When a proven Indiana life scientist invents a promising medical technology, you'd expect local venture capitalists would snap to attention.
So when Lafayette-based Ash Access Technology Inc. announced March 14 it had landed $6 million in venture capital, it was surprising to note the names of the investors in the deal. None were based inside state lines.
But Dr. Stephen Ash wasn't shocked. After all, he's been through this before.
"I don't know what happened," Ash said. "I was disappointed. It would have helped. [We] would have been thrilled to have some local money in this."
In 2002, Ash's previous firm, Renal Solutions Inc., led all Indiana companies for venture investment, landing $15.6 million from a syndicate of out-of-state firms. Renal Solutions, which makes an artificial kidney Ash designed, moved to Pennsylvania to be near its investor base.
Indianapolis-based merchant bank Periculum Capital Corp. shopped both Renal Solutions and Ash Access before local venture firms, with no takers. In both situations, Periculum ultimately widened its net to land cash.
"We gave the Indiana people first crack to lead it," said Ash Access CEO Robert Truitt. "I gave presentations to every one of them, and they wouldn't give us the time of day. If we want to keep companies here, somebody's got to belly up to the bar."
Periculum Senior Managing Director Joe Broecker said all the Indiana venture capitalists backed by BioCrossroads' Indiana Future Fund had the chance to review the deal before others did.
"I was frankly surprised. I thought this would be oversubscribed. If we'd relied on the initial reaction, we'd have been dead in terms of the financing," Broecker said. "I don't know how many [startups] in the last three to five years had $500 million market opportunities. This is one of them. If this slipped through the cracks, what else is?"
This time around, Dr. Ash said his firm has no plans to move closer to investers. But leaders of the entrepreneurship community say local funding would have strengthened the company's roots here, and they worry what happens the next time a promising biotech startup wants to raise capital.
A practicing physician and Purdue University adjunct professor, Ash founded his first company in 1983. Since then, he has regularly invented medical devices, which he often licenses to large corporations. He holds 20 U.S. patents.
Peter DeComo, CEO of Warrendale, Pa.-based Renal Solutions, said Ash is unique in the world of life-sciences-based entrepreneurship. Since Ash has both engineering and medical degrees, DeComo said, he can design viable solutions to the health problems he encounters.
"There are very few physicians in research organizations that have the kind of business acumen that Ash has," DeComo said. "You always hear about universities that spin out companies. But you find very few of them have great success. And if they do, they're years and years in the making. [He has] the ability to get products very close to their commercialization stage."
Ash describes his inventions as improvements on the stop-gap measures he often sees in the hospital.
"The stimulus to me is not in areas where we don't have any answers, but where the answer works so poorly or has so many problems that it's a problem in itself," he said. "It's the halfway technologies that really intrigue me."
His latest innovation is called the Ash SureFlow catheter. It uses a novel locking mechanism and a proprietary antibacterial solution to keep blood and other fluids flowing freely through long-term catheters. Ash said common catheters are prone to cause clotting, scarring and infection when used indefinitely. Ash Access plans to target the dialysis market first with the SureFlow, but hopes eventually to penetrate the broader catheter market.
Ash said he raised $1.5 million two years ago from local angel investors to start Ash Access. The company also earned a $2.7 million grant from the National Institutes of Health six months ago. It plans to use that money, along with the $6 million it just raised, to conduct its first widespread clinical trial involving 400 patients. Truitt said more than $1 million of the firm's recent $6 million again came from local angel investors.
But when every local venture firm passed on the deal, Broecker said, he began searching for institutional investors familiar with the catheter market. He ultimately attracted New York-based Bear Stearns Health Care Value Partners LP, Cleveland-based Frantz Medical Ventures Fund LP and Los Angeles-based Eight Plus Ventures LLC.
"[The Bear Stearns group] saw and appreciated the value we were creating and had created. I don't think the regional venture community saw quite as clearly that opportunity," Broecker said.
Since it left Indiana three years ago, Renal Solutions has continued growing. Ash remains a director.
