Health Care and Life Science & Biotech and Media & Marketing

Twilight fund fades away: Meanwhile, six BioCrossroads-backed VCs are just getting started

May 9, 2005

Its specialty is developing local life sciences startups. But its partners can't raise any more money. So the sun is setting on Twilight Venture Partners.

Meanwhile, the six venture capital firms BioCrossroads staked with its $73 million Indiana Future Fund have just three local investments to show among them.

Venture investments take time, the six IFF recipients argue. And their first duty is to earn the high rate of return the IFF's organizers demand. That means significant proof of concept is necessary before investments in startups can be made.

"To me, that defeats a little bit what the purpose was of the whole Future Fund," said Twilight Chief Investment Officer Ron Henriksen. "People understood going in, I thought, that we'd be doing earlier-stage [investments] than usual and helping companies more than you might expect."

In the year since global investment bank Credit Suisse First Boston made IFF's first commit- Officials have not said how much of the $73 million each fund received.

Formed in September 2002, Twilight had once hoped to be counted among the six. Its partners were a who's-who of the Indiana life sciences industry. Twilight has now invested $10 million of its partners' own cash in nine biotech startups-five of which are in Indiana. But since none of the partners were professional venture capitalists, CSFB chose to direct IFF's money elsewhere.

Twilight had planned to use an IFF investment as the foundation to raise even more money. Without it, Henriksen said, that proved impossible. Potential investors, particularly those from out of state, wondered why they should be confident in Twilight when CSFB was not.

Lacking funds to invest, Henriksen said, Twilight's plan now is for its partners to remain in close contact. When it sells its stake in any of the nine companies in its portfolio, it will regroup and plow the proceeds into new startups.

The IFF's six recipients, on the other hand, still have plenty of coins in their coffers.

In December, San Francisco-based Burrill & Co. and Triathlon joined a syndicate that made a $22.6 million investment in West Lafayette-based cancer therapy developer Endocyte Inc. Twilight was also part of the syndicate, but Henriksen had served as an Endocyte board member in its earliest days. By the time the IFF recipients invested, Endocyte had already attracted multiple rounds of venture capiments, the six venture firms have reviewed hundreds of potential local deals. BioCrossroads and the VCs promise a flurry of investment activity will emerge from their efforts.

Some deals may be inked soon, they said; others will require more time.

"Go back to what we said at the beginning. Deal flow wasn't going to fall from the sky. We had to really connect a lot of dots. The good news is that's happening," said Mike Arpey, managing director of CSFB's Customized Fund Investment Group. "We're seeing a lot of good deal flow. In the days, weeks, months and years to come, we'll bear the fruit of that as a fund."

Hoosiers will need it. They always expected to start out trailing the biotech centers on the coasts. But over the last 15 months, Minnesota, Missouri, Ohio and Kentucky all outpaced Indiana for health care venture investments, according to Cleveland-based BioEnterprise. Indiana's $57 million was just 20 percent of the $287 million total attracted by Minnesota, the Midwestern leader.

BioCrossroads announced the IFF's first four recipients April 12, 2004, and the fifth less than a month later. IFF's last commitment was revealed on Oct. 5, in the Cincinnati-based Triathlon Medial Ventures Fund. Those six recipients will invest the money into young biotech companies. tal, including money from national venture players, like Menlo Park, Calif.-based Sanderling Venture Partners.

Observers called the deal a venture capital layup.

Ann Arbor-based EDF Ventures, which makes up half of the IFF's REI Ventures partnership, has so far been the most active of the IFF recipients. It has taken a stake in two West Lafayette-based startups: protein diagnostician Quadraspec and securitysoftware-maker Arxan Technologies.

Plenty more potential IFF investments are percolating, said EDF General Partner Mary Campbell.

"This is a long-term play. I'm a runner, and just ran the Boston Marathon," she said. "I often say venture capital is much more like a marathon than a sprint."

For the most part, the IFF recipients have scoured the state for promising opportunities, then performed due diligence on the ones they like best. The local activity described by David Mann, a partner with Carmel-based Spring Mill Venture Partners, was typical of the six IFF recipients:

"The deal flow in the state is strong and we are actively spending time with the other IFF funds reviewing opportunities," he said. "We have reviewed hundreds of deals, of which the majority are from Indiana."

Critics point out it's been more than three years since BioCrossroads was formed. And more than four since completion of the original Battelle Memorial Institute study that spurred Indiana's life sciences initiative. If Indiana is bursting with so many biotech prospects, some wonder, why haven't more IFF deals emerged?

Triathlon Managing Partner Carrie Bates quickly rattled off a back-of-theenvelope list of 12 typical early-stage life sciences firms in Indiana, all of which have received angel or seed investments in the last year. In a short while, those startups will be ready for IFF's venture investments, she said, and there are many more in the pipeline behind them.

To further cultivate even more truly early-stage ideas and prospects, BioCrossroads is attempting to raise its own seed capital fund. The Indiana Venture Center is trying to facilitate another one.

Perhaps the most difficult barrier to IFF investment is pricing. Entrepreneurs and venture capitalists sit on opposite sides of the table during negotiations. Entrepreneurs selling stakes in their companies tend to have much higher figures in mind than the venture capitalists on the buyer's end.

Stella Sung, whose Los Angeles-based Coastview Capital makes up half of the IFF-backed Pearl Street Venture Partners, said her team's negotiations have led all the way to term sheets with several local biotech companies. But in the end, the two sides couldn't agree on a price.

"As much as we like a company," she said, "it's difficult to justify very high valuations if you don't think they'll provide you and your investors with the appropriate venture return."

But Henriksen said VCs, particularly those that hail from out of state, tend to overemphasize the need to haggle over terms. For Indiana's emerging biotech startups to be successful, he said, the stress should be on mentoring people and nurturing ideas.

"Eighty-five percent of how you make money in this business is still picking the right companies, the right deals and the right teams," he said. "Fifteen percent is beating down the valuation."
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