of Health (NIH)
as regulations in 1976 applying to any research funded by the federal government.
Founding Genentech
Pitching the Idea
While searching for alternative employment to Kleiner-Perkins, Swanson had contacted Boyer to
determine the feasibility of commercializing the science behind recombinant DNA. Together, Swanson
and Boyer prepared a six page document outlining their objective “to engage in the development of
unique microorganisms that are capable of producing products that will significantly better
mankind.”16 In essence they proposed to develop DNA based therapeutics (specifically they chose
insulin because of the large worldwide market and the potential for high margins) and license the
technology to pharmaceutical firms because these had the necessary financial resources to fund the
clinical trials process and full scale production. Swanson estimated $500,000 for setup costs.
The political controversy over genetic engineering and the investment experience with Cetus
should have made Perkins hesitant to invest in yet another science-based startup. But he agreed to
discuss investment possibilities with Swanson. Perkins recalled of the first meeting:
A week or so after they had put together the nucleus of a business proposal to do
genetic engineering, Bob brought it to me for financing. It was very conventional in that I
would put up the money, they would hire the people, and it would be a straightforward
Kleiner-Perkins and Genentech: When Venture Capital Met Science
venture. I took the view that the technical risk was so enormous. I remember asking,
“Would God let you make a new form of life like this?” I was very skeptical. 17
To make a more informed decision about investment potential based on the underlying scientific
ideas, Perkins met with Boyer later that week. Of this meeting he noted:
[W]e sat down in our conference room for about three hours. Of course I have a
background in physics, electronics, optics, computers, lasers [but] biology was never a
strength for me. I really didn’t know what kind of questions to ask. So I said, “Let’s just
got through it step by step. Tell me what you are going to do. What equipment you’ll
need. How will you know if you’ve succeeded? How long will it take?” I was very
impressed with Boyer. He had thought through the whole thing. . . . I concluded that the
experiment might not work, but at least they knew how to do the experiment. 18
Perkins agreed to invest $100,000 for 20,000 shares of preferred stock of the new startup, which was
incorporated as Genentech in April, 1976. Swanson had suggested calling the firm “HerBob” (Herb
from Herbert and Bob as the shortened version of Swanson’s first name). Instead, and probably
fortuitously, Boyer suggested a derivative of the words, “genetic” “engineering” and “technology”. As
President and Treasurer, Swanson received an annual salary of $30,000 (about $100,000 today) whereas
as Vice President and Secretary, Boyer’s salary was $12,000 (about $40,000 today). Both were allocated
25,000 shares of Genentech stock and took board seats. Perkins was the Chairman. 19
When he was later asked why he was willing to fund such a risky venture, Perkins recalled, “I
figured better than 50-50 we’d lose [our investment] . . . but [i]f it worked, the rewards would be
obvious.” 20 Equally he noted, “What was different about Genentech was the astonishing amount of
capital required to do all this. I know on day one that if anyone had whispered into my ear that ‘For
the next twenty years, you will be involved in raising literally billions of dollars for this thing,’ I might
not have done it.”21
Although Swanson had asked for $500,000, Perkins agreed to invest only one-fifth of that amount.
He explained:
I got together with Swanson and I took the view that I’m willing to go along with this
thing, but that we’ve got to figure out a way to take some of the risk out of it—something
instead of me giving you all of the money, then you renting the facility, buying the
equipment and hiring the people. With that approach you’ll have spent maybe a million
dollars by the time you get to actually performing the experiment. Then if it doesn’t work
it’s all over and all that money is lost. 22
As a resolution to this issue Perkins questioned: “Can’t we figure out some way to subcontract this
experiment to different institutions, each of which already had a part of these capabilities.” Moreover,
in order to move Boyer and Swanson towards that strategic goal he tied funding cycles to outcomes.
“In order to give some incentive to subcontract the work . . .,” he said “I would be willing to finance
the thing in phases, to put up less money up front. If things started to work then I’d put up more and
more money at higher and higher prices. Otherwise, Perkins stated: “I’ll want to own most of the
company if I’m going to take all of that conventional risk.” 23
Kleiner-Perkins and Genentech: When Venture Capital Met Science
Boyer and Swanson agreed with the subcontracting strategy and Genentech began negotiating
contracts with the University of California in San Francisco, the City of Hope, a private research
institution and hospital in Duarte, California (close to Los Angeles) and Caltech. Each was to perform
a distinct function. Boyer’s laboratory had expertise in gene splicing and he had developed a good
network of scientists working there, City of Hope had capabilities in the area of gene synthesis, and
two strong specialists, Arthur Riggs and Keiichi Itakura, and Caltech was a first-rate testing facility.
