Frederick Muto Interview – October 3, 2016
WEISS: I am Helen Weiss for the San Diego Technology Archive, housed at the Special Collections at the UC San Diego Geisel Library. I'm interviewing Mr. Fred Muto on October 3, 2016 at the offices of Cooley, LLP in La Jolla, California. Mr. Muto is a founding partner of the firm’s San Diego office. He's received many accolades and awards during his more than [37] years of service. He currently specializes in corporate and securities law for emerging and public technology and growth companies as well as venture capital investors and investment banking firms. Thank you, Mr. Muto, for taking the time for this interview. We'll start with your background education, then we'll explore your extensive expertise with companies here in San Diego in biotechnology, communications, consumer, hardware, healthcare, Internet, medical devices, retail, semi-conductor and telecommunications industries.
MUTO: Thank you.
WEISS: Thank you. So with such a broad background and expertise, tell us a little bit. Where did you grow up and what were your childhood interests and hobbies?
MUTO: I grew up in Niagara Falls, New York. I was a very typical young boy. I was interested in sports of all sorts, particularly baseball. I played a lot of baseball. I went to my undergrad at the University of Buffalo, SUNY Buffalo, and then to law school at Berkeley. Coming out to visit Berkeley led to 40 years out here on the West Coast now.
WEISS: So when you were at SUNY Buffalo, you were graduating in 1975, Phi Beta Kapa with a BA in political science. Did the draft for the Vietnam War impact you at all upon graduation? You were in that little window at the end of the war.
MUTO: It was at the end of the window and I did get a draft number. I was very fortunate and had one – I can't even remember – it was in the 300s. So that meant I knew I was not being drafted.
WEISS: When did you decide that you wanted to go to law school?
MUTO: I decided in my senior year of undergrad. I thought I wanted to go to law school, so I applied. I put a deposit down at the University of Michigan Law School and then decided I wasn't ready to make that commitment. So with a good friend, I put a backpack on and went to Europe for [three] months and travelled. That's notable in my life because on a summer night in St. Mark's Square in Venice that friend met his wife of 40 years, Mindy [Nierenberg] – also a very good friend of mine.
WEISS: So then you chose Berkeley. How did you get to UC Berkeley?
MUTO: Well in my year of travels – and again, I was born in western New York, which has very challenging weather. In my year of travel after getting back from Europe, I spent a little bit of time on the East Coast but then came out West to visit a few friends who had gone to school in Silicon Valley, and it was the drought years. I was here for two weeks and every day I woke up and it was sunny and 80. I decided at the end of that period that I would put in an application at Berkeley. I think I submitted it on the last day that I was eligible. Put another deposit down at the University of Michigan but hoped to get admitted to both. I was fortunate to be admitted and made the commitment to come.
WEISS: At that time, you were at Berkeley and are you pursuing some kind of career path in working with technology, or what type of law were you interested in throughout your law school?
MUTO: I don't think I went to law school for the best of reasons. I couldn't find a better path in my life, so I went to law school. I was a good but kind of indifferent student. Like a lot of second-year law students, I interviewed in major law firms in different cities. I decided it would be fun to work in New York City for the summer, so I went there with my then girlfriend and now wife of 37 years. We had an interesting summer. She loved her summer clerkship. I thought mine was boring. I was working on bond offerings and very, very large transactions. I came back with a little bit of a crisis in confidence of whether I was on the right path. Learned about Cooley, my firm of 37 years now and its early work with the Silicon Valley start-ups. [I think the firm had just over] 40 lawyers. I think I was the 44th lawyer when I joined.
I learned about the practice of working with start-ups and trying to help them grow through stages, as well as with companies working on cures to cancer and predecessors of the smart phone. I thought that would be a lot of fun; interviewed at Cooley and I fell in love with it. Then my now wife and I decided to get married and after taking the job at Cooley in 1979, I deferred for a year to follow my wife. She had a federal clerkship here in San Diego. I wanted very much to be at Cooley and to do the kind of work Cooley was doing but the marriage was the most important thing to us.
So I went back to the managing partner at Cooley, and told him I couldn't come. [My wife and I] didn't want to have a long distance relationship. He expertly asked me if I would come the following year. I committed to do that. Came down here and taught legal writing at USD’s [law school]. And, of course, I fell in love with San Diego.
About a year later, we marched back up to Silicon Valley, mostly because I couldn't find anything like what I was going to be doing at Cooley in San Diego at the time and because I didn't feel like I could back away after [Cooley was] so gracious the first time. We went back up and I spent the next 10 or 12 years keeping my eyes on San Diego’s [business community] and hoping that there would be a path back. It's where my wife grew up and it’s a pretty special place to live.
WEISS: What was the landscape in terms of technology in Silicon Valley and what was going on here in San Diego?
