At age 2, Future Fund still work in progress: So far, 7 startups have received investments from BioCrossroads

For two years now, the $73 million Indiana Future Fund has been at work in the Indiana life sciences market.

BioCrossroads, Indiana’s public-private life sciences economic development initiative, is pleased with the results so far.

“When we put the Indiana Future Fund together and surveyed the landscape, there were only two or three [local venture capital] firms that really identified themselves as in [the life sciences] area,” said BioCrossroads President David Johnson. “Now we see much more traffic than we did a few years ago. And I think the Indiana Future Fund has had a lot to do with that. It’s at least put us on the map as a potential destination for good venture capital investments.”

BioCrossroads raised the IFF in 2003 and began distributing its $73 million to six professional venture capital firms in April 2004, hoping to spur an increase in local life sciences business development.

To date, IFF money has found its way into seven different Indiana-based life sciences startups, said Mike Arpey, managing director of investment bank Credit Suisse First Boston’s Customized Fund Investment Group, which oversees the IFF. Those startups received $16.5 million of the IFF’s funds, leaving $56.5 million still available.

Perhaps more important, Arpey said, the seven startups attracted another $50 million, bringing the total worth of their deals to $66.5 million. Most of the additional capital came from venture capitalists outside Indiana.

“These companies that have been financed by IFF funds are not being financed alone by IFF funds,” Arpey said. “The validation … is the fact that they’ve been able to attract capital from very reputable firms around the country.”

Although the seven startups that got cash represent just 1.4 percent of the 500 Indiana companies reviewed by the IFF affiliates, Arpey and Johnson said such a ratio is to be expected.

“It takes many, many deals to look at before you make an investment,” Johnson said. “That’s exactly how the venture market works. People asked for the venture market in Indiana. [Now] they have the venture market in Indiana.”

Fund of funds

From its inception in 2002, BioCrossroads’ premise has been that Indiana has a vast untapped wealth of life sciences expertise and innovation in its research universities, hospitals and biotech corporations. If venture capitalists only had the resources, the argument went, they could stimulate commercialization of all sorts of new technologies and build businesses around them.

BioCrossroads hired CSFB and spent most of 2003 raising money for the IFF, closing on $73 million that October. Its investors included many of the state’s largest institutions, such as Indiana University, Purdue University, Ball State University, the Indiana State Teachers’ Retirement Fund and the Indiana Public Employees’ Retirement Fund.

Four of Indiana’s largest corporations also invested: Eli Lilly and Co., Guidant Corp., American United Life Insurance Co. and Anthem Inc.

To maximize its impact, the IFF was structured as a venture capital fund-offunds, which meant it would not invest directly into life sciences startups. Instead, CSFB interviewed several dozen professional venture capital firms and selected six to share the $73 million. Those six firms are responsible for the seven IFFbased investments.

Although BioCrossroads hopes to see biotech startups become a cornerstone of Indiana’s future economy, it said from the start that its goal isn’t pure economic development. The IFF’s first responsibility, Johnson has stressed at every turn, is to produce superior returns for its investors.

“This is a return-driven fund,” he said. “It has to be about return before it’s about anything else.”

Endocyte Inc.

San Francisco-based Burrill & Co. is the largest of the IFF’s six venture affiliates. With $500 million under management, Burrill has so far made one investment in Indiana. It joined a syndicate that raised $23 million for Lafayette-based cancer therapy startup Endocyte Inc. in November 2004.

“They had some of the best preclinical data I’ve seen in the relevant animal models. I liked the fact that their intellectual property was broad and very strong,” said Burrill Managing Director Ann Hanham. “We are starting to approach the time of looking at the next [investment]. We’re certainly committed to follow-ons in this company.”

Hanham said people from Burrill spend four to five days a month in Indiana. Burrill also stages an annual venture capital conference here.

“We have responded to the directive, and have really tried to find investment opportunities in Indiana as a result of having this funding available,” she said. “Before the IFF was formed, we received almost no business plans from Indiana. There has been a large increase. But that could be also a factor that we’re doing the search. There’s a statistical phenomenon where, if you look, you will find.”

Endocyte CEO Ron Ellis said Burrill invested $3 million in his company. With $96 million under management, Cincinnati-based Triathlon Medical Ventures, another IFF affiliate, invested another $3 million. Since inception in 1996, Ellis said, Endocyte has attracted $48 million in venture capital, plus another $6.6 million in grants and $7 million in partnering or licensing fees.