The contract with the University of California at San Francisco stipulated that Genentech would pay
$35,000 and the university in return would own any resulting patents with Genentech being an
exclusive licensee paying royalties back on sales. The contract with City of Hope provided Genentech
with a stronger intellectual property rights position. It would own any patents and pay a 2 percent
royalty on sales. Finally, a sponsorship agreement was established with Caltech including monetary
payments and 1,500 shares in Genentech stock to a graduate student called Richard Scheller who was
proficient in the area of DNA. He remembered of the inducement, “I had a ponytail halfway down my
back. I smoked marijuana every day. I didn’t give a damn about money or stock or anything. I was a
scientist.” 24 (Scheller joined Genentech in 2001 as senior vice president of Research.)
Prior to establishing these contracts Swanson had unsuccessfully approached the Technology
Licensing Offices at the University of California and Stanford with the aim of securing an exclusive
license to make recombinant therapeutics, based on a DNA-related patent the universities were
pursuing following Boyer and Cohen’s research.
Eight months after Genentech had been established, the nucleus of a strategy was in place, but
nothing more. In December 1976 Genentech reported losses of $88,601 on assets of $88,421. 25
The First Experiment
Between December 1976 and February 1977 Genentech raised a second funding round with KleinerPerkins investing an additional $100,000 and a further $750,000 coming from other investors for a total
of 25 percent of the equity. 26 At the nascent startup stage, Boyer, Swanson and Perkins realized that
Genentech’s fate rested on making scientific breakthroughs.
It was decided that Genentech should experiment with producing the human protein somatostatin
in E. coli. Although the ultimate objective was to clone human insulin, somatostatin was a systematic
step along the way. Boyer explained:
Somatostatin is a small protein. It’s only fourteen amino acids long. It would be easy to
synthesize the gene for that. At that time, it was still a laborious and time-consuming
thing. And also, we would make it as a part of a larger protein which we could chemically
cleave away from the majority of the protein, and there was a very sensitive
radioimmunoassay for the protein. So it was much more straightforward as a model than
doing insulin. What we needed to do was to show that we could actually make a human
protein in bacteria, and that was key to the next level of funding, to get an independent
laboratory, and hire people and so on and so forth. 27
Perkins reiterated this viewpoint:
We decided to do a proof of principle first, with the smallest gene that, we hoped,
could be expressed. It might have some use but basically it would be a proof of principle.
Kleiner-Perkins and Genentech: When Venture Capital Met Science
It was a gene to express a protein called somatostatin. Somatostatin had not yet found a
commercial use, but it could someday. It wasn’t an utterly useless exercise. The gene went
together more or less as planned and was delivered up to UC where it was spliced and
expressed, then tested. And it worked. 28
While the process of developing somatostatin was considerably more fraught with difficulties than
Perkins’ description suggests, it was an important iterative step and it also produced intellectual
property rights and scientific articles that signaled Genentech’s commitment to world class basic
research (Exhibits 3, 4 and 5). Furthermore, Perkins pointed out that the experiment had done
something critical, which was to “remove much of the risk from the entire venture. . . . For next to
nothing we had removed a world class question about risk.”29
Perkin’s sentiment was passed on to investors. Noting the significance of the success of the
somatostatin experiment Swanson stated in his address to shareholders in April, 1978:
I am pleased to point out that the two year start-up of the company, including the
completion of our first research goal, the production of the human hormone somatostatin,
and the first commercial demonstration of our new technology, was accomplished for a
total of $515,000. We plan to approach future growth in the same lean but effective
manner. 30
Developing Insulin
Exploring Partnerships
Swanson knew that somatostatin had limited commercial applicability and he realized that
experimenting with human insulin, a hormone used to treat diabetes, was the next priority. The global
pharmaceutical powerhouse, Eli Lilly held 80 percent of the U.S. market by deriving human insulin
from the pancreas of animals. So the potential payoffs from replicable recombinant insulin were
enormous. Perkins recalled:
Insulin had always been Swanson’s primary target. Somatostatin was just a way station
on that quest. He and I both agreed on this. We didn’t have to do market research to
convince ourselves that if we could make human insulin—literally human insulin—with
this genetic engineering approach that the market would be tremendous. Whether we
developed the product ourselves or licensed it, it would be a valuable thing. 31
Swanson’s preferred solution was to partner with a pharmaceutical firm. This strategy to mitigate
risk was analogous to what Genetech had done by subcontracting out its first experiment. He
approached the Danish firm Novo Industri, the German firm Hoechst but none agreed to a
partnership. 32 Eli Lilly, did however engage with Swanson. While Lilly was keen not to invest in-house
in the new science of recombinant DNA given the uncertainty of the payoffs, it was also fearful of being
displaced. In June 1978 Lilly agreed to provide $50,000 a month to Genentech in support. 33
Investing in Plant, Equipment and Scientists
Having raised a third round of financing of $950,000 for 8.6 percent of the equity in March 1978 34,
Genentech began to build out capabilities at a 10,000 square feet warehouse in South San Francisco.