MUTO: It was very different. There was really very little momentum in the early 1980s in San Diego. There was no North County – it was a very different place. There was not the same professional infrastructure [as in the Bay Area]. We ultimately opened the office in March of 1992, ten years later. We were the first law firm to [place our office] in North County. If you just fast forward to today, most of the major corporate law firms have their offices either here in the UTC area or in the High Bluff area. There was very modest activity in the early 1980s. There were a couple of grandfather companies that people talk about all the time. Hybritech was sold to Lily and spawned a lot of companies. Linkabit was founded by the same group that very successfully founded Qualcomm. But back then, there was a relatively small number of companies.
There really was not much of a life sciences community anywhere. It was such a nascent industry. But I followed it closely. We came down to San Diego often. Around the mid-1980s I think you started to see some more technology and life sciences companies being started, usually getting funded from Bay Area venture capitalists. There was not much of a native venture community here and it was still a relatively slow pace compared to what was going on in the Valley.
When you look at the technology companies [from that period] – Cisco, Intel, Oracle, and many others – San Diego had one of those and that's Qualcomm. But momentum picked up. In the late 1980s we started being retained [to represent life sciences companies] because we were spending time down here, getting to know people in the community. One of the original ones – an original San Diego IPO – was a company called Gensia and we represented the underwriters in that transaction with the company.
Then as I recall when Qualcomm decided to do its IPO, they checked with Gensia, who recommended us. That was, again, in the late 1980s, early 1990s. There were a number of companies that got formed or raised a lot of capital at that time. Then Ionis – it used to be named Isis – was formed in 1989 and went public in 1991. And there was Amylin, which went public in 1991 as well. Qualcomm went public in 1991. There was just a steady stream of companies after that and it kept building till today. It was very vibrant.
So I kept watching that from a distance and in the late 1980s I started lobbying our firm's management to look at opening an office here. I was a young partner and I think the firm mainly humored me for a while but we finally made a pretty compelling case and we started building those relationships. Being selected for the Qualcomm IPO was pretty pivotal in getting the firm to back us. So we came down with two partners, myself and one other partner, and five associates and today all but one of them are still here practicing. I think the real ascent of the technology life sciences communities happened in the early 1990s.
There have been some challenges – ups and downs along the way. The tech crash in 2000 greatly affected the technology company environment, but the life sciences [community was greatly affected] as well. Whenever there is uncertainty and risk people stop making investments, stop doing things, stop buying companies. More recently, the financial collapse in 2007, 2008 [was extremely challenging]. Same effect. Even today, with near negative interest rates and an election, there's a caution that hasn't been around for a number of years now.
WEISS: Is that paralleled in Silicon Valley throughout the ups and downs the same way?
MUTO: It is, I would say with one different thing going on in the Valley right now. There has been such an extraordinary amount of capital put into private companies, companies not yet public or that have only recently gone public. Facebook, Twitter, Uber. There's just a whole lot of companies in the Bay Area that are called unicorns that have a billion-dollar market cap as a private company. If you scroll back five years ago, there might be a handful of unicorns in the world. But the Bay Area had over 100 unicorns at last count.
Now some of them are now raising capital at lesser valuations or at least there's some talk about that. So certainly, back to your question, I think in that segment of the economy, those first tier Internet enabled/consumer facing businesses, there's just a layer that just doesn't seem to be very affected by this at all. And I do worry for all of us. Facebook is maybe 12 years old and has, I think, the highest market cap or the second highest market cap in the world. Google and probably Uber are other great examples.
People talk about, "Is it a bubble or not?" Well I don't know but we've never had a hundred or two hundred companies with billion-dollar market caps before. I think it's a time when I feel cautious and I think other people in the field whose job it is to place money are getting more cautious.
WEISS: One company in the whole arena or a couple you didn't mention here were ViaSat. What was ViaSat doing during this time?
MUTO: I'm not sure I can get the ViaSat timeline completely right, but it's a long-standing tech company, very stable. I think they have recently hit a couple of interesting developments in their business but I think they worked for a long time on a base of government business that they did. They were not as flashy as some companies but they built the company steadily and kind of were always there over time. But I have never actually done any work with the company so I'm not very familiar with it.
WEISS: What about SAIC which had an unusual model for a long time as an employee-owned company early on, compared to what was going on in San Diego as I understand it?
MUTO: It was a very interesting company. The founder of it who has recently passed away was a real evangelist for employee ownership and made a very unique company. He ultimately had a commercial and a government contracting side. When his successor came aboard the company was split into two companies. But it is an example of what was going on – San Diego was really an aerospace, defense, and government-contracting business.
You mentioned ViaSat and SAIC. But there were a number of others along the way. Titan. We actually represented Titan I think on probably 12 or 13 acquisition transactions over the years. So those companies, they sort of exist a little outside of – there isn't a lot of venture capital that goes into government contract companies but it produced a lot of talent. I think a lot of that talent is what ultimately led to people forming companies here.
