26 Jul Five seed-stage funding groups filling Midwest Life Science void
CHICAGO – Anyone who has traveled to London and taken the “tube” (the subway for New Yorkers or the “L” for Chicagoans) is constantly besieged by tape loops of “mind the gap,” which is a warning for the dark hole or space between the subway car and the concrete waiting area as one gets on or off the tube.
In other words, beware of the void as it can be dangerous for your health.
In last week’s column, we explored the void of seed and start-up capital in the U.S. and particularly the Midwest (as witnessed by the PricewaterhouseCoopers MoneyTree report on venture capital for the first quarter of 2004). We also learned about the unhealthy impact on the regional life science industry.
For the sake of our emerging Midwest life science companies, let’s hope it gets better during the second and remaining quarters of 2004. While we may be holding our collective breaths, there may be some relief in sight.
Recent news that IllinoisVENTURES, the venture capital arm of the University of Illinois at Urbana-Champaign, has completed its first fund of $20 million is a shot in the arm for seed-stage funding in the region.
IllinoisVENTURES was created to fund new technologies and companies in the fields of the agricultural sciences, chemical sciences, engineering, information technology and, of course, the life sciences and biotechnology.
According to its Web site, portfolio companies currently include investments in 11 companies. These range from nanotechnology for drug delivery, micro fuel cells and laser retrofit kits for flow cytometry to a number of software applications and high-volume data analysis.
It appears, however, that some level of funding has taken place with an additional 14 companies. There is a close alignment between IllinoisVENTURES in Urbana-Champaign and the Office of Technology Management at the University of Illinois at Chicago.
The new IllinoisVENTURES fund, which is called the Illinois Emerging Technology Fund, was completed via $4 million of public funding from the University of Illinois and the state of Illinois. The remaining $16 million came from the private sector.
IllinoisVENTURES was founded in October 2002. Now with $20 million under its belt, it really has some teeth to get some companies up and running.
Since its start up, its team has looked at more than 200 early stage technologies or companies, according to a May 20 article from a University of Illinois publication. Managing director John Banta seems very upbeat about the fund’s prospects as well as the number of new companies being formed and the quality of their technology.
If this was the only early stage financing going on, it would be a bright spot that’s also a lone star in the financing celestial horizon. Fortunately, other nearby groups are emerging almost simultaneously.
A group of angel investors in Chicago, who are focused on early stage medical and life science businesses in the Midwest, is appropriately called BioAngels.
Unlike IllinoisVENTURES, the not-for-profit BioAngels is not a fund but rather a group of members that gets together at least quarterly to review two or more companies that make formal presentations for funding up to $1 million. The members are typically individuals interested in the life sciences. They range from doctors and lawyers to businessmen and entrepreneurs.
BioAngels organizes these meetings and reviews and screens business plans. It operates via membership fees ($250 per member per year), presenting company fees ($295 per company), sponsorships and dinner admittance fees ($100 per person). It does not take a cut or commission of any funds raised by the companies.
Members must fall into the category of “accredited investors,” which according to the SEC means an individual with a net worth of $1 million or an annual income of at least $200,000 for two of the most recent years. Members are limited to individuals rather than companies.
Interestingly, service professionals (doctors, lawyers, accountants and executive recruiters) can’t join unless they can show prior cash investments as angels in other life science activities.
BioAngels had its first dinner on May 25 and plans its second event for Sept. 22. The first event showcased two companies:
1. Genomics of Palatine, Ill., which is working on technology that’s based on human leucocyte typing, human identification and microbial ID markets with an orientation toward bioterrorism and homeland defense.
2. Vasc-Alert, a software technology to identify the risk of clotting in access sites for hemodialyis patients.
To date, the main BioAngels sponsor has been the law firm of Katten Muchin Zavis Rosenman.