Swanson attempted to recruit scientists from research institutions that were working independently on
cloning genes for insulin. Swanson attempted without success to extend contracts to star scientists at
Kleiner-Perkins and Genentech: When Venture Capital Met Science
the University of California at San Francisco and at Harvard. Stanley Cohen refused to join Genentech
on conflict of interest grounds, given that he was already employed at Cetus.
Eventually Swanson’s recruitment efforts (with help from Boyer) paid off when two scientists
Dennis Kleid and David Goeddel from a contracting research institution, Stanford Research Institute
(SRI), agreed to join Genentech. Swanson had learned about talent at SRI from Dutch star scientist Herb
Heyneker who had joined the firm in September 1978 on a salary of $40,000 (about $130,000 today).
Heyneker had been a postdoctoral fellow in Boyer’s laboratory. Together these scientists formed the
nucleus of Genentech’s research team and they worked with Boyer at the University of California at
San Francisco and with Riggs and Itakura of City of Hope.
Genentech’s policy was to allow scientists to publish their academic findings, so long as the research
results had been included in a patent application first. All employees were required to sign contracts
assigning the right to their inventions to Genentech. 35 This norm was essential to balance Genentech’s
basic and applied objectives, but it required significant adjustments on the part of scientists who were
less orientated towards thinking through the relationship between science and commercial research.
Swanson also offered scientists stock options, something which was standard in new startups but not
in the pharmaceuticals industry. 36
Perkin’s believed Swanson’s efforts in building infrastructure and capabilities and recruiting
scientists were instrumental to developing Genentech’s tradition of scientific excellence. He stated:
Bob Swanson deserves tremendous credit for putting Genentech together. I think the
next most important thing he did was to realize—and Herb Boyer helped him come to
this conclusion—that to build a world-class scientific research corporation he had to hire
world class scientists. To do that he had to establish an academic-like environment, but
even better than an academic environment. In academia the researchers spend a huge
amount of their time writing research proposals to get funding. Genentech eliminated that
while encouraging some pretty basic work. 37
The Big Discovery
With contract agreements with the City of Hope still in place and Genentech’s own scientists
arriving at the firm around the middle of 1978, work on recombinant insulin began in earnest,
especially given parallel efforts taking place at competing research institutions. In fact a team of
scientists at Harvard soon announced that it had produced insulin in the laboratory, albeit only rat
insulin as opposed to the human kind.
Furthermore and unbeknownst to Genentech, Eli Lilly had also hedged its risks by contracting with
the University of California to license the technology in the event that academic scientists were able to
develop insulin first. In effect, Genentech, still a small startup at the time, was involved in a race with
competitors with arguably much stronger resources and capabilities. Fortunately for Genentech, they
largely operated outside of the constraints of federal regulations governing NIH funded DNA research,
which quickened the pace of their experimentation.