One interesting thing that happened in the early years, in the mid-1980s to 1990s particularly on the tech side is, you would have a company start here in San Diego, raise some venture capital, have a founder, a technical founder, and a chief scientific officer who served as CEO. But then when it turned commercial you bring in an executive with commercial experience. Very often, probably four or five times I can think of in a year span, when that commercial CEO came aboard, he would immediately want to move the company to the Bay Area partly for talent and partly because usually it's a 40 to 50-year-old CEO who knows that he's going to do this for 3 or 4 or 5 years and then he's going to have to find another opportunity. That was clearly the case and easy to do in the Bay Area.
Here, this was like a foreign land I think to some of those tech entrepreneurs. It was really hard to keep companies in San Diego. I think that's reversed itself both on the tech side and especially on the life sciences side. There's so much going on here. We see so many new companies moving here from other parts of the world because they've got great access to resources and ways to develop companies. Muragi just came from another part of the world. We've had companies move here from the Midwest, from Toronto. So that doesn't happen anymore. I think San Diego's got the kind of momentum necessary for long term success, clearly on the life sciences but I think on the tech side, too.
WEISS: What role does UC San Diego and the other universities in the area play in terms of getting start up grants or having scientists and engineers come into the companies here?
MUTO: A big role. When we were looking and trying to make the case to open an office here, we looked at some of the parallels to Silicon Valley. The Silicon Valley had major research institutes like Stanford and UC Berkeley. You had this history of successful companies in each industry, granddaddy companies. When we came to look at San Diego there was UCSD for biology, chemistry, and also engineering talent. There was Scripps and the Salk Institute, both of which were very entrepreneurial and had lots of entrepreneurial scientists, probably more so than UCSD.
These were highly trained people and people with big government grants. Salk at the time for example, I think is still the case, all of those scientists had government grants that fund their labs. There's a lot of technology developed in these labs. Karl Hostetler at UCSD formed multiple companies including Triangle Therapeutics which became part of Gilead, and one of the most successful companies in the industry. Ron Evans and Rusty Gage at the Salk Institute have each started [multiple] companies. So I think the institutes contribute founding scientists. They frequently have a license to the early-stage technology that launches the company.
UCSD in particular is a – I don't even know how many engineering grads they have each year but it's a phenomenal number. Companies like Qualcomm have hired many of them over the years, but now with the merging of the digital and healthcare world a lot of the healthcare start-ups that are doing genomics based business models need software engineers and they're really relying on that talent. A company like Illumina, which is a very successful company here in San Diego, hires a lot of engineers.
WEISS: So you think that now it's easier to keep the talent here in San Diego than it had been previously because there was always the big move to the Bay Area to Silicon Valley?
MUTO: Yes, it is definitely easier. In some ways there's a competitiveness in trying to build these infrastructures out but I hear increasingly that the San Diego city officials are starting to trumpet that San Diego has some real advantages now that it has gotten a critical mass in these industries, because as expensive as we think it is to live here, it is impossible in the Bay Area which has become much more like New York City. It's just a challenging place to live. The other thing, in San Diego, there is still a kind of a basic loyalty people have to their employers. In the Valley, for better or worse, people with job opportunities for talented engineers are all over the place. It's a lot easier to jump ship and a lot of harder to build a stable place of employment. I think things have really turned in San Diego's favor.
WEISS: Your company, or the people you work with here and some partnerships, now have offices all over the U.S. in some of the tech hubs and also overseas. Could you just tell me a little bit about that?
MUTO: Yes. We started – San Diego was our first – well actually Palo Alto was our first branch office when I started. The year I started we dispatched three lawyers to Palo Alto. That office today probably has [300] lawyers and has grown with the Silicon Valley; [300], maybe more, all focused on serving the emerging technology and life sciences base in one way or another. We set out to be the preeminent law firm in the world representing [technology and life sciences] companies and we grew with our clients. We built [expertise and capabilities, such as] intellectual property, to serve them [at the highest levels. We focused on building a national footprint by opening offices in cities which had meaningful technology or life sciences commitment].
We built out the West Coast with Colorado and Seattle. When we first went to the East Coast we went to Northern Virginia to open an office in the Mid-Atlantic area, because a lot of government funded technology companies had been formed there. Then from there we built offices in Washington, D.C. and New York City, [which we followed with offices in Los Angeles].
Then we extended our reach overseas by opening an office in Shanghai just because of the incredible level of activity and formation of companies [which very quickly became substantial companies] with very large market caps to start. More recently London to service the companies, particularly U.S. companies that do business throughout Europe—tech companies. So we have [approximately 1,000] lawyers in the firm and really the entire firm is built around representing that client base.
WEISS: So back to the university relationship. And the subject of patents: how is the whole patent field started and possibly changed? We've heard from some of the smaller entrepreneurs that the patents become more difficult. How broad is the intellectual property field now?
MUTO: I'll try and speak to that but I'm not a patent lawyer. What I know is limited. But substantively, there's definitely been a series of decisions, a Supreme Court decision, and a new procedure at the patent office that have the effect of making it harder to get certain kinds of patents. Historically, if you look at the companies that started the Valley, the Intels and chip companies like Qualcomm built very much on an intellectual property model. Qualcomm is a tremendous success making chips that are sold, that are part of every iPhone or at least Qualcomm technology is in every one and their business model is built on licensing intellectual property.
