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QB3's VC Fund Raises $7.5M to Fund Startups

NEW YORK (GenomeWeb News) – The new venture capital firm created by the California Institute for Quantitative Biosciences, or QB3, is in "due diligence" review phases of selecting its first of 15 startups set to receive portions of a recently raised $7.5 million seed money fund.

Mission Bay Capital LLC is "expecting to make two to four investments a year over the next three or four years," Douglas Crawford, QB3's director of industry alliances and associate executive director, told GenomeWeb Daily News on Monday.

"We hope to be able to make our first investment early next year," he added.

Crawford — who along with QB3 Executive Director Regis Kelly also serves as unpaid directors of Mission Bay Capital — said the firm's goal is to award capital to 15 startups that will receive an average $500,000 in seed funding.

Longer term, he said, Mission Bay will help its portfolio companies find partners for later funding stages, but it is less likely to take part in those later rounds because of the size of the fund.

Companies approved for funding need not necessarily be among the 15 startups housed in two QB3 facilities created to nurture early-stage spinouts — "The Garage", the 2,500-square-foot facility that houses six startups, and a 10,000-square-foot space that houses nine startups one block east, within FibroGen's headquarters — but must be based on technologies developed within the publicly-funded University of California system. However, the fund's operation is designed to be independent of UC and QB3.

"I would say that the investment committee would probably look more favorably upon investments where the founders have already shown the gumption to reduce the execution risk by forming the company and getting going on a shoestring," said Crawford. "If we invest in companies that are in the QB3 Mission Bay Incubator Network, that very well may be done after they've been here for six months or a year or more."

Crawford, the secretary and treasurer of Mission Bay's managing member, Mission Bay Capital Management, said "a dynamic tension" exists around the two kinds of investments the fund is seeking to invest in.

"On the one hand, we'd love to participate in the creation of breakthrough companies with novel technologies, so we will be ever vigilant in looking for really exciting, big, swing-for-the-fences opportunities," Crawford said. "At the same time, we will be interested in more narrowly-tailored opportunities."

An example of the latter, he said, was True Materials, a Garage graduate, which last year was acquired for $25 million in cash by Affymetrix.

"We think there are a lot of technologies that are at universities that are important solutions to cleantech, medical devices, even the biopharmaceutical industry, and research tools that have opportunities for exits in the $25 million to $50 million range," Crawford told GWDN. "Companies of that ilk often have a hard time attracting venture capital, not because the internal rate of return are low, but because [the seed funding they need] simply is too small a number to move the fund that's got a few hundred million dollars under management."

Crawford said the explosion in genomics data presents "important commercial opportunities ranging all the way from hardware technologies that can help lower the cost of producing sequence or expression data, all the way through — we haven't really begun to figure out what we're going to do when we have tens of thousands of human genomes. We're very much interested in investments in that space."

Mission Bay is designed to return 20 percent of profits from its investments toward future funds, as well as a new endowment to support the research and educational mission of QB3 — which includes the University of California's San Francisco, Berkeley, and Santa Cruz campuses.

QB3 announced the formal launch of Mission Bay Capital on Monday. Its $7.5 million was raised in two offerings — just over $6 million in the first closing on Aug. 26, and the remainder in the second closing on Oct. 1.

Limited partners for the most recent offering included the law firm Wilson Sonsini Goodrich & Rosati, which will provide legal counsel to entrepreneurs funded by the firm; and two limited partnerships whose principals the fund will not disclose.

Overall, Mission Bay Capital has attracted a total eight limited partners — including Pfizer, and John Wadsworth Jr., managing director of Manitou Ventures. Wadsworth serves on Mission Bay Capital's pro bono investment advisory committee, as does Brook Byers, founding partner of the venture firm Kleiner Perkins Caufield & Byers.

Byers and Wadsworth are two of eight venture capitalist mentors that work with entrepreneurs at QB3, Crawford said during a presentation at "Maximizing Return on R&D Investments in Tough Economic Times," a policy workshop held in June at QB3 by the National Governors Association's Center for Best Practices.

Other mentors include Brian Atwood, a managing director and co-founder with Versant Ventures; Karen Boezi, a partner with Thomas McNerney & Partners; Ralph (Chris) Christofferson, a partner in Morgenthaler Ventures; Fred Cohen, general partner in TPG Ventures and a professor at UCSF; Bill Ericson, a partner in Mohr Davidow Ventures; and Luke Evnin, managing director of MPM Capital.

The fund includes for-profit partners, as well as philanthropists who contribute to the fund via a gift to the UCSF Foundation, which promotes the University of California, San Francisco, and the UCSF Medical Center.

Crawford said Mission Bay Capital is still interested in new partners. "Corporate venture is very helpful, but also astute private individuals can be very helpful to us as well," he said. "And we also have participation either indirectly or directly by some venture firms. All of that adds to our capacity to be effective."

Mission Bay Capital was established with the goal of raising up to $15 million, according to its Notice of Exempt Offering of Securities or "Form D" filed with the US Securities and Exchange Commission.

"That remains our target still," Crawford said. "We are reasonably confident that we will get somewhere in that $10 million to $15 million range over the next six months or so, and will continue to add limited partners as appropriate."

Crawford said the closest parallel he knew to Mission Bay Capital was Arch Venture Partners, formed in 1986 as a nonprofit partnership by the University of Chicago and Argonne National Laboratory to commercialize promising technologies. Its first fund, Arch Venture Fund I, raised $9 million in 1989. Three years later, the university spun out Arch, creating an independent, for-profit company that over two decades has grown to managing seven funds totaling nearly $1.5 billion, with investments in more than 120 companies.