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Study: Smaller Life-Sci Clusters Saw Steeper Growth in VC Cash Than Larger Rivals Since ‘97

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Several of the nation’s smaller life-science clusters eclipsed their larger counterparts over the last decade as they pocketed a greater increase in venture-capital investments accompanied by greater growth in the number of start-ups, according to a recent survey.
 
The study, by the National Venture Capital Association and PricewaterhouseCoopers, found that Pittsburgh recorded the highest growth in VC funding between 1997 and 2007, which swelled by more than 30,000 percent to $61.9 million from $200,000 over the period.
 
The next-highest VC recipients were Portland, Ore., followed by Seattle and the San Antonio/South Texas region, according to the study. The San Francisco/Berkeley area, which is the nation’s largest life-sciences cluster in number of companies and total venture-capital investment, was ranked number five in VC financing obtained by start ups.
 
Pittsburgh also saw the greatest increase in the number of companies funded, to 14 last year from one in 1997, followed by Seattle, San Antonio/South Texas, and Austin, Texas. Ranking fifth in that category was another established life-sciences hotspot: the Washington, DC, metroplex region that includes Maryland and its massive Montgomery County cluster [see charts below].
 
“You have to have good research facilities and you have to keep the people who are doing the research in that geographic region,” Mark Heesen, president of the National Venture Capital Association, told BioRegion News last week. Venture capitalists “follow the entrepreneur, not the other way around.”
 
He explained that it is “very important” for regions to encourage professors and other academic officials, as well as federal labs, “to look at things not just from a scientific-discovery perspective but from a commercialization perspective; as important as getting tenure and writing papers is, [so is] getting a discovery that actually goes out into the public domain and saves lives at the end of the day.”
 
The NVCA and PwC supplied its life-science findings at the request of BioRegion News after announcing on March 11 a top-5 list of regions measured by VC-funding growth and number of companies funded between 1997 and 2007 across all industries.
 
The study also found that Pittsburgh led in VC spending in all industry categories, with $198.2 million in capital invested in 2007 compared with $32.3 million in 1997. Trailing the Steel City in all categories were the state of New Mexico, Seattle, Los Angeles, and the Washington metroplex area.
 
However, the growth in the number of startup companies across all industry categories in Pittsburgh, which jumped to 44 from 12 during the 10-year period, was surpassed by New Mexico, which founded 21 start-ups in 2007 compared with three in 1997.
 
Heesen said Pittsburgh benefited from Pennsylvania’s decision to use funds from the 1999 tobacco settlement to nurture startups, as well as from the state’s consistency in maintaining that commitment under both Republican and Democratic governors.
 
Helping Pittsburgh secure its position as the highest-growing life-science cluster is the fact that it is home to one of Pennsylvania’s three Life Sciences Greenhouses — the others are in Philadelphia and Harrisburg — which Heesen said have helped draw venture capitalists to the state’s startups, especially in Pittsburgh.
 
“We’ve seen Philadelphia-based venture capital firms looking at deals in the Pittsburgh region,” he said.
 
While many of those deals are with Pittsburgh-area universities and research institutions, the city has also welcomed spin-outs from Cleveland, 90 miles away, where entrepreneurs from the Cleveland Clinic, Case Western University, and other institutions have been drawn east to the Steel City’s lower cost of doing business, Neesen noted.
 
“I see a growing corridor in life sciences between Pittsburgh and Cleveland, and both of those are going to be very aggressive in trying to make that a cluster zone,” he said. “Ninety miles is not a huge distance.”
 
In terms of VC stage investment, the market is “generally seeing mostly series A-, series B-type companies,” Sean Sebastian, a partner with the Pittsburgh VC firm Birchmere Ventures, told BioRegion News. “We don’t have enough, regrettably, of the C and D companies raising big rounds to do final commercialization pushes. They tend to be still at [the] product-development phase, which is where we like to specialize, so we don’t consider that a detriment at all.
 