Today, it's not that companies like Facebook, [Google or Twitter] don't have patents, but the development of patents isn't quite as central to the mission of the company. Sure, everybody wants intellectual property if they can get it, but it used to be that if an entrepreneur came in and had no intellectual property at all that we'd tell them, "Geez, it's going to be very hard to get funding without some barrier to others entering the space."
If you go back to when I started, there were very few IP lawyers in large law firms. I think we probably didn’t have a single one. Today, out of our [1,000] lawyers there are probably a couple hundred that do either IP litigation or IP commercial transactions and licensing or IP patent prosecution. It has been the significant growth area in the legal profession for the last 20 or 30 years. I just think it's at a point now where there are a lot of abuses that develop patent trolls that bought patents and asserted them against larger companies with the intent of just extracting a payment.
I think the pendulum's going to swing a little bit. But when I look at it, one of my sons is a privacy lawyer and I think he's in a field which is this generation's IP opportunity. I think it's just become so important to so many companies and consumers and all of us who use online resources [and there will be more and more attention to efforts to regulate]. IP's not going away. It's just not quite as embedded in every business opportunity.
WEISS: How does that relate when you have offices – well you say London now more recently and China. Where does that fit into that scope of getting investors and maintaining the whole intellectual property field?
MUTO: Well it has huge challenges for the companies. This is – Qualcomm has had very public and – I'll speak to only public matters – but a very public challenge with the Chinese government, where the Chinese government alleged a bunch of things including that Qualcomm used its patent monopoly in a way that was not consistent with Chinese laws and pushed back very hard in ways that Qualcomm had to then grapple with. I think on a country-by-country basis, it can be very challenging. China is probably the most challenging because it's a huge market for every tech company and has a huge population base.
I think the European Union is a much more developed economy. There are all sorts of reasons why those countries will respect intellectual property. But again, if you look at Google, it’s an example of a big tech company running into challenges with the E.U. on taxes, with how they've done their tax planning, with the anti-trust concerns that [European regulators] have, and with privacy concerns. There are huge markets that no global tech company can ignore but they have to have country by country lobbyists and a [legal] counsel to get the best results.
WEISS: How about Korea?
MUTO: I don't think South Korea's like a European Union country, but more in that model of collaboration with the West and with the U.S.
WEISS: Do you seek to get investors to come to some of the newer start-ups here in San Diego that may be overseas investors that would come in because they see San Diego as this evolving bio-tech hub?
MUTO: Yes. There have been a number of sovereign wealth types of funds from China, [Russia and other countries] that have come and put in significant amounts of money. I have – we have a company that's on file [with the SEC] right now – I can't name it because it's confidential – but it’s on file to do an IPO and in the middle of that IPO, they have gotten what I – it's a two-stage investment but it's going to be about $50 to $60 million invested in the company which is still a pretty decent IPO if it were the IPO. This is just a round of capital to give them the ability to persevere whether they get that IPO done or not. There's a fair amount of activity. Lots of Chinese investors and some Russian sovereign funds have invested in a number of life sciences early stage companies.
WEISS: Have any of the professors or some of the scientists from Salk ever come through the UCSD CONNECT or with something that was run in the early days out of the university? Do you have any people that kind of evolve into that way or do you not in a way have any involvement with that?
MUTO: No, I think – CONNECT is a terrific organization. One of the things that San Diego has that everybody who does what I do or anything like that in the space is, it's got a collaborative mentoring focus to the extent we raised the tide in the community and all boats rise with it. CONNECT has been a big part of that. A variety of different programs have been.
As a younger partner when I came down here, I spent a lot of time on some of [CONNECT’s] programs. They had a springboard program for years that worked with early stage companies. They're people that do a lot of work and could help them with their business plan and their presentation and their focus and mentor them toward a better result when they go out to the capital markets.
CONNECT has a variety of programs and we've done joint programs with them. Usually CONNECT and Cooley would be getting the same type of people sending out the message that they need help. They might get some of it from CONNECT, they might get some of it from lawyers here, and sometimes we do it collaboratively. CONNECT is broadly focused at industries – no particular industry – other groups like EvoNexus, for example, is much more technology focused. Then there's Biocom and local chapters of a national organization, which offers strong support for life sciences entrepreneurs.
WEISS: How does that concept with EvoNexus, which has these accelerators and incubators, how do you think that works for San Diego in terms of this collaborative work and getting people to work together as opposed to maybe the Silicon Valley or other places where you now have offices?
MUTO: I think it's an advantage, very much an advantage. People just extend themselves and, to some extent, those that might not be so inclined to be that way probably get influenced to change a bit here.
WEISS: Nature Magazine named you as one of two attorneys that were instrumental to the success of San Diego as a high technology and biotechnology hub. How would you describe your role in terms of this whole mentoring or why you, among the hundreds of attorneys in the field here?
