The Indiana Economic Development Corp. is looking to renew its commitment to life sciences by creating a $30 million venture fund.
The amount dedicated to one sector would be equal to the state’s allocation for all high-tech startups over the past two years.
Commerce Secretary Dan Hasler floated the dedicated fund as part of his budget request for the two-year cycle that begins July 1. If lawmakers agree, the money would go into a sub-fund of the 21st Century Research and Technology Fund, which is the state’s primary means of supporting emerging technology firms.
“That would be a good thing, I think,” said Pete Kissinger, a Purdue University chemist who has started several companies, most notably Bioanalytical Systems, a publicly traded drug-molecule tester in West Lafayette. “We’re in a small state with big ideas and not enough resources.”
The proposal comes amid a national drought in venture capital funding for life sciences.
The dry spell is worse in Indiana, said Kristin Jones, president of the Indiana Health Industry Forum, because over the last few years, 21st Century Fund managers have turned away from life sciences startups, which require more capital and take much longer to mature than information technology firms.
She embraces IEDC’s plan.
“Anywhere there is a concentration of life science companies, there is state involvement,” Jones said. “Indiana absolutely has to be at the table to keep this growing.”
Hasler’s pitch might have legs because it doesn’t require the General Assembly to increase its spending on the 21st Century Fund, which received about $30 million in the last biennium.
IEDC has attracted enough federal money, about $34 million, that the broader 21st Century Fund could operate another two years, even if the appropriation were zero, Hasler told the state budget committee.
The fund, which is managed by the not-for-profit Elevate Ventures, invested $4 million last fiscal year in Indiana companies. That was about half as much as in the prior year.
It’s not clear how much is left in the fund. An IEDC official was unable to provide that figure by IBJ deadline.
The $34 million came from the Treasury Department’s State Small Business Credit Initiative in May 2011. Indiana was the first state to win money from the program. IEDC set up special funds to handle the award, and already has distributed some of it.
One of those new vehicles, an angel-investing fund, gave money to five early-stage companies last fiscal year, according to the 21st Century Fund’s annual report. (The report did not detail the names of companies or amounts received.)
IEDC’s overall budget request is $58.7 million a year, a 29-percent increase. That includes a $4 million increase in federal grants, plus $18 million in state general funds for work force training, about double the prior level.
Quality over quantity
The challenge of selling life sciences to lawmakers—whose top priority for 2013 is job creation—is that startups in the industry don’t hire as many people as in other industries.
Even so, Jones said, “They’re very solid jobs that require a very skilled work force, a very educated work force, and they’re jobs that are going to be around for a very long time.”
Unfortunately, the industry’s message of quality over quantity has yet to reach many in the Legislature who are in their first or second terms, she said.
Other economic benefits are well-documented by the industry group BioCrossroads, which issued a report this year pegging life sciences’ contribution to Indiana’s economy at $44 billion. Leading the way are major firms such as Eli Lilly and Co. and Roche Diagnostics in Indianapolis and Zimmer and Biomet in the orthopedics hotbed of Warsaw.
Companies that receive awards from the 21st Century Fund have to line up at least an equivalent amount from the private sector. Hasler thinks the $30 million fund would last two or three years and attract another $60 million from the private sector.
Hasler said his goal for the new fund is to attract East- and West-Coast venture capital and strengthen Indiana’s entrepreneurial community. Entrepreneurism, along with innovation and education, is a key area where Indiana falls short, at least in the eyes of outsiders, IEDC market research shows.
It makes sense to put the focus on life sciences because Indiana already has a reputation for its broad-based sector, which includes pharmaceuticals, medical devices, and plant and animal science, Hasler said.
“Our problem is getting a sizable venture-capital community together around life sciences,” he said.
National Venture Capital Association President Mark Heesen thinks Hasler’s goal is realistic for Indiana. Many states have biotech funding initiatives, but because of drugmaker Eli Lilly, Indiana has a reputation to build upon.
Heesen said policymakers will have to wait longer than four to six years to see results.
“They are putting a stake in the ground for the future,” he said.
The payoff is obvious in a city like Minneapolis, which became the leading hub for medical-device startups because of the success of medical-device maker Medtronic, Heesen said.
Venture capitalists, who tend to follow fads, are starting to perk up to life sciences after fleeing the sector for information technology and software, Heesen said.
In Indiana, venture capital investing in life sciences and health care firms soared to more than $50 million before the recession, then fell to $7.4 million in 2010, according to the Money Tree Survey, by the National Venture Association and PricewaterhouseCoopers.
Investments recovered in 2011 to $27.2 million, but first-time deals were at a six-year low.
The 21st Century Fund has followed a similar investing path. Life sciences accounts for more than half the fund’s portfolio since 2005, and two of those early investments are its biggest successes. Carmel’s Marcadia Biotechnology sold to Roche Diagnostics for $537 million in 2010, the same year West Lafayette cancer-drugmaker Endocyte went public.
Since 2010, the fund has invested $6.5 million in seven life sciences firms.
IEDC acknowledged in the 21st Century Fund’s annual report that managers shifted toward more “capital-efficient” industries, such as information technology and advanced manufacturing, after the fund was cut in half in 2009.
The only life sciences company to receive direct funding last fiscal year was Indianapolis-based Wellfount Corp., an institutional pharmacy that received $1 million and attracted $10 million in private-sector capital.
Several small life sciences companies received $75,000 grants to match federal Small Business Innovation Research grants. (The 21st Century Fund spent $525,000 to the federal government’s $888,592.)
The fund used to provide an even match for those federal grants, but now entrepreneurs are lucky if they get any money, Jones said. That policy frustrates life sciences entrepreneurs, who struggle most in rounding up early-stage capital, she said.
“The challenge here is, there isn’t much clarity around Elevate Ventures and the 21 Fund and how you go about getting funding,” Jones said.
Hasler said the new life sciences fund would not try to cover that early-funding gap. The 21st Century Fund since 2010 has targeted companies that are past product development and into an early growth mode.
The life sciences industry’s early-stage funding problem is not something the public sector can solve alone, the 21st Century Fund’s annual report says. Officials believe the state’s money is better spent on nationally competitive companies that are either homegrown or attracted from elsewhere, the report said.•