Venture capitalists “follow the entrepreneur, not the other way around.”

“We’re seeing an ever-increasing outflow from the tech-transfer functions both at the University of Pittsburgh and at Carnegie-Mellon University, and interestingly from Case Western Reserve,” Sebastian added. “But we’re also seeing a number of companies that are more typical start-ups in the sense of not coming directly from the universities: entrepreneurs leaving major corporations and starting new companies.”
 
One such entrepreneur is Peter DeComo, who in 2000 left an Indiana-based kidney dialysis-product maker where he was COO to launch a spinout medical-device and healthcare service company.
 
DeComo’s company, Renal Solutions, focuses on in-home equipment for people with chronic and acute kidney failure. By 2002, the company became the first to win funding from the Pittsburgh Life Sciences Greenhouse; in return DeComo moved Renal Solutions from West Lafayette, Ind., to the Pittsburgh region, intent on capitalizing on his contacts at the University of Pittsburgh Medical Center Health System, where he had worked years earlier.
 
In 2002, Renal Solutions raised $17.7 million in series A financing led by Sebastian’s firm, joined by UPMC, three other venture firms, and several unnamed private individuals and institutions. Those investors pumped an additional $5 million into the company two years later. In 2005 Renal Solutions won an additional $16.5 million in series B financing as VC firms Triathlon Medical Ventures and PA Early Stage Partners (now Novitas Capital) joined the original investors.
 
All those investors saw their hoped-for exit last November, when German-owned Fresenius Medical Care bought Renal Solutions for $200 million. The company remains in the Pittsburgh suburb of Warrendale and continues to be headed by DeComo as a Fresenius subsidiary.
 
“We like to see universities contributing,” Sebastian said. “We like to see the entrepreneurs just starting out de novo, so there’s a pretty good breadth of activity going on.”
 
Heesen said not all fast-growing regions enjoy Pittsburgh’s concentration of local VC firms. “It isn’t imperative, but it is nice to have that local presence, because they know not only can they get to that portfolio company if something blows up, but they also know the local lawyers, accountants, [and] middle managers that you’re going to need if that company is going to get that second, third, and fourth round of funding.”
 
One constraint on Pittsburgh’s emerging life sciences companies until now has been a dearth of lab space available for lease. That, too, has begun to change, with Cleveland’s Ferchill Group breaking ground last December on Bridgeside Point II, a $46.5 million, 150,000-square-foot building set to rise within the 48-acre Pittsburgh Technology Center, in the city’s South Oakland section [BioRegion News, Dec. 10, 2007].
 
Heesen cautioned that the fastest-growing regions in VC spending and company formation are still too small to pose a challenge to the nation’s top two life sciences clusters in the San Francisco Bay area and greater Boston. San Francisco/Berkeley placed fifth in amount of VC invested in life science companies and sixth in number of startups created. Greater Boston placed 11th and eighth, respectively.
 
“The lion’s share of money is going to continue to go to Boston, northern California and increasingly, to southern California,” he said. “Those are areas that have marked out a strategy to attract venture capital dollars in the biotech space 10 to 25 years ago, and they certainly have the research facilities, and most important the professionals who understand biotechnology and are very happy to live in those regions.”
 
The strength of these clusters is one reason why regions that have showered millions of dollars to lure life sciences employers, such as Florida, will likely have to wait years before officials can gauge whether the money was well spent.
 
“You may see results here, but these things take an awful lot of time, particularly in the biotech area,” Heesen said. “A decade may even be optimistic. I think these are very long-term projects.”
 
Microsoft and More
 
Two hotspots for VC-backed life-sciences companies were in the Pacific Northwest. Heesen said Portland and Seattle, which ranked second and third, respectively, in VC growth between 1997 and 2007, have capitalized on concentrations of multiple tech sectors, including the life sciences.
 