Although Endocyte had a successful history raising venture capital long before the IFF was formed, Ellis said it was helpful at a key stage of his company’s development. Since raising its most recent $23 million, Ellis said, Endocyte has furthered its product development and added 20 employees, bringing the firm’s total to 50. Burrill took the lead on the investment round, establishing the price of the deal for the rest of the venture capital syndicate.

“That investment was really the core of that financing round. There’s a lot of leverage there,” Ellis said. “The Future Fund was the catalyst for getting this round of financing together. I think they’ll probably participate in the next round.”

CoLucid Pharmaceuticals

With $230 million under management, Research Triangle Park, N.C.-based Pappas Ventures is the next-largest IFF affiliate. So far, Pappas has invested in just one Indiana-based life sciences company, the Lilly spinout CoLucid Pharmaceuticals Inc.

In January, Pappas co-led a $16.5 million investment in CoLucid along with Princeton, N.J.-based Domain Associates LLC. CoLucid is attempting to develop therapy based on a migraine molecule it licensed from Lilly. It has several other drugs in development from a pipeline it acquired from Providence, R.I.-based Sention Inc. For now, CoLucid is working out of the Indiana University Emerging Technologies Center, a business incubator on the Central Canal.

“Doing something from scratch like this takes a lot of work,” Pappas said. “It took more than a year and a half to pull it together. It’s not a quick process.”

Triathlon was also a CoLucid investor. Triathlon Managing Director Carrie Bates said to earn investment, a startup must fit Triathlon’s niche. Triathlon doesn’t consider health care IT or service businesses, for example. When venture capitalists choose to pass, she said, it doesn’t necessarily indicate a startup is unworthy.

“The fact that we made two investments doesn’t mean we’re only invested in two companies. We’re in due diligence with two companies right now and following a number of others,” Bates said. “It’s not that, out of 100, there were 98 we don’t like. It’s [that] 30 or 40 were services or IT. Then maybe 10 to 20 we said we’re not interested in for various reasons. Or even though it fits in our space, the company isn’t far enough along and doesn’t need money [yet]. It’s not as negative as 98 no’s.”

With $20 million under management, Indianapolis-based Pearl Street Venture Partners also joined the CoLucid deal. Managing Director Tim Tichenor said CoLucid has been Pearl Street’s only Indiana deal so far.

Even so, Tichenor said Pearl Street has been busy, spending much of its time cultivating potential investments and providing informal mentoring and advice to local startups. He declined to name any.

“Just because we haven’t invested doesn’t mean that we aren’t adding value,” he said. “We’re trying to spend time with the ones from an investment perspective that may end up in our portfolio.”

Purdue startups

A pair of small Purdue University-connected startups have received the rest of the IFF’s announced investments.

With $20 million under management, Carmel-based Spring Mill Venture Partners invested in diagnostic-device maker QuadraSpec Inc. in July 2005. Last month, it made an investment in Lafayette-based respiratory-device maker SonarMed Inc. Spring Mill Managing Director Ken Green said that, in both cases, he was attracted to the strength of the management team, platform technology and market opportunity.

“We felt the potential returns warranted the risk of investing in an early-stage company,” Green said.

Spring Mill has also invested in the Indianapolis-based digital video production equipment maker Cine-Tal.

Mary Campbell, managing director of Ann Arbor, Mich.-based EDF Ventures, has put money into QuadraSpec. With $170 million under management, EDF’s other Indiana investment was in the Purdue startup Arxan Technologies, which makes software for IT security. Arxan’s labs are still in Lafayette, but its headquarters is now in San Francisco.

“Our hope is to get another couple Indiana investments on the books in the next 12 to 18 months,” Campbell said. “We’re pretty far down the path on a couple now. You never know if you’re going to get there until you get there.”

Bottom line

Although CSFB’s Arpey said seven Indiana-based startups have received IFF money, he declined to name them. He stressed that it will be a long time before the IFF’s true results are known. The six venture firms still have another four years to invest the IFF’s remaining $56.5 million. It will likely be years after that before the startups ripen to maturity.

“We’re still in the early days of this program. We have a six-year investment period. The program really got kicked off in the beginning of 2004. So we are a little more than two years into it,” Arpey said. “To me, we’re making very good solid progress and we’re excited about it.”

“Indiana is becoming less of a flyover zone for venture capital firms,” Arpey added. “I think [the IFF] has dramatically changed for the better what’s going on in Indiana.”