The 12-person BioAngels board of directors includes a blend of disciplines including VC executives (ARCH Development, IllinoisVENTURES and CID Equities), physician executives from local hospitals (Lutheran-General, the University of Chicago and the University of Illinois) and biotech executives (Nanosphere, NanoDisc and Advanced Life Science).
“BioAngels was created to meet the chronic shortage of seed-stage equity investment in the Midwest,” said Mike Hanna, chairman and founder of BioAngels and CEO of a medical device company called NewMedical Technology. “We are confident that we’ll be able to show our members some outstanding opportunities because of our focus in medical and life science early stage companies.”
BioAngels has even hired Samantha Borland as a part-time executive director.
While BioAngels is still in its early days of activity, it’s gratifying to know that there is at least an angel group in the Midwest that’s dedicated exclusively to the field of life sciences. It will be even nicer to know that some actual investment took place in companies.
Kegonsa Seed Fund
This Madison, Wis.-based Kegonsa Seed Fund is brand new and is run by former Wisconsin Alumni Research Foundation (WARF) licensing executive Ken Johnson. He has a long history of entrepreneurship in the life sciences arena. WARF is the technology transfer group for the University of Wisconsin-Madison and is one of the most productive tech transfer groups in the country.
Johnson spent nine years at WARF and did numerous life science deals on behalf of the university. He was also a technology prospector for New York life science merchant bank Paramount Capital where he helped establish five start-up companies that are based on licensed technology from universities.
Johnson was a co-founder and part owner of Tetronics, a specialty chemicals company that makes raw material for pharmaceuticals drugs. Tetronics was just acquired by pharmaceutical specialty chemicals giant Sigma-Aldrich. He is also a co-founder of biochip company Gentel BioSurfaces as well as several other companies.
Kegonsa is an appropriate name for this new seed fund. Aside from being the name of the lake that’s 15 minutes outside Madison (which is where Johnson lives), it is a Ho-Chunk Indian (formerly known as the Winnebago Indians) name that means “lake of little fishes”. After all, it is the “little fishes” that Johnson is pursuing.
With this new $8 million fund (Johnson expects to complete the fund with more than $10 million), he has targeted new technologies coming out of the Midwest’s leading research universities. His premise is that the U.S. government is funding $2.1 billion of research in nine Midwest universities (of which $1.1 billion is in the life sciences space).
These universities include the University of Wisconsin-Madison and the University of Wisconsin-Milwaukee, the Medical College of Wisconsin, the Marshfield Clinic, the University of Minnesota-Minneapolis, the University of Illinois at Urbana-Champaign and the University of Illinois at Chicago and the University of Iowa and Iowa State University.
In these universities, 601 patents have been filed.
Johnson’s model will be focused on building companies from scratch based on promising technologies that are identified at Midwest universities, involvement of the inventor and providing management and auxiliary services to get a company up and running with commercialized products.
Johnson should know these areas well given his experience as an entrepreneur and spinning out university-based technologies into commercial ventures. He has also put in $250,000 of his own money in this new fund.
Though Johnson will manage the new fund, he has assembled an investment committee of Wisconsin-based entrepreneurs. On the committee is Hector Deluca, the renowned inventor and professor and chairman of biochemistry at the University of Wisconsin-Madison. Deluca could be called the Alex Zaffaroni (the famed founder of Syntex, Alza and numerous other companies) of the Midwest.
His products are at the heart of Bone Care International (whose lead commercialized product is appropriately called Hectorol). In Japan, they are commercialized by the pharmaceutical giant Chugai. He is also a founder of Deltanoid Pharmaceuticals, Tetrionics and other companies.
Thomas Burke, who co-founded Pan Vera Corp and was its CTO, is also part of the committee. The committee also includes David Walsh, a partner at the law firm of Foley & Lardner; Elmer Lemon, a CPA and a retired part of Grant Thornton; and Peter Johnson, founder and CEO of Hyclite and chairman and CEO of Tetrionics.