MUTO: I think in fairness, that article should have named Cooley, not me personally. I think Cooley [had a lot of foresight] in coming down here when we did. In retrospect, you look and you see the Scripps Institute and the Burnham and the Salk and UCSD and these granddaddy companies and all these life science companies that did IPOs – it looks all clear. But there was a lot of risk in coming down. I remember my first few trips in coming down here. Sam Zell, the famous real estate investor who many thought was a bottom-feeder, bought the Wells Fargo tower. We started our office [in the building – there was one other tenant in it. It was a ghost town.]
So it was really actually a tough time for the Southern California economy. The financial Savings and Loan scandal wasn't that far behind and the defense industry had contracted. So we came down and helped build the infrastructure. We were one law firm. Now there are 20 national law firms with offices around here. But when we came and we were in that building we were the only law firm in North County San Diego.
We worked hard to help organizations like CONNECT and EvoNexus and its predecessors. We don't raise money for companies, but we help them, introduce them to sources of capital, help them get their technology out of the labs and into companies. I think we did a lot of that. I think frankly from the law firm perspective we spearheaded that because we were down here, the first ones, and we have approximately 110 lawyers down here now. But that's not individual accomplishment. That's really the entire firm.
WEISS: Who were key entrepreneurs that you would identify as leaders today in San Diego's tech and biotech?
MUTO: I made a few notes.
WEISS:Oh great.
MUTO: At the top of any list you have to include Irwin Jacobs, both for all that he's accomplished in his career and his continuing contributions. I think he's chair of the Salk, and has been an investor in different start-ups. I think Dan Bradbury, who was the CEO at Amylin and is now investing in and sitting on boards of companies, is a phenomenal entrepreneur and has had great success. Stan Crooke, the CEO of Ionis, which has got a tremendous clinical pipeline unlike any other life sciences company in the country. It has recently been approved to treat spinal muscular atrophy. Stan built the anti-sense platform that [produced the drug and showed extraordinary perseverance in building Ionis].
I think Drew Senyei, who was one of the original life sciences venture investors in San Diego. He's now doing individual investing but he's started a lot of different companies. Magda Marquet and her husband, François Ferré. They're great. Tina Nova, just started another new company called Molecular Stethoscope. She built a company from scratch that was sold to Novartis for $500 million and probably created 600 or 700 jobs here in San Diego.
Ivor Royston who was one of a number that were scientists or executives at Hybritech which was the granddaddy for a lot of life science companies. It was sold very successfully to Lily. It developed the prostate screening technology that's been used to test for prostate cancer for many, many years. Then probably another one I think I'd add is Karin Eastham. She's just a very prominent woman entrepreneur [and Board member] in town and has a number of successful companies. She was on the Amylin board, the Illumina board, and several others. A very talented person and a personal friend. Actually I think all of these people are personal friends. So I should be honest about that.
Then another one would be Harry Gruber. Harry has built two successful life science companies. He's got another one right now, Tocagen, that developing a drug to treat brain cancer. In the middle of all that, he also built an internet company that was sold for a few billion dollars as well. So a unique entrepreneur and he crossed over.
I think actually we'll see more of that: healthcare entrepreneurs and VCs going into the digital health community. Digital health great potential. One prominent local leader in digital health is Eric Topol – who was at the Cleveland Clinic for many, many years – and is a world-famous cardiologist. He started at the Scripps Translational Medicine, which is all about digital health.
WEISS: Where does Craig Venter fit into this whole scheme?
MUTO: You know, he's a larger than life figure. I've never met Craig. He deserves to be on the list. He's got lots of different things going on, vaccine companies and human longevity. So he belongs on the list.
WEISS: Over the years, you've worked with different kinds of business transactions, private placements, public offerings, mergers, acquisitions, spin-offs and other strategic collaborations. Can you tell me how these different types of business models have helped San Diego companies evolve now to becoming the hub that they are?
MUTO: I can try in a few instances. If you look at a company like Ionis, which Stan Crooke founded and leads. He has led Ionis through virtually every one of those types of transactions. They've been around [nearly 30] years and raised several billion in capital. One of the things that we did a lot of over the years, and we have a group that does this, is partnership arrangements with major pharmaceutical companies. We've worked on some of the most interesting and pioneering agreements.
In the first partnering arrangements that were made, you get a molecule, you’d licensed it out, and you would get a royalty on it. But we helped several clients develop a model which said if they can raise the capital and opt in investing, they could get a share of profits. We did a lot of arrangements like that. Those freed up a lot of life sciences companies to try and last longer, to not be sold at the earliest stages and raise more capital.
So otherwise, that long list of transactions all in one way or another relate to leveraging your technology or your products to get the capital to build stockholder value or raising it in some form in the capital markets whether it's a pipes transaction, a public offering, or a rights offering. There are smart people out there thinking of new ways to do this. For me, personally at this point, I spend most of my time counseling CEOs and the boards that I either counsel to or sit on and try to use my years of experience to help them choose the right paths to maximize their value.
