I interview Chuck Donnelly, founder and CEO of Rockstep Solutions. Rockstep is a great example of a disruptive startup that landed technology development grants very early on from both federal and state sources. That’s not the kind of seed funding you typically hear about. Now however he needs a chunk of equity to support the marketing and sales effort needed to penetrate the corporate marketplace, which tends to be characterized by long sales cycles.
Links and Resources
Minimum Viable Product – my joke was I had an unviable minimum product
Pivot – a major Silicon Valley phrase
Crossing The Chasm – a classic book for technology and innovative companies
Don: Chuck Donnelly of Rockstep Solutions, welcome to The Funding Coach.
Chuck: Hey thanks. Great to be here.
Don: Well so Chuck you and I have known each other for some time now, but for the audience, can you give just a little bit of background on yourself and how Rockstep Solutions got started?
Chuck: Sure yeah. Excited to have the conversation about this. My degree is in computer science. So I graduated from San Francisco State University way back before… I dont even want to talk about how long ago it was, but back in the 80s.
Don: Long time ago. Yup.
Chuck: From there I moved over to UC Berkeley and joined a group called the space astrophysics group there at UC Berkeley. And so while I was at UC Berkeley I got into a number really really cool projects around computer science. Including space… working on the space shuttle, working on spaceflight systems software that actually ran in space, controlling instrumentation in space. Really really cool software that actually ran right on computer systems that we designed. I also worked on a radio astronomy projects in the search for extraterrestrial intelligence.
Don: So can you fast forward to your time here in Maine?
Chuck: Absolutely yes. But with that background in this space astrophysics group I decided that I wanted to move to Maine and the only way to actually make that really work and start a science career was to try to figure out how to get into the Jackson Laboratory. So I took classes in molecular biology, cellular signal transduction, molecular genetics, so all of that kind of stuff to help me get into the Jackson Laboratory. And I was hired on and I became the director of computational sciences at Jax. And when I started there it was just me in that group. And I grew that group to a group of about 20 people that included statisticians, computer scientists, biologists, all working together in a collaborative team to basically use computers to solve massive scientific problems.
Don: So you so you went to Jackson labs and you basically did a little bit of a startup inside Jackson labs. Which in turn is one of the largest sources of genetically engineered mice for scientific experiments in the world. Tucked away in Bar Harbor Maine.
Chuck: Yes exactly. And that’s right. Yeah, it was a it was kind of like doing a startup. They had had a group like this before and they needed some… some software, some people that understood technology and science, and that was really the bridge that I provided. And so I grew that group and managed to get funding from the National Institutes of Health to develop informatics systems – bioinformatic systems – and worked in all kinds of really cool research areas including cancer genomics, and general lab informatics, and just all kinds of disease areas. Mostly as a director leading the group. Some, in my early days there actually doing some of the software development and algorithm development.
So that’s my background that got me to where, you know, where I had the background to start Rockstep Solutions. So in.. Around 2013 or so I began to be concerned that NIH – the National Institutes of Health… Their priorities were changing a lot, and that getting funding for these kinds of informatics problems are going to get more difficult. So I went to NIH and I talked to them about some of the ideas that I had with some of my cofounders in Rockstep, to basically develop a transformative informatics system for biomedical research.
And by transformative I mean there is a whole new technology wave coming. And that wave is mobile devices, that wave is artificial intelligence, that wave is IoT systems, machine learning, the cloud… All of that technology was really starting to take off, yet hadn’t really been adopted in the biomedical field for a number of reasons. A lot of those have to do with… they just… They move slowly in biomedicine because of regulatory compliance and things like that. So the National Institutes of Health was very interested in funding a company, a small company to actually get started in this space and start to really break some ground in the innovation that was going to be needed to really leverage these technologies.
So we applied for a grant from the National Institutes of Health, an innovation award, and we got that award and left Jackson Laboratory in 2014 and here I am.
Don: So you got started with something called the SBIR, a kind of federal grant. And what other kinds of funding did you tap in order to take the company as far as it’s gotten?