Johnson expects the Kegonsa Seed Fund I to invest in 12 to 15 companies. That’ll provide the first $250,000 to $500,000 in funding. Let’s hope his fishing prospects are good. Johnson, by the way, is accustomed to fishing in all kinds of weather and hosts ice-fishing parties in the dead of winter on Lake Kegonsa.
A major difference with the Kegonsa Seed Fund is that it will go one step earlier. In other words, it’ll not only identify a promising technology and inventor but it’ll also help to form the company and then fund it.
Johnson’s fund isn’t the only life science seed and start-up fund in Madison. Another Madison, Wis. VC called Venture Investors has been playing in this space since 1984 and has raised $82 million since its founding for 37 start-up or early stage companies (30 of which are in Wisconsin).
Venture Investors, which is usually the lead investor, has helped these companies raise money with other investors for a current total of $375 million.
The organization has also concentrated its efforts heavily on Midwest universities. One Venture Investors success story is Third Wave Technologies, a publicly traded genomics diagnostics company in Madison with a current market cap of about $140 million. It has raised more than $82 million to date.
Another difference between the Kegonsa Seed Fund, Venture Investors and IllinoisVENTURES is that the latter two groups have received state funding.
Venture Investors has received funding from the State of Wisconsin Investment Board (SWIB) and IllinoisVENTURES has received funding from the state of Illinois and the University of Illinois. The Kegonsa Seed Fund is 100 percent private capital.
ARCH Development Partners
I would be remiss if I didn’t mention the pioneering efforts in this seed stage space of ARCH Development Partners, which has fostered financing and development of start-up companies in Chicago, Peoria, Indianapolis, Kalamazoo and Cincinnati.
Championed by Tom Churchwell and Teri Willey, ARCH Development currently has investments in 14 companies (of which six are in the biotech/nanotech space). These include Arryx, Zuchem, Nephrx, PanCel, Rubicon Genomics and Xcyte.
It appears that ARCH Development manages a $25 million fund and invests from $100,000 up to $1 million per company. While ARCH Development closely aligned with National City Bank (a growing Midwest bank that’s headquartered in Ohio), it’s building up a strong Illinois presence.
ARCH Development has been a leader in establishing its monthly meetings in Chicago, Kalamazoo and Peoria to showcase new companies that aren’t quite ready for primetime. These monthly meetings often afford the companies their first opportunity to get in front of an audience and tell their story.
It’s often like the famous “Gong Show” where host Tom Churchwell stops them in their tracks if they go over their allotted time and seeks audience critique of the message. Churchwell usually asks the audience four key questions about each company:
1. Do they have the appropriate management team?
2. Is their product clear?
3. Is their business model clear?
4. Is their exit strategy clear?
The audience is a mixture of entrepreneurs, service providers, job seekers and university professors and students.
Having spent an earlier part of his career at Searle and Monsanto, Churchwell is also one of the early founders (and a current board member) of IBIO. Biotech, though, doesn’t currently seem to be high on his priority list for investments.
Kudos to the Seed-Stage Groups
All of the above is good news for the Midwest. If only we could multiply this by a factor of 10, we could really build some critical mass with our outstanding science and technology in the Midwest.
You gotta start somewhere, I know, so kudos to all five groups. Let’s hope there are some early success stories to attract the formation of even more groups. No applause, please. Just throw money their way. See you next week!
Michael S. Rosen is president and CEO of Barbeau Pharma and a founder and board member of the Illinois Biotechnology Industry Organization (IBIO). He can be reached at firstname.lastname@example.org. This article has been syndicated on the Wisconsin Technology Network courtesy of ePrairie, a user-driven business and technology news community distributed via the Web, the wireless Web and free daily e-mail newsletters. They can be found at www.eprairie.com.
The opinions expressed herein or statements made in the above column are solely those of the author, & do not necessarily reflect the views of The Wisconsin Technology Network, LLC. (WTN). WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.