So far, VC deals scarce: BioCrossroads: Networking should spawn commitments

September 26, 2005

Almost two years ago, in October 2003, BioCrossroads debuted its $73 million Indiana Future Fund. In the time since, just three Indiana startups have received IFF-backed investments.

But it's not for BioCrossroads' lack of trying.

Both in public and behind the scenes, BioCrossroads is working diligently to put promising local life sciences prospects in front of venture capitalists. This year, BioCrossroads has already held two well-publicized Indiana Future Fund Entrepreneurial Forums: the first in April at Purdue University in West Lafayette, the second earlier this month at Indiana University in Bloomington. Three more are planned in the days to come in Fort Wayne, Warsaw and Indianapolis.

More quietly, BioCrossroads holds quarterly closed-door Venture Opportunity Forums. At each of the meetings, two to four handpicked young Indiana biotech businesses receive the chance to pitch their stories before a room filled with venture capitalists.

With all the attention BioCrossroads has received and expectations it has raised, some observers complain they had hoped for more than a handful of investments in two years' time.

But BioCrossroads President David Johnson preaches patience. He expects the community's life sciences efforts to begin paying dividends soon. Johnson anticipates several IFF-affiliated investments before year-end.

"I'm expecting some significant activity in the near future," he said. "Everybody wants this to work. Some people have different expectations on the timing, but everybody's aiming for the same outcome."

In the meantime, all BioCrossroads can do is attempt to increase the amount of activity on the front end of the investment pipeline. And its entrepreneurial forums are one of its most public opportunities.

The efforts aren't just for the benefit of venture capitalists. They're also about educating the local marketplace. IU Vice President for Research and Information Technology Michael McRobbie said the Sept. 7 IFF forum in Bloomington showcased IU's life sciences skills and prospects. But it also allowed scientists and professors to learn what venture capitalists want.

Great ideas aren't enough. Venture capitalists only want great ideas with realworld applications in hungry markets. And the ideas must be patentable.

"You really need to hear from venture capitalists what it is they're looking for," McRobbie said. "Somebody in a laboratory can have a great idea, and expect to make millions. The venture capitalist will say, 'Who else is doing work like this?'

If you say, 'I've got 50 friends at other universities doing this, too,' it ceases to be of interest."

Venture capital investments don't happen overnight. Before they can, most venture capitalists want to see proof of concept. Two years ago, the majority of Indiana's life sciences business prospects were just ideas, said Carrie Bates, managing partner of the Cincinnati-based Triathlon Medical Ventures, which is backed by the IFF.

Now those prospects are beginning to ripen. Many university professors' raw ideas today have clinical data showing proof of concept; business plans written; and intellectual property patented. Bates is keeping an eye on 40 Indiana-based companies she believes are on the verge of earning venture investments.

John Barnard, managing director of the locally based Pearl Street Venture Funds, which is also backed by the IFF, agreed local prospects are starting to develop.

"We have yet to make our first investment, but I think we will make one real soon unless the wheels come off at the last minute," he said. "We're seeing some interesting opportunities right now. Some of the deals are maturing a bit. The first year, we were seeing a lot of very earlystage things. It was difficult for us as a new fund to reach down and invest in that early a company."

"But now, some of them have been able to get some financing, move things forward and hit some milestones," he continued. "So we're starting to look at some of these companies again. And some of the ones we didn't look at before have done a lot of good work in the last year."

Until the formal frame of a business is in place, Bates said, all a venture capitalist can do is informally advise would-be entrepreneurs. Most are eager to offer their expertise to any startup, she said, as long as their purposes overlap. Triathlon, for example, specializes in medical devices.

"If you look at the stage of most of the life science companies in Indiana, they are earlier rather than later. Typically, a venture capitalist will want to see certain things before they invest," she said. "But if anybody calls me and says they want to talk about a company idea, if it's in the life sciences, I always make time to sit down and speak with them."

Such conversations lead to relationships. And while it may sometimes take years, those relationships are what ultimately spur venture capital investments. On Sept. 2, for example, Carmel-based Spring Mill Venture Partners, another IFF-backed venture firm, announced its first Indiana investment. It put several million dollars into the fast-growing West Lafayette-based medical device startup QuadraSpec.

But Spring Mill's relationship with QuadraSpec dates back before the startup's formation. Spring Mill Managing Partner Ken Green said he first met QuadraSpec CEO Chad Barden at an event organized by local technology trade association TechPoint. Later, Green and Barden taught a class together at IU's Kelley School of Business.

"That's sort of how these things happen," Green said. "Creating opportunities for people to meet and network with each other is great and important. Eventually, those things take on a life of their own and pay dividends."

"You can't orchestrate them, but you can facilitate them," he added. "People like to invest in and work with people they're comfortable with."

Which is exactly why BioCrossroads is so keen to promote conversations and encounters between venture capitalists and entrepreneurs. In addition to its own meetings, BioCrossroads also participates in or sponsors events organized by Tech-Point, the Indiana Health Industry Forum, the Indiana Venture Center and the Venture Club of Indiana.

QuadraSpec's Barden is one of the few life sciences entrepreneurs so far to receive IFF backing. And he readily acknowledges how the networking process has helped his startup quickly grow. Even so, he's not anywhere near declaring victory-for his company, or for the life sciences initiative. Meetings are helpful, but they're a means, not an end.

The real test, he said, once the IFF is fully deployed, is whether some of the startups it funds can grow into the kind of large and successful companies that will drive Indiana's economy in the future.

"We have a long way to go. We're not there yet, but the right things are happing," Barden said. "But it's really pretty critical that these first funds invested result in some positive stories coming out of Indiana."
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