Biotech venture fund in works

January 5, 2009
BioCrossroads is setting the stage to create Indiana Future Fund II, an effort that would raise tens of millions of dollars for speculation on promising Hoosier life science companies.

Indiana Future Fund I launched five years ago with $73 million. About four-fifths of that now has been committed to life science firms, and about half the money actually has been paid out.

Officials with BioCrossroads, Indiana's life science initiative, declined to discuss a second fund, saying Securities and Exchange Commission rules limit what they can disclose.

But in December, representatives of Switzerland-based Credit Suisse Group, which manages the first fund, told the board of the Indiana Public Employees' Retirement Fund—one of the fund's investors—that they planned to craft a sequel in the near future.

Credit Suisse investment banker Mike Arpey could not be reached for comment by IBJ. But from the inception of the groundbreaking first fund, Credit Suisse aspired to launch a second.

"There is a reason why this is called Indiana Future Fund I," Arpey said five years ago. "It's not Indiana Future Fund, end of story."

BioCrossroads CEO David Johnson called the first fund a success—both for the investors and for Indiana companies that used the money to stoke their growth.

"When we first started talking about all this, what we were lacking was enough resources focused on early company formation," Johnson said. "I think we've been able to establish the fact there are companies worth investing in Indiana."

Indiana Future Fund I is a venture capital fund-of-funds. That means it doesn't invest directly into biotech startups. Instead, Credit Suisse doled out the $73 million it raised from the state's largest corporations, pensions and universities to six professional venture capital firms that agreed to concentrate on Indiana life science deals.

A dozen firms with Indiana ties are among the companies receiving Future Fund cash so far. They range from West Lafayette-based medical diagnostics device-maker Quadraspec Inc. to CoLucid Pharmaceuticals Inc., an Eli Lilly and Co. spinout that's developing drugs to fight migraines. CoLucid's headquarters is now in North Carolina's Research Triangle Park.

According to Credit Suisse, the first Future Fund has produced net returns topping 20 percent, similar to other top-performing venture funds raised in 2003.

But return figures for such a young fund aren't that meaningful, because they rely on estimated values for the companies in the portfolio, said John Taylor, an executive with the Arlington, Va.-based National Venture Capital Association. Life science investments take years to ripen, often with investors cashing out through company sales or initial public offerings.

Further complicating matters: Markets to sell or take life science firms public have all but shut down because of financial turmoil. Typically, about 140 venture-backed firms in the United States go public each year. In 2008, only six did, five of them in the first quarter.

And this is a tough time to kindle investor interest in new venture funds. Institutional investors lost billions of dollars in the 2008 market crash, straining their ability to make risky new investments.

"Life sciences and clean tech are still widely viewed as very promising. The question is, are the institutional investors already tapped out?" Taylor said. "You have some that are saying we can't put more money in, no matter how good the prospects are."

On the other hand, since the launch of the first Future Fund, the state has burnished its credentials as a good place for venture capital investment. Back then, Indiana was saddled with a reputation as a venture capital backwater.

Until San Francisco-based Burrill and Co.—one of the world's biggest life science venture firms—affiliated with Indiana Future Fund I, it had reviewed fewer than 10 Indiana business plans in its history.

Burrill officials originally worried there wouldn't be enough promising companies here to justify the firm's attention, said Ann Hanham, its managing director.

Burrill isn't fretting anymore. The firm now reviews several Hoosier biotech business plans every month and has invested in two local companies.

"Five years have gone by and there's a very, very different feel to Indiana. There are a lot more investments to look at. Deal flow has picked up considerably," Hanham said.

"For biotechnology, there are hotbeds around the country. San Francisco, San Diego and Boston are the biggest places we get deal flow from. We also see a fair amount from Seattle and Oregon, and then North Carolina. Indiana is starting to come up parallel with North Carolina."

The new attention is benefiting some fledgling Indiana firms in a big way. Quadraspec, one of the state's highest-profile startups, has received $3 million from venture firms affiliated with the first fund, and its total venture funding has swelled to $22 million.

"We can argue all day about which came first, the chicken or the egg," CEO Chad Barden said. "But the fact the Indiana Future Fund existed helped draw attention to what we were doing and helped me raise other money."

Durham, N.C.-based Pappas Ventures was an affiliate of Future Fund I, though it won't be for the second because of timing issues, Managing Partner Art Pappas said. Even so, it now has a taste for investing here, largely because money from the first fund it plowed into CoLucid produced an impressive return.

"We target a number of states in the underserved markets, and Indiana is our priority state in that regard," Pappas said. "Indiana is core to our overall strategy."

Burrill's Hanham is just as bullish about Indiana companies—a shift in mindset that was one of BioCrossroads' goals all along.

"If we were offered the opportunity to do it again, I would definitely want to do it," Hanham said. "I feel a lot more confident this time than I did five years ago. There's absolutely good things to do in Indiana, and I'd have no trouble finding good companies to invest in."
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