While the region’s most famous tech giant isn’t strictly a life sciences company, Microsoft took a stake in a growing industry segment two years ago when it formed the BioIT Alliance, whose 67 members include IT firms and biotechs committed to advancing personalized medicine through collaborative projects. Microsoft’s founder has grown the Seattle region’s global health concentration by funding research through the Bill and Melinda Gates Foundation.
 
“We consider Microsoft to be a very, very strategic asset,” said Jack Faris, president of the Washington Biotechnology and Biomedical Association.
 
But not the only asset. Faris said the region’s life-science success also rests on its success in drawing VC money for spinouts of the University of Washington’s medical school, which provides access to publicly funded medical education in its namesake state and four nearby states without their own med schools: Alaska, Idaho, Montana, and Wyoming.
 
During the fiscal year that ended June 30, 2007, UW cracked the $1 billion mark in grant and contract-research funding for the first time, nearly all of it for peer-reviewed research proposals by faculty members.
 
UW has been the top single public university nationwide in federal research funding every year since 1974 when it racked up just over $90 million; and among the top five universities, public and private, in federal funding since 1969.
 
“There’s a certain entrepreneurial culture [at UW and Seattle] that encourages innovation and company formation,” Faris said. “There’s also a nice culture of collaboration. It’s easier to get people to work here than some other places, and that also helps foster company growth.”
 
The region’s life-science efforts also benefit from Faris’ 18-year-old industry group; from institutions like UW and the Fred Hutchinson Cancer Research Center; the state’s 3-year-old Life Sciences Discovery Fund, launched with money from Amgen as well as Microsoft; and the Accelerator Corp., a $25 million business-acceleration fund established in 2003 by Alexandria and a group of VC firms in Seattle.
 
The life sciences discovery fund plans to award up to $28 million in two rounds this year. While the first round’s deadline has passed, entrepreneurs still have until March 26 to apply for grants for the $18 million to $20 million to be made available in the second round. A request for proposals with additional information is available here. “We certainly expect great things from that for the future,” Faris said.
 
Since being formed five years ago, Accelerator Corp. has raised $130 million and launched seven companies. The seventh emerged just last week — Recodagen, a spinout of Washington State University researcher J. Suzanne Lindsey that has developed a therapy aimed at cancer metastastis. Investors include Alexandria, Amgen Ventures, ARCH Venture Partners, OVP Venture Partners, and WRF Capital.
 
Accelerator’s success has sparked talk in neighboring Oregon of a creating a similar start-up-nurturing venture. The concept is being studied by Oregon State University and its “innovation liaison,” Joe Tanous, a venture capitalist who has invested over $100 million in 50 startups over the past 15 years, as part of OSU’s effort to improve its tech-commercialization effort.
 
Eager to increase their commercialization activity, OSU and three other schools — Oregon Health & Science University, Portland State University, and the University of Oregon — are creating an Oregon Innovation Portal that would list prospects for technology licensing. The portal is slated to launch this summer.
 
Also in the works is a life-sciences incubator for Portland. Oregon Health & Science University and the Portland Development Commission agreed to flesh out the concept as part of a five-year deal reached last year to promote the long-promised development of a biocluster in Portland’s South Waterfront district. The commission agreed to give $3.5 million of tax-increment funds toward infrastructure work already completed in the district, including roads, sewer, and electric lines.
 
Don’t Mess With Texas
 
Public and private efforts have stimulated VC activity in Texas’ San Antonio and Austin regions. Last December, a spinout fund of Austin Ventures called Santé Ventures raised $130 million for medical-device makers and healthcare-services providers.
 
On the public side, Texas’ Emerging Technology Fund, part of a push by Gov. Rick Perry to ramp up state tech-commercialization efforts, is on its second fund, with $194 million available through 2009. The first fund in 2006-‘07 was set at $200 million, of which $25 million went unspent. While TETF has participated in some series B rounds, most of its awards are in earlier stages.
 