Scientists working at Genentech’s facility and City of Hope eventually managed to synthesize the
insulin gene and clone it in bacteria. Although the process was inefficient and the yield was low, on
August 21, 1978 they produced the world’s first genetically engineered form of human insulin. This
was to be Genentech’s first commercial product. Commenting on the breakthrough, Perkins noted:
Kleiner-Perkins and Genentech: When Venture Capital Met Science
The announcement of insulin was a world news event. The day we announced, it was
the headline in the San Francisco Examiner. That woke up the world to what we now call
gene engineering. It put Genentech on the map. It went from essentially nothing to a very
interesting and viable enterprise. Thus began the real fundraising for Genentech. We were
able to raise money at much higher prices. So high that Kleiner and I made only token
investments ever after, because Kleiner-Perkins already had a significant ownership of
Genentech. 38
Once the process for creating human insulin had been refined and patent applications filed,
Genentech faced key decisions about how to make money from it. Perkins recollected:
After two or three years of work at Genentech we had some strategic questions to ask
ourselves. Should we attempt to use our patents as a barrier to other companies? Or
should we license our patents broadly? I persuaded Swanson to follow the licensing
strategy. Otherwise our technology was just so absolutely basic that we would be in
endless patent litigation. We would spend every resource defending patents and it would
be years before we had an income stream from products to pay for that. It would be better
to license and shoot for royalties. 39
Genentech’s first licensing agreement was signed with Eli Lilly in 1978. For an upfront fee of
$500,000 and commitments to fund further milestone-based R&D, Lilly received an exclusive
worldwide license. Genentech would receive a 6 percent royalty and City Hope a 2 percent royalty on
sales. The agreement stipulated that Lilly could only use Genentech’s technology to manufacture
human insulin, not other products, and Genentech retained full ownership of the intellectual property
rights. Hence, it received a large injection of capital for R&D without diluting its equity and this was a
large payoff for a firm that still had only 26 employees. Lilly, on the other hand, could deploy its strong
production and marketing capabilities to maximize the sales potential of the new product and equally
importantly to gain regulatory approval. 40 In 1980 recombinant DNA insulin was trialed on humans
for the first time. In 1982 Lilly launched the prescription medication Humulin and sales reached
approximately $300 million by the mid-1980s.
Genentech’s scientists were buoyed by the success of insulin and they engaged in further research
and development, cloning human growth hormone in 1979. But despite this momentum some nonscientific constraints remained to be overcome. With the evolving regulatory side of recombinant DNA,
Genentech was the subject of intense ethical discussions in the media. According to Perkins:
There were two streams of hostile press. One was the . . . anti-technology stream. At
the root of it was the genuine fear that we’d make Frankenstein monsters, poison the
atmosphere, and everything else. The other stream of it was whether it was morally
correct for academicians like Boyer to make so much money. 41
In 1980 Genentech underwent an IPO raising $35 million with a first-day price spike from $35 a
share to a high of $88 (Exhibit 6). Perkins recalled, “we were the hot guys, with the best this, the most
aggressive that, the best science, the best patents, the best financial relationships, the best publicity.”42
Genentech subsequently became a multi-billion dollar company.
Kleiner-Perkins and Genentech: When Venture Capital Met Science
Looking back Perkins reflected on the success of a venture where science and venture capital had
become inextricably bound together:
I honestly think that if we had to do it all over again, we’d do it the same way. I don’t
think we made a single strategic error. We might have done a few things different
tactically, and we should have spent more time tightening all these agreements, though
they seemed so tight at the time. But I still think the strategy of the way we did it—
subcontracting the experiments, then licensing to Lilly. . . . I don’t think we could have
done it better. 43
Kleiner-Perkins and Genentech: When Venture Capital Met Science
Exhibit 1
Venture Capital in Biotech, 1978–2005
Compiled by the casewriter from data in ThomsonONE, Private Equity module.
Kleiner-Perkins and Genentech: When Venture Capital Met Science
Exhibit 2
R&D and Sales by Members of PhRMA, 1970–2005
Compiled by the casewriter from data in “Pharmaceutical Research and Manufacturers of America,” PhRMA Annual
Membership Survey, 2008.
Kleiner-Perkins and Genentech: When Venture Capital Met Science
Exhibit 3
Front Page of An Early Genentech Patent
Patent document from the United States Patent and Trademark Office.
Kleiner-Perkins and Genentech: When Venture Capital Met Science
Exhibit 4
Front and Back Page Sections of an Early Genentech Scientific Publication
This article was published in Science, New Series, vol. 198, no. 4321 (December 9, 1977), pp. 1056–1063.
Kleiner-Perkins and Genentech: When Venture Capital Met Science
Exhibit 5
Publications in Science and Nature, 1976–1987
Data provided courtesy of Simcha Jong. See further “Academic Organizations and New Industrial Fields: Berkeley
and Stanford after the Rise of Biotechnology,” Research Policy vol. 37 (2008), p. 1274.
The data were obtained using the following queries in ISI Web of Science citation database: Journal: Science OR Nature;
Publication type: Article; Years: 1976–1987; with separate searches in the address field for: Berkeley AND Biochem,
Stanford AND Biochem, Genentech.
