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VCs to Georgia: Invest in Entrepreneurs, Not Just Innovation, to Build Life Science Economy

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This is an updated edition of a story first published May 28.

Georgia's life sciences effort has a solid base of academic and other nonprofit research institutions, as well as access to capital and talent, but the state's unwillingness to create additional economic incentives for the industry is placing the Peachtree State at a competitive disadvantage to rival regions, venture capitalists who invest in early-stage biotech companies agreed at a recent panel discussion in Atlanta.

Thomas Callaway, general partner in Georgia Venture Partners, noted that the state has spent nearly two decades joining with its largest research universities in working to commercialize their life-sci technologies through the Georgia Research Alliance, which fosters collaborations between industry and four state academic institutions — the University of Georgia, the Medical College of Georgia, Emory University, Clark Atlanta University, the Georgia Institute of Technology, and Georgia State University.

In the 2008 fiscal year GRA spent $41.1 million in state funds — $19.1 million on research infrastructure, $12.5 million on eminent scholars, and $9.5 million on tech commercialization.

"Our GRA program has been very successful in creating novel innovation, and sadly a lot of times that novel innovation ends up in Princeton, NJ, or North Carolina. What we'd like to do is keep some of that here," said Callaway, whose firm specializes in seed- and early-stage investments of up to $1 million in Georgia-based life sciences startups.

Georgia Venture Partners has invested in state-based companies alongside Georgia Tech's Advanced Technology Development Center Seed Capital Fund, which invests $1 for every $3 of private capital raised by bioscience and advanced tech startups, up to $1 million.

"Now we're sitting here with everybody's budgets being cut, wondering, 'What is our next step?' I think that's what our challenge is," Callaway said.

Callaway was one of five panelists to assess Georgia's strengths and challenges as a life sciences cluster, compared with other Southeastern states, during "Financing the Southeast Biotech Sector," a panel talk held May 21 on the final day of the Biotechnology Industry Organization's 2009 International Convention, held at the Georgia World Congress Center.

Long-Term Planning

Callaway added that taking that next step so that life-sci startups grow in Georgia is complicated by the state's shorter-term focus on economic development compared with the Southeast's