WEISS: So among some of the companies you've mentioned, were these all start-ups that you consider evolved into success stories or…
MUTO: They all range from complete start-ups. Gilead is one of the most successful life sciences companies; its drug cures hepatitis C. I remember the start-up of Gilead in some early meetings with the founders.
I can remember the formation of Amgen in our conference room in San Francisco in the weeks and months after I first joined the firm. In a little conference room with six or seven people in it signing documents that led to this company that's probably the largest market cap biotech company. So plenty of stories like that and I'm still working with – I don't think you mind me mentioning Rusty Gage on his fourth start-up and that's great. But we also got brought in at Qualcomm to do the IPO.
They had been around a while and have done a lot of different things. There were still lots of growth and opportunities to help that company. So it can be almost at any stage. We recently started doing work for – I probably shouldn't mention the name of the company, but a very high-profile Bay Area company that's already raised several billion dollars and they just saw us in some transaction and thought we would add more value. So we've gotten retained to do that.
WEISS: These are San Diego focused companies even if they've branched out, that you've mentioned. Ionis has stayed here in San Diego. They haven't moved?
MUTO: Stayed here. No. Up in Carlsbad, one of the first. The community started out and life sciences in particular have started out on the Mesa and over time it's built into the surrounding valley and up to Carlsbad and even up to Poway. But I would say in life sciences, there is a real concentration now up in Carlsbad.
The technology companies I think have been more – some of them have their building signs up here in the Torrey Pines Mesa but they are less of a presence here and much more of a presence down in Sorrento Valley. That's a little more tech oriented. But again, it's spilled out in both directions. There are tech companies up in Carlsbad.
WEISS: Speaking of geographical spread, do you now consider there's like a tech corridor where as far north as Irvine could be considered a tech corridor or is that really the Orange County considers Irvine its own with the Irvine company and all the evolution of Irvine from a small city to now a premier city?
MUTO: More the latter. I think there's more of a set of connections to West L.A. and to Internet enabled business there or new business model companies. We recently represented the Dollar Shave Club which advertises on TVs and they were bought in a transaction that was widely reported for a billion dollars. I think the investors started that company three years before. Orange County has got a very diverse economy. It's a little bit more med tech, med devices. That hasn't been as hot an investment area because of the regulatory challenges.
Having said that, we have had some really good clients up in Orange County. We don't have an office there. We do have one in West L.A. One thing with the earlier stage companies, if you're representing larger companies and driving an hour, it isn't that hard at all if you're trying to help a start-up along and the CEO just wants to have a cup of coffee, it's kind of hard to go up to northern Orange County to have a cup of coffee. It just doesn't have the same level of activity. I mean West L.A. has really kind of exploded in companies that are raising capital at early stages. Most of it, again, Internet enabled business plans.
WEISS: What about the gaming industry?
MUTO: The entertainment industry for sure, but the gaming industry is so highly regulated. You mean –
WEISS: Sorry. I was not thinking of the casinos, sorry. I misspoke. I was thinking more of the computer – when you talk about Internet enabled computer generated games that are now Internet enabled…
MUTO: Absolutely. As I mentioned before, my oldest son is a lawyer. He lives in Santa Monica and works for a game company that's hugely successful and I think he told me has 2,000 employees and it's one of the most frequently used multi-player online games.
WEISS: Speaking of entertainment. In some of the earlier days in San Diego, there were some entertainment technology oriented companies, Sony and some others that were in the area here. What's happened with that business and how's that evolved?
MUTO: You know, I think those were all content folks. I don't know. They may still be here but there were a couple I worked with. MP3 which was really a high flyer. I'd say there's not much going on there today.
WEISS: What about trans-border with Mexico? Certainly there have been the mock leader assembly plants but is there any innovation investment that their companies that are trying to do cross-border here?
MUTO: I think I've said this a couple times. I've done this for 37 years and probably 24 of them here in San Diego. I don't think I've ever worked on a cross-border transaction with Mexican innovators or Mexican capital and San Diego innovators. I just haven't – I think that's such a different economy. It's maybe 20 miles from here but it's a long ways away.
WEISS: What about San Diego business development in terms of the support and economic development and assistance from the City of San Diego, the County of San Diego or some of the individual cities up and down the coast?
MUTO: I hear a lot of people in the business community still rail against California taxes and California water and other regulations. Of all things, I think there's lots of industry groups collaborating trying to help the State find the right balance. Still, we've got so many other strengths that allow a lot – when you look at all the great companies that have transformed life sciences, Amgen and Gilead for example, those two great companies are here and they're not from Iowa or Idaho or Nevada with no taxes.
If you look at the great Internet companies, Facebook, Google, Twitter, they're all here. If you look at probably the top hundred innovative companies that have changed the world like Facebook has already or will change the world, I'm just guessing but I'm sure you'll probably find 80 of those companies in California. So we have to find the right mix and balance. I will say I've had friends and clients, probably four or five leave San Diego in between opportunities [– to locate in a State with no or lower state taxes].
WEISS: Okay, so we're talking now about the San Diego environment. Why California specifically? Why San Diego and the companies that have stayed here despite taxes and maybe not the best business incentives that may have been advertised in other states?