Genentech’s Capitalization Table at its IPO
Exhibit 6
Kleiner-Perkins and Genentech: When Venture Capital Met Science
1 Thomas J. Perkins, “Kleiner Perkins, Venture Capital, and the Chairmanship of Genentech, 1976-1995,” an oral history
conducted in 2001 by Glenn E. Bugos for the Regional Oral History Office, The Bancroft Library, University of California,
Berkelely, 2002, p. 75.
2 Gary Pisano, “Can Science be a Business: Lessons from Biotech,” Harvard Business Review vol. 84, no. 10, 2006, pp. 114-24. See
also Gary Pisano, Science Business: The Promise, the Reality, and the Future of Biotech (Harvard Business School Press, 2006).
3 For further analysis on this tension see, Iain Cockburn, Rebecca Henderson, Scott Stern, “Balancing Incentives: The Tension
Between Basic and Applied Research,” NBER Working Paper (1999).
4 A.J. Nair, Introduction to Biotechnology and Genetic Engineering (Jones & Bartlett, 2008).
5 Sally Hughes, Genentech: The Beginnings of Biotech (Chicago University Press, 2011).
6 Hughes, Genentech.
7 “Kleiner Perkins, Venture Capital,” p. xvii; Tom Perkins, Valley Boy: The Education of Tom Perkins (Gotham, 2007).
8 The traitorous eight are Julius Blank, Victor Grinich, Jean Hoerni, Eugene Kleiner, Jay Last, Gordon Moore, Robert Noyce and
Sheldon Roberts, who had resigned their positions at Shockley Semiconductor Laboratory in 1957 following a conflict with the
founder William Shockley.
9 “Kleiner Perkins, Venture Capital,” p. xvii.
10 Paul A. Gompers, “The Rise and Fall of Venture Capital.” Business and Economic History vol. 23, no. 2, 1994, p. 2.
11 They had also hired another individual, Jimmy Treybig, to help source deals, though his tenure at Kleiner-Perkins did not
overlap with Swanson’s. Treybig was one of the founders of Tandem Computers.
12 Iain M. Cockburn, “The Changing Structure Of The Pharmaceutical Industry,” Health Affairs vol. 23, no. 1 (2004), pp. 13–14.
13 Cockburn, “The Changing Structure,” pp. 13–14.
14 Pisano, Science Business.
15 Perkins, “Kleiner Perkins, Venture Capital,” pp. 3–4.
16 Hughes, Genentech p. 38.
17 Perkins, “Kleiner Perkins, Venture Capital,” pp. 4–5.
18 Perkins, “Kleiner Perkins, Venture Capital,” pp. 4–5.
19 Hughes, Genentech p. 41.
20 Hughes, Genentech p. 40.
21 Hughes, Genentech p. 42.
22 Perkins, “Kleiner Perkins, Venture Capital,” p. 5.
23 Perkins, “Kleiner Perkins, Venture Capital,” p. 5.
24 Hughes, Genentech p. 58.
25 Hughes, Genentech p. 47.
26 William D. Bygrave and Jeffry A. Timmons Venture Capital at the Crossroads (Harvard Business Review Press, 1992), p. 116.
27 The UCSF Oral History Program and the Program in the History of the Biological Sciences and Biotechnology, The Bancroft
Library, University of California, Berkeley “Recombinant DNA Research at UCSF and Commercial Application at Genentech.”
28 Perkins, “Kleiner Perkins, Venture Capital,” p. 6.
29 Perkins, “Kleiner Perkins, Venture Capital,” p. 6.
Kleiner-Perkins and Genentech: When Venture Capital Met Science
30 Hughes, Genentech p. 63.
31 Perkins, “Kleiner Perkins, Venture Capital,” p. 6.
32 Hughes, Genentech p. 77.
33 Hughes, Genentech p. 86.
34 Bygrave and Timmons Venture Capital at the Crossroads, p. 116; Hughes, Genentech pp. 85–88
35 Hughes, Genentech pp. 85–88.
36 Hughes, Genentech p. 90.
37 Perkins, “Kleiner Perkins, Venture Capital,” p. 6.
38 Perkins, “Kleiner Perkins, Venture Capital,” p. 7.
39 Perkins, “Kleiner Perkins, Venture Capital,” pp. 8–9.
40 Hughes, Genentech pp. 85–103.
41 Perkins, “Kleiner Perkins, Venture Capital,” p. 26.
42 Perkins, “Kleiner Perkins, Venture Capital,” p. 12.
43 Perkins, “Kleiner Perkins, Venture Capital,” p. 9.

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