“It’s a beautiful program that has really had a huge impact on the state,” said Tom Kowalski, president of the Texas Health and Bioscience Institute.
 
TEFT helps recruit to state universities top researchers with records of tech commercialization, and matches the funding that startups receive through industry-led consortia, in addition to funding early-stage technologies, both within and outside the life sciences. Life sciences account for 48 percent of TETF’s deals, but the state does not spell out any tech specialties for funding, TETF Director Mark Ellison told BioRegion News.
 
“We’re going to let the market tell us where those technologies are,” Ellison said in an interview. “It just happens that the life sciences are a hot area, and we’ve got the research infrastructure here to help spin them out. Our goal is to not replace private capital, but to try to fill that infamous valley of death,” or funding gap between proof-of-concept and series A venture capital financing.
 
TETF also funds converging technology projects, such as biotech-nanotechnology — another reason why the fund doesn’t set aside specific amounts for specific technologies, Ellison said — as well as clean energy and IT projects.
 
To date, the fund has invested $110 million in 61 completed deals, and plans to invest another $17 million in 22 pending deals with undisclosed companies. TETF is gathering data on how much in private VC funding it has been able to leverage as a result of its activity.
 
“There’s a convergence in information technology, engineering, general biology, life sciences, healthcare and healthcare management,” said Mary Pat Moyer, founder, president, CEO, and CSO of San Antonio-based Incell Corporation, which has developed an oral vaccine technology platform. “A lot of parallel tracks are converging,” said Moyer, who is also president of the San Antonio Austin Life Sciences Association.
 
As a result, she added, “the community has undergone a change in self-recognition that our healthcare and bioscience industry is our primary economic generator in San Antonio.”

 
Growth in Number of Companies
by Region, 1997—2007
Region
No. of Companies 1997
No. of Companies 2007
% of Growth
Pittsburgh/Tristate
1
14
1300
Seattle
10
30
200
San Antonio/
South Texas
1
3
200
Austin
3
8
200
Washington DC Metroplex
22
41
86
San Francisco/ Berkeley
28
52
86
San Jose
64
117
83
Boston
55
88
60
Great Lakes
29
44
52
San Diego Metro
41
61
49
Research Triangle
18
25
39
Philadelphia
25
34
36
Twin Cities
17
23
35
Denver
10
13
30
Dallas
4
5
25
New York Metro
31
34
10
Orange County
20
21
5
Los Angeles
9
8
-11
Atlanta
11
9
-11
Portland
5
4
-20
South New Jersey/West Pennsylvania
8
6
-25
Chicago
12
8
-33
Houston
10
6
-50
Nashville
12
6
-50
Other U.S.
62
93
50
 
 
Growth in Life Sciences
VC Investment,
1997—2007 ($M)
Region
Life
Science VC Investment 1997
Life Science VC Investment 2007
% of Growth
Pittsburgh
0.2
61.9
30,825
Portland
0.3
45.5
15,067
Seattle
75.6
422.9
460
San Antonio/
South Texas
2.1
9.3
354
San Francisco/ Berkeley
177.0
796.6
350
San Diego
270.8
1,172.9
333
Austin
39.6
171.0
332
Twin Cities
72.9
266.1
265
San Jose
523.0
1,807.3
246
Research Triangle
98.8
327.7
232
Boston
386.5
1,155.8
199
Washington
Metroplex
126.8
342.6
170
Philadelphia
168.0
449.9
168
South New Jersey/West Pennsylvania
32.3
84.9
163
Great Lakes
100.2
260.3
160
Los Angeles
65.8
170.3
159
New York Metro
182.7
426.0
133
Orange County
154.4
269.9
75
Chicago
85.7
131.8
54
Dallas
27.0
33.6
25
Atlanta
106.1
108.7
2
Nashville
67.0
59.5
-11
Houston
59.3
25.5
-57
Other U.S.
367.1
717.2
50
 

Source: PwC/NVCA/Thomson Financial

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