The company landed another $17 million in venture capital a year ago. Today, it has 59 employees and has completed development of its device, which allows patients to conduct dialysis in their own homes. DeComo said it has received most of its Food and Drug Administration and European regulatory approvals, and is now being tweaked based on the results of human trials. Renal Solutions aims for the first phase of its product launch this summer.
Locally based venture capital firms CID Capital, Gazelle TechVentures and Triathlon Medical Ventures all invested in Renal Solutions-after it moved to Pennsylvania.
"Everything is moving along as planned," DeComo said. "I wish it was moving a little faster, but when you live in a regulated world, it moves at its own pace."
DeComo is particularly enthusiastic about the successful initial public offering of a rival, Lawrence, Mass.-based NxStage Medical Inc. Its shares debuted in October at $10 and now trade for about $12.50. The company has 153 employees and a stock market value of $267 million.
Renal Solutions is "about 18 months behind" NxStage, DeComo said.
"What they're doing for us is warming up the market, both the clinical and financial markets," DeComo said. "We're headed in the right direction. It's all about meticulous implementation and execution at this point."
The Indiana Economic Development Corp. is doing its best to make sure the state doesn't lose Ash Access like it lost Renal Solutions. Bruce Kidd, IEDC's director of entrepreneurship, said Indiana has already awarded Ash Access a $100,000 phase one grant from the 21st Century Research and Technology Fund. It is also being considered for a $2 million grant from the 21st Century Fund. Ash Access has additionally claimed $355,000 through the Indiana Venture Capital Tax Credit.
Before Renal Solutions landed its first $15.6 million in 2002, it had been approved for a 21st Century Fund grant, but never got the money because the cashstrapped state froze the fund's assets.
To help retain promising companies like Ash Access or Renal Solutions from now on, the IEDC has sped up the 21st Century Fund's approval processes. It also added clawback provisions to its grants. Kidd said IEDC requires companies to pay their grants back if they move outside state lines.
But state grants and clawbacks alone won't grow Indiana's life sciences sector.
"The Catch 22 in these kinds of situations, like they had with Renal before, is they hit the [local] markets as hard as they could for a long time and were never successful, so finally the big investors convinced them to move," Kidd said. "The big money still controls these deals."
Ash, Truitt and Broecker all say Ash Access is far less likely to uproot itself than Renal Solutions was. Renal Solutions hired DeComo, in part, for his financial connections to East Coast venture investors. They knew from the start there would be pressure to move the company.
Ash Access' CEO, Truitt, is rooted in Lafayette, Ash said. What's more, Broecker said the Bear Stearns syndicate hasn't pushed to move the company.
"I think the investors are highly interested in investing in the business in Indiana, and are impressed with the resources we've been able to assemble," Broecker said. "And they're still minority investors, which is a little different than the issue that was facing us with Renal, which from day one was a change in control."
Perhaps the bigger issue is what happens the next time Ash Access-or one of its peers-seeks capital. Despite the formation of BioCrossroads and the establishment of a half-dozen local life-sciences-focused venture firms, promising startups are still forced to go out of state for investors.
Local venture capitalists insist they gave Ash Access plenty of attention. They say they passed on the deal because they thought others were more promising. And the venture firms affiliated with the Indiana Future Fund have begun to make investments. On March 22, for example, Carmel-based Spring Mill Venture Partners announced it put an undisclosed sum into Lafayette-based breathing-tube maker SonarMed Inc.
John Barnard, managing director of Indianapolis-based Pearl Street Venture Funds, was one of several local venture capitalists who saw a silver lining in the Ash Access deal. He said it proves Indiana has evolved into an attractive place for coastal investors.
"[Ash Access] was one we thought was interesting, but we found a couple others we liked better," Barnard said.
Despite the cold shoulder from local venture capitalists, Ash says he plans to grow his company close to home anyway.
"Our preference, mine and Bob Truitt's-and we've each lived here 30 years-is strongly to keep the company here," Ash said. "The difference is just, this time, nobody came up and said, 'We'll invest if you move it.'"