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MaRS, Seeing Red Among Toronto Life-Sci Startups, Debuts Program to Form New Fund

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With one funding source for Toronto-based early-stage tenant companies expected to dry up in three years, the MaRS Discovery District research-office incubator campus in that Canadian city is working to craft another.
 
MaRS, an acronym that once stood for Medical and Related Sciences, has secured anchor funding of an undisclosed amount in a new venture philanthropy fund it plans to roll out soon. The fund would allow the nonprofit innovation center to provide seed-stage funding for startups as well as tax-deductible receipts for benefactor investors, CEO Ilse Treurnicht said during the National Business Incubation Association’s 22nd International Conference on Business Incubation, held in San Antonio earlier this month.
 
“What we’ve had, both from individual philanthropists as well as from foundations, is an increasing interest in funding the next stage of taking important research to practice,” Treurnicht said during a discussion session, titled “Technology Clusters: Accelerating Science-Driven Start-Ups and Convergence Innovation.”
 
Treurnicht said that the organization has ”been looking at a number of venture philanthropy models across the United States and elsewhere.”
 
Speaking with BioRegion News following her presentation, Treurnicht said it was too soon to discuss the size of the fund or the timing of its launch pending additional responses from prospective investors.
 
She did say the fund was needed to help make up for the decline expected in an important source of financing for early-stage companies — investment funds created by labor unions. The province of Ontario, which includes Toronto, is phasing out tax subsidies for the labor funds and will eliminate them entirely by 2011. The change is expected to all but dry up the funds, which have frustrated investors with years of sub-par returns.
 
Canada has 127 such funds — known as labor-sponsored venture capital companies — with a combined $12.8 billion under investment. According to GlobeFund.com, an outlet for mutual fund information run by the Toronto Globe and Mail, only 32 of the 115 labor funds in operation longer than a year saw their net asset value per share rise in the year that ended April 30; another two were unchanged, while the rest saw their share prices fall. The worst-performing fund, Axis Investment Funds Series I, finished at $5.98 per share, down 36.2 percent from April 30, 2007.
 
The best-performing labor fund, Covington Venture Fund IV-New Mille, finished the year with a share price of $15.914, up about 52.7 percent.
 
Between 2001 and 2005, when the combined value of labor funds was $10 billion, the average return to all labor funds was minus 6 percent. Between 1991 and 2005, the labor funds lagged behind US Treasury notes in all but two years — 1999 and 2000, the years of the technology meltdown wrought by the end of the dot-com bubble.
 

“Due to the tax subsidies, they have so much money that they’re making so many investments, that the number of investments per fund manager is typically very large. …”

Numbers like these have persuaded Douglas Cumming, Ontario research chair in finance and economics at York University’s Schulich School of Business in Toronto, that the labor funds should lose all other provincial and federal tax subsidies.
 
“Due to the tax subsidies, they have so much money that they’re making so many investments, that the number of investments per fund manager is typically very large, roughly two to three times the number of a private limited partnership,” said Cumming, who is also an associate professor of finance and entrepreneurship at Schulich.
 
“At a well-run private venture-capital fund, you might expect just a handful of projects per fund manager so that they can take a lot of time sitting on boards of directors, adding value, making strategic, financial, human resource, and marketing decisions for the company, and really growing that company.”
 
Private VC investors “are really actively involved in helping that company put in stock option plans, helping them go public if that’s going to be the exit outcome. It takes a lot of time. It’s not just about the money,” added Cumming, who wants Canadian policy shifted to favor private VC firms, which could include cutting capital-gains taxes.
 
Despite their shortcomings, the funds have retained enough support from labor to stop other provinces, and from Canada’s federal government to not follow Ontario’s lead. And Ontario has already pushed back what had been its initial phase-out year of 2010.
MaRS on the Horizon
 
In addition to the phase-out of Ontario tax breaks for labor funds, Treurnicht said, MaRS is responding to a decline in investment by venture capital firms, and a shift by VC investors away from early-stage companies and toward later-stage businesses at or close to generating revenue.
 
That shift can be seen in Canadian venture-capital investment figures from Thomson Reuters. During the first quarter of this year, venture funding for life-science companies fell 72 percent to $54 million from $206 million year over year, even as the number of deals stayed relatively steady with 31 in Q1’08 versus 25 in Q1’07. But the dollar drop cut to 17 percent from 30 percent a year ago the share of total investment activity held by life sciences companies.
 
Life-science deals accounted for 17 percent of the total $323 million in 138 Canadian VC deals in the first quarter, just over half of the $610 million in 131 deals recorded for the first three months of 2007.
 
Much of that falloff reflected investors’ shifting $164 million from private venture funds into 14 labor and other retail funds. Yet that figure was less than half the $396 million shifted a year earlier. And the amount of money heading into the labor funds was surpassed by the $170 million invested into five private VC funds, up from $70 million in Q1 ‘07.
 
Treurnicht said two other factors — one governmental, the other historical — also spurred the creation of the venture philanthropy fund. Canada lacks the strong Small Business Innovation Research, or SBIR, grant program developed in the US, forcing many companies to move out of incubators like MaRS in search of their own funding.
 
And in pursuing philanthropy, MaRS is harkening back to its past, when a dozen benefactors raised $1 million each, then secured $5 million from the University of Toronto as a charitable contribution. Those efforts helped stave off the sale to condominium developers of the downtown campus vacated by Toronto General Hospital after it merged into University Health Network.
 
That allowed MaRS to redevelop the hospital site — which is rich in research history; the first clinical trial for insulin took place at the hospital, in a facility built in 1913 — into a mixed-use business incubator. MaRS houses some 70 tenants within its 700,000-square-foot first phase on the southeast corner of College and University.
 
The man who wrote the first check, John Evans, now chairs the MaRS board; he is expected to relinquish the helm by the end of the year.
 
Biotech and medical-device businesses account for about one third of the resident companies now at MaRS; another third consists of legal and financial firms, plus nonprofits and nonprofit research centers, the investment manager of University of Toronto, and a statistical analysis practice launched by the University of Waterloo.
 
Those numbers should grow by 2010, when MaRS and joint venture partner Alexandria Real Estate Equities are set to complete the incubator’s $300 million, 750,000-square-foot second phase now under construction [BRN, July 16, 2007].
 
Joel Marcus, Alexandria’s chairman and CEO, said at the discussion session that MaRS should consider borrowing from a successful venture philanthropy effort. Marcus cited the California Institute of Technology, which in 2006 received an $8.9 million grant from the Broad Foundations and philanthropist Eli Broad toward launching the Broad Fellows Program in Brain Circuitry.
 
Over the following five years, CalTech was to use the funding to establish six new neuroscience labs and hire 24 researchers. Just how much progress has been made toward those benchmarks was not available at deadline; a CalTech spokeswoman did not return telephone messages from BRN.
 
Treurnicht said the venture philanthropy fund would incorporate features now used by similar programs throughout the US.

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