MUTO: I think it's all about talent. Again, I look at San Diego and you look at all the fundamental advances in molecular biology and genomics, these great research institutes that are here and you can almost throw a baseball from the Burnham to the Salk to Scripps to UCSD. I mean they're literally four or five square miles. It's a tremendous amount of talent and that talent accretes over time. It keeps building on itself.
Is L.A. ever going to not be a capital of entertainment? Probably not. I mean or is the media world going to ever not have New York be a very big part of it? Probably not. I think you can ruin a good thing, for sure, and we could do it if we don't figure out water in California, or if we don't think hard before we put more taxes onto businesses. Maybe because as I was about to say, I have four or five CEO folks who have just left. They're 50, 55 and saying, "I don't want to work for another five years generating return for my stockholders and be taxed at the California rates."
But again, with the talent we've got collected here in the Bay Area in these fundamental industries, that's an incredible asset for any region and anyone that believes in the new economy – and I do. There's some companies that are way out ahead of themselves on valuations but companies like Google and Facebook are making enormous financial returns.
WEISS: So where do the Navy and the Marines and SPAWAR and some of the defense industries fit into the picture now because from the '60s on they were some of the reason for contracting companies like SAIC and even space technology development. How has that changed and is the Navy still important here in terms of the technology?
MUTO: The Navy is very important. I don't think it's on the cutting edge of technology anymore. I think SAIC's move was a big one. I think I see more of these couple hundred-million-dollar defense contractors that are really trying to build a different kind of business. They're not trying to change the world. So I don't see it as much of the defense touching or leaking into the tech world.
WEISS: How about in life sciences or biotech? Is there any crossover with that?
MUTO: Not really. I don't think so. I would say if I had to pick one office, our Washington, D.C. Northern Virginia office is really vibrant with government contract businesses. I'm not sure any other market is like that.
WEISS: What about the role of STEM in schools, fostering interest among a wide range of students now? I was just at the Makers Fair at Balboa Park and especially in some of the – various museums but especially the science museum, the Fleet and the Aerospace. You see a lot of young or creative people that have worked in different industries that are trying to do start-ups and even doing some of the crowd sourcing. Where does that fit in? I mean you're at the totally other end of the spectrum with most of your clients but there are some people.
I mean there was a Chinese-born inventor of a 3D modeling printer that would be inexpensive. They have representation there. Then they have a lot of robotics competitions for kids and the solar and the drones now. How do you see getting a younger generation of kids excited about staying here, moving into technology and the future?
MUTO: My firm is sort of the opposite end of West Germany or East Germany from the crowd funding sources. I don't know where that all is headed. I don't think it could ever be a replacement. Maybe it'll be for the sorts of entrepreneurs we work with but it could be in addition to them, to allow some ideas to get funded at earlier stages. I think if I were to look at the young people today and look at [Downtown] San Francisco, it's just a remarkable place.
When I left it in 1992 everything was about Palo Alto and the Silicon Valley. But if you look at the big, successful companies, Uber, Twitter, they're right there and Zynga, the game company, they're right there. If you walk around the streets of San Francisco you might think the average age of the population is 25. There's a lot of excitement and lots of entrepreneurs and people that are engaged in business but in a different way. I think San Diego's trying hard.
A lot of people in a small way. I try to do it, try and promote the sort of pure technology side of it. Those companies are a lot easier to start, most of them, than a big concept biotech company. They take less capital. I think there are some – I try and track all the articles but there's some activity downtown I think that makes downtown a place for young people to want to be because they get jobs there and because it's a city center. It's way behind San Francisco.
WEISS: Through the end of this decade, what do you see for San Diego now?
MUTO: Scroll back to ten years ago. There have been very few biotech drugs approved in the San Diego community, a relatively small number of successful drugs that have $100 million a year in revenue or more. The big success was Biogen Idec's lymphoma drug. Fast forward to today, a lot more have been approved or are on the verge of being approved that are fundamental, and especially if you go to the Bay Area.
Gilead is my example because it's solving a major medical problem permanently. It's getting killed for what it's charging to do that. This is the $80,000, three-month treatment. But what the world is not understanding is that all the people that were otherwise going to need liver transplants aren't going to need them anymore because they won't have hepatitis C chronically. I see the prospects for a couple Gileads here in San Diego and below that, a number of other companies that have gotten enough progress that they can sell their company for $300 or $400 million dollars and there's a lot more of those. That will bring more capital back in. It will keep the virtuous cycle.
I think I see, but maybe it's because I want to see, more momentum on the tech side. We just had an event in our office. We brought in some seed investors, some individuals who may have had some success and want to put small amounts of capital in. There were maybe 25 or 30 of them and it was good to see that number of people in a room, people interested in coming to a networking meeting to hear about interesting new things.
So I'm optimistic, very optimistic on the life sciences, optimistic on the tech side. But I do think global events can just shut the engine off at any time. I’ve certainly been worried about that at different junctures here. We think it's all about numbers and metrics but it's not. It's all about emotions and psychology.
