First Indiana Future Fund off to a slow start

Six years ago, when the $73 million Indiana Future Fund launched, BioCrossroads CEO David Johnson insisted the first-of-its-kind
effort would be return-driven.

Johnson

His vision was that investment results would validate the life sciences initiative’s central
thesis—that there’s biotech gold under the Hoosier soil, as much here as anywhere in the world, but no one ever
had dug for it.

On Dec. 16, BioCrossroads unveiled the IFF’s successor, the $58 million INext Fund, touting
it as proof of concept. But the IFF hasn’t yet become a Sutter’s Mill.

As a telling sign, more than
half of the IFF’s original investors didn’t double down on INext. Ball State University, the Indiana Public Employees
Retirement Fund, OneAmerica and WellPoint all passed on the venture capital opportunity.

The recession certainly was a major factor. And it remains possible the IFF will
someday show inspiring results.

But for now, IFF’s investors
still are waiting to hit pay dirt.

“We’re seeing about a 0.9 percent of invested
capital returned and a negative rate of return,” said Tom Heck, chief investment officer of the
Ball State Foundation, which put $2 million into the IFF. “But it’s
still very early on that question.”

IFF is a fund-of-funds managed
by global investment bank Credit Suisse, which put the money to work in six venture capital firms.
Some were local. Others came from the coasts. All six VCs speculated on promising young life sciences companies, making
$40 million of investments in 14 startups inside state lines. Those deals leveraged another $160 million from other VCs not
affiliated with IFF.

Despite the fund’s name, some of the IFF’s capital trickled outside state lines.
Since 2003, its six VC partners have invested in 76 life sciences startups located elsewhere.

None of the 14
Indiana startups have become the next Eli Lilly and Co. At the same time, none has gone bust. Some, like locally based Muroplex
Therapeutics, are still tiny upstarts. Even the most developed, like West Lafayette’s Endocyte Inc., which is developing
cancer therapy, or locally based CoLucid Pharmaceuticals, which is developing a migraine drug, need another half-decade or
more before their products will reach patients.

CoLucid illustrates just how long it often takes for new life
sciences businesses to get off the ground. Eli Lilly began the earliest research on CoLucid’s technology in the early
1990s and continued development until passing the baton in 2005.

Pappas Ventures, an IFF affiliate based in North
Carolina’s Research Triangle Park, invested seed money. Four other VCs have invested in CoLucid since, two of them IFF
affiliates. Together, the firms kicked in $16.5 million in 2006 and another $25 million in 2008.

CoLucid CEO
Jim White said his company is wrapping up a large phase two trial in Europe that will conclude preclinical development.

Next year, White said, CoLucid is hoping to broker a partnership or outright acquisition with a big pharmaceutical
company, perhaps Lilly, that has the resources to take the drug to market.

“In my view, CoLucid is the
perfect example of what companies like Lilly can do when you have an overflowing preclinical pipeline,” White said.
“No one has the cash to develop all the ideas. If you can spend other people’s money, let the drug evolve, and
have the opportunity to bring it back in house, to me that’s a huge win for everybody.”

‘Lousy
timing’

BioCrossroads’ Johnson acknowledges the past year was a rough time
to raise venture capital. But organizers pressed on, fearing that without the availability of new funding, promising Hoosier
biotech startups—some already backed by IFF—could wither and die during the recession.

“Eighteen
months ago, we talked with [IFF’s] managers and said we’ll have a problem,” Johnson said. “We’re
getting people all dressed up, and there won’t be anywhere for them to go. That’s what led us to pick this lousy
timing.”

Making the task even tougher was the reality that IFF still is too young to assess whether its
early investments will pay off. It’s impossible to calculate a true return on a venture capital fund until all its bets
stage initial public offerings, change hands or go bust.

“The reality is, anything that’s medical
devices or biotech that has to work its way through the FDA, in six years you really don’t know,” said John S.
Taylor, vice president for research of the Arlington, Va.-based National Venture Capital. “The success of each fund
will be the sum of its individual investments, which can either still succeed or fail. It’s too early to tell.”

The recession could stretch IFF’s time line longer. Taylor pointed out that many promising small companies
would like to engineer an IPO or acquisition—the type of “exit events” that spark venture returns—but
right now, nothing is moving.

Another challenge is that many institutional investors are overweighted in private
equity because the value of their stock portfolios has fallen sharply. As a result, they are loath to make additional venture
capital investments.

That’s certainly the case at Ball State. Heck said he would have considered an investment
in INext, but had no room in his target allocation.

“For us, the timing was not good, given where we are
with the [Ball State Foundation’s] portfolio and the decline in other parts of the portfolio,” Heck said. “We’re
currently over-allocated to private-equity-type investments, so we didn’t have the capacity to make a follow-up commitment
to the INext Fund.”

With far fewer new investors available, venture capital firms are hoarding the money
they have, Johnson noted, keeping it available to sustain the startups they’ve previously backed.

Carroll

The upside is,
it’s a buyer’s market for the $58 million INext raised, noted Darren Carroll, managing director of Lilly Ventures
and chief adviser to both IFF and INext.

“This could not have been a more difficult time to raise funds
for a venture capital fund,” Carroll said. “[But] there is no better time to have capital for investment than
in the midst of great capital scarcity. This has given Indiana, I think, a unique leverage point.”

Putting
Indiana on map

BioCrossroads believes the first fund helped build buzz about the state
in the venture capital community, which has helped foster more deals. In 2001, Indiana ranked 39th among 50 states for venture
capital investment, according to Credit Suisse. This year, it’s in 19th place.

Not all that is attributable
to the IFF, Johnson noted. But he said there are plenty of signs venture capitalists around the country are starting to wake
up to the prospect of a Hoosier biotech boom.

Like IFF, INext will have about six venture capital affiliates.
Two have already been selected. One’s from California. The other’s from New York. Twenty more are under consideration.

Seven or eight years ago, Johnson said, he struggled to get out-of-state venture capitalists to even agree to a
meeting.

“I feel incredibly good about it,” Johnson said. “We believe we have not only met
expectations with performance of the first fund, but clearly captured enough excitement about the [Indiana life sciences]
sector that we have institutions continuing at a tough time to put more money into it.”•

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