26 Sep Wisconsin venture picture tied to Midwestern neighbors
Milwaukee, Wis. – When bemoaning the amount of venture capital deployed in Wisconsin, especially in comparison to the massive amounts invested on the coasts, it’s easy to take an overly parochial (and negative) view. When thought of in terms of the entire Midwestern region, however, the picture is much brighter, and that portends good things for the Badger state and the region, according to investors here for the annual BIO Mid-America VentureForum.
Whether or not they represented funds with investments here, investors agreed that the trend lines are increasingly positive for the state and the region, even if building networks and pipelines can be a painstaking process.
“There still is a vast amount of capital invested on both coasts, and the Midwest still is getting a disproportionately small share,” said Pete Shagory, a partner in Baird Venture Partners, “but we’re starting to see coastal funds invest here.”
Case in point: OpGen, a Madison technology company that has developed optical mapping technology for genomic analysis, has raised $23.6 million, much of it from CHL Partners of Stamford, Ct., the Boston-based Highland Capital Partners (with offices in Menlo Park, Calif.), and Versant Ventures of Menlo Park.
The growth of organizations like Mid-America Healthcare Investor Network, an association of 50 venture capital firms, has not only raised the amount of venture capital under management here, it is helping states in the region get over geographic hurdles.
Success stories like TomoTherapy, which netted more than $180 million in an initial public offering, and NimbleGen, a developer of gene chips that has been acquired by pharma giant Roche for $272.5 million, have attracted investor attention, but these companies both were founded in the 1990s.
“It’s not something that happens overnight,” Shagory said. “These companies can take a long time to develop, but success stories can do amazing things for a community.”
They also can do amazing things for a region. A recent BioEnterprise survey reports a record amount of venture capital funding in Midwest life-science companies – $742 million in 64 companies – during the first six months of 2007.
The underpinning of that is a rich pool of technology throughout the region, particularly in Madison, Ann Arbor, Cleveland, and St. Louis, and some of the best-funded research institutions in the nation. The University of Michigan and the University of Wisconsin-Madison are the third and fourth largest research universities in terms of dollars spent on research and development, according to the National Science Foundation.
“The [Midwest’s] sum total is very attractive,” Shagory said.
While there are a growing number of seasoned executives from large companies playing a management role in Wisconsin life-science ventures – a critically important development for attracting capital – venture funds would like to see more.
Gino Di Sciullo, a partner in Charter Life Sciences of Palo Alto, Calif., is impressed with the level of scientific sophistication in the Upper Midwest, but he said the region lacks visibility in terms of the commercialization path and the capital requirements to develop pharmaceutical and medical-technology organizations. Di Sciullo, who represents a fund that invests in therapeutic devices and therapeutic pharmaceutical products, said there is less managerial experience here – and not just in upper level management.
“When you look at that [therapeutic] space, there is less experience in terms of the managerial side,” Di Sciullo said. “They may not have had as much product-development experience to know what is required to advance something forward, so that is what’s lacking.”
Some managerial roles can be outsourced, Di Sciullo said, but to drive a project forward, organizations need executives with the relevant knowledge about milestones, investor and regulatory requirements, and what creates value. These skills give investors the confidence that organizations are more efficient at using capital to move the company forward.
Nevertheless, Di Sciullo has noticed a significant change in the amount of venture capital that exists in the Midwest. As early as 2001, when he became familiar with life-science industry, he said there were virtually no venture investors in the Midwest. Now, there are a number of firms that are healthcare focused and have good track records.
“What’s happening is that as those firms continue to invest in syndicate, they are creating relationships with the big coastal firms,” he noted. “There is nothing magic about the coastal firms, other than that they just have longer track records. They’ve been around longer.
“I think as the industry matures in the Midwest, what you’ll find is growing integration with the coastal VCs, and as a consequence those VCs will come in at later stages.”
One thing to bear in mind about large coastal venture funds is that they are segmented by size. The larger funds will do the later-stage deals because they don’t have the expertise or the regional contacts to participate in earlier-stage deals that could help Wisconsin technology start ups. That’s where Wisconsin’s attempts to build angel networks should pay dividends.
“When you think about what’s going on in Wisconsin, there is a grassroots level of investing that will be generated by a couple of things,” Di Sciullo said. “Number one, small VCs that are working indigenously in Wisconsin, and then also I think you’ll see a growing sophistication among angel investors because now angel investors are investing in syndicate.”
Stem cell focus
One area where Wisconsin hopes to cash in is the development of its stem cell companies. The state has several home-grown stem cell businesses in their proof-of-concept phase, each having received seed or angel money in addition to support from the State of Wisconsin.
Gregg Fergus, an executive in residence for Baird Venture Partners, operates on both sides of the fence. He works for Cellular Dynamics, a stem cell company looking to raise money, and for Stem Cell Products, both co-founded by UW-Madison stem cell researcher Jamie Thomson. He spends 60 percent of his time managing these and other companies, including Caden Biosciences, and about 40 percent on the venture side.
In the years after Thomson’s stem cell discovery was announced, much of the investment focus was on the longer-term applications, but now investors tend to focus on stem cell companies that have the potential to bring short-term return on investment. Examples of the latter would be cell therapy and the “tool space,” Fergus said.
“There will be companies that will see the advantage of what you can do with stem cells as a discovery tool, as a drug-screening tool, and as a toxicology tool,” he said. “They won’t need as much capital so they will be much more capital efficient, and the development of products will be much quicker.”
Joe Hildebrandt, managing director of the Phenomonelle Angels Fund, said investors are excited about the stem cell frontier, but are looking for something that has a relatively early exit of about five years. Thus far, the Phenomonelle Angels Fund has invested in Stemina Biomarker Discovery, a stem cell start up founded by Beth Donley, former director of the WiCell Research Institute, and UW-Madison scientist Gabriela Cezar.
“A lot of great things that will occur in this [stem cell] space are probably longer off than our fund would be able to afford,” Hildebrandt said. “A lot of companies are looking for shorter-term solutions such as Stemina. We have to look at what the timing is going to be for commercialization.”
• OpGen’s $23.6M venture capital score could transform hospital care
• Venture investment executive Dan Broderick joins St. Louis venture fund
• NimbleGen to discontinue IPO after Roche’s $272.5 million acquisition
• UW scientist, former WiCell director found stem cell company