In 2008 there was a slide deck put together by one of the most recognizable venture capital firms in the country and we were all talking about how the bubble's burst, where are we headed. The deck has a big RIP tombstone on the front slide. The VC firm went through and it said to each of their CEOs of their portfolio companies and basically said, "The world as you knew it just ended." I got that emailed to me probably [30] separate times. It went viral.
You could just see it sort of put a push into the psychology that was already developing, which was that you're never going to raise money, that this was the worst of times, it's a nuclear winter. It was pretty bad for a few years, but we got beyond that. We have an economy. We did some extraordinary things to keep it.
I won't try and [predict the future], but I think there are single events that could ruin the momentum behind the entire tech economy. It's all based on optimism about the future, optimism about putting your money to work. When people lose that optimism, entrepreneurs don't jump ship and start new companies, venture capitalists don't put money into companies and bigger companies stop buying companies. That's all an emotional thing. I think there's some pretty scary terrain to cover.
WEISS: I appreciate this expertise, your optimism for moving ahead. One area we didn't touch on at all was the space industry and excitement about space. Do you see that any of the companies you've worked with before are now interested in space technology and where it's going?
MUTO: A few we've done work for SpaceX and Tesla. I think there's a unique entrepreneur there with a remarkable vision for a lot of different things. There's a level of interest in it but I think the risk on space exploration is so great. I saw that recently with the failed launch – and the capital is so great that it's going to be a finite number of people that can march into that space. It's just too much capital, too much risk.
It's going to take someone like a Musk to really pull people into that. He's having a hard time now trying to put the two companies – I saw that Tesla just reported great results. So maybe he'll get his deal done. So not so much from the kind of capital that I see.
WEISS: Any other thoughts on where we are now, where you'd like to go? We just went through the end of this decade. What if you want to envision 50 years out? Do you – you're such an optimist. It's great through the ups and downs
MUTO: I hope there's another fundamental shift that – like the discovery of DNA and modern molecular biology or the microprocessor or the Internet - that produces enormous opportunities. One of the highlights of my career occurred on successive nights many years ago. The first night I went to a board dinner and seated on one side of me was one of the three guys that developed the backbone at DARPA that became the Internet. I don't know if it's still there but in the Boston Museum of Science, there was a little thing about these three guys at DARPA and how they've never really been recognized. Al Gore became the father of the Internet, not these guys.
Then the next night I went to another board meeting for a company. This one's long gone so I can mention it. SIBIA [Salk Institute Biotechnology Industrial Associates Inc.] which came out of the Salk Institute. Two guys on their board, Francis Crick and James Watson, wanted to talk about the IPO process that SIBIA was going through. I'm just sitting there thinking, "Wow. One of the guys that developed the Internet and the two guys who discovered DNA in two nights."
Out of those two things, unbelievable opportunities have come. I think the microprocessor's another one. If you look at the world in the last – well as long as we have a record of it – it's one of –things that just changed, made fundamental, great, new opportunities available, like electric power for example. I think there will be something else.
Another good example is the steam engine. There are just these fundamental advances. Driverless cars, maybe it's driverless cars. There's not a lot of attention going into space launches but enormous amount from entrepreneurial companies and investors into driverless cars. I don't know if that's quite the same kind of innovation but, anyway.
WEISS: Do you have any other comments? This has been great.
MUTO: No.
WEISS: This is wonderful. I really appreciate your time, expertise and vision for where we could be going and perspectives on where we've been. So thank you very much.
MUTO: Well you're a very gentle interviewer. I appreciate that. I was just trying to think about moments that were really special to me and participating in the kinds of things that we got to participate in here in San Diego. One of my first life sciences companies – really I just met the CEO at a CONNECT forum when I came down and I ended up representing them for three years. It was two chemists. They had started a services business. It wasn't a cure cancer company but a services business at developing libraries for large pharmaceutical companies. They raised some capital from a relative. They didn't get any traditional venture capital.
They each maintained about 20 percent of the equity ownership. One of the two guys was a Russian who had come here, immigrated to the US about three years before that. So he had been in the country less than six years. When he came, he came with his wife who was a linguist who I think is teaching on the Harvard faculty now, a son, one suitcase, and $20. We sold the company, very successful, to Agouron which then was sold to Pfizer.
This Russian physician stuck with it the whole way. The closing of the sale to the first company where he got his 20 percent of the sale price said, "I should try to get the Union Tribune or some of the local papers to tell your story, Alex. I mean it's an incredible story. It's remarkable. It's hard for me to believe." He looked at me and he said, "If it's hard for you to believe, how do you think it feels to me," because he came from a Russian economy, central planning. To me it's the promise of all these new businesses and – by the way, that chemistry capability is part of Pfizer and helping them develop the drugs that they bring to market. Anyway…
WEISS: Well thank you. That's great to have concrete examples and a success story that you could be involved in like that and that people had that experience. I appreciate that. Thank you very much.
MUTO:Well thank you.
END OF INTERVIEW