Chuck: We’ve done very well with the SBIR. It’s the Small Business Innovation Research award. We got a small award of $250,000 to kind of do some prototyping and test our ideas. Then we applied again and we got $1.5 million award from them in order to really build out the systems and make them actually commercializable.
Don: I find that really interesting just because those sizes are equivalent in the in the equity world of a seed funding.
Chuck: Absolutely yes. That’s actually been… It was really great to have the seed funding and I’ll talk about that a little bit of how that has made it a little bit confusing in terms of what we’re trying to get next. Is it seed funding or is it series A?
We also got some financing from the Maine Technology Institute. We got a $200,000 development loan from them. And then we’ve also brought in a little under $200,000 in a convertible note which is really… Those other funds really help us run a business. Because the SBIR awards themselves are really focused on the project, but to run a business you have to have other sources of funding. You know, basically do your marketing and all of that kind of thing. So MIT, we got the development loan for $200,000. We also got about another hundred thousand dollars in grant money from MTI. So we’ve done pretty well in terms of that initial funding.
Don: That’s great. So all told about $2 million so far. Now when we first got together the first time I tried to interview you about three months ago… Kind of reminds me of my favorite quote by Reid Hoffman, founder of LinkedIn, who says “if you’re not embarrassed by your first release you’ve waited too long.” So three months has passed. Can you take us back to that point. You were as I recall in the middle or maybe early stages of an equity fundraising and thinking about a pivot. So what were the challenges back then.
Chuck: Yeah. So the challenge is really had to do with the fact that we have already had $2 million of financing and we have a product… products in the market. And what we’re building is really an enterprise solution. So we decided to try to get financing from angel groups and we need more than $500,000 or $200,000. We really need, you know, upwards of about $2 million to really go forward. And that’s a lot of money for raising in an angel round.
And we got into this situation where, as you pointed out, we’re… Are we series seed? Are we series A? You know we’re… What are we trying to raise here? Because we already had that $2 million to get to where we are now. So that challenge… We talked to a lot of angel groups and I think that we ran into a lot of challenges in the fact that we’re enterprise software. We already have a product in the market. We’re not just a, you know, small team with an idea, a prototype and a hockey stick if you will. We’re actually a functioning company with a proven product moving into an enterprise market. And that’s a much more complicated story to tell because we’re… Then you’re really getting into what’s the competition in that market, and the biomedical research market itself is a very complicated market with lots of players, and there are some big players, and we’re really doing a new technology play in that market. And it was a really hard story for us to tell to the angel investors. And I think we generated a lot of interest. But we had a really hard time getting somebody to take the lead.
Don: Chuck as I recall as well, you were in this transition of having proven the product with their early research institutions but you realized those folks weren’t going to be paying going forward. And you had to switch to the next phase, which you’d already planned, for the pharma companies. And as I recall you were just starting to bring on a very experienced sales guy with experience in the pharma business right.
Chuck: Yes, so that’s the pivot you were talking about. And you know actually I don’t like to use the word “pivot” because sometimes pivot makes it sound like you were doing the wrong thing and now pivoting. We were actually always… It had always been in our plans to start out with a Segment A was going to be small academic research labs. We did that, we proved that out. Segment B was going to be the larger research labs. We’ve actually worked very closely with a Nobel laureates lab at UCSF and it’s a gigantic lab where they have, you know, multiple sites and over 50 people working in the product every single day. And now the next step, Segment C if you will, is the biopharma. So not so much as pivot but moving up-market.
And that’s the challenge, is sort of crossing that chasm from the market that we were in and academia to this new biopharma market, where you really need to, you know, you’re working in industry. It’s a slightly different thing that they need. We don’t have that background, the proof of that market yet. Yet we know that the product is usable in that market. We’re starting to get some interest there. So that was the real challenge there. And to convince the angel investor community that, yeah, we… Segment A we’re done with, Segment B we’ve nailed, Segment C we’re moving right into it. And you know hearing from a lot of the investors that they would like to see proof in Segment C. However, we need money to make that proof happen.
We did hire a sales guy and that’s been great. We’re starting to make some… lots and lots of interest traction. But we need the marketing money to attend conferences and, you know, we really need to do a big splash. We really need to get a significant amount of money to really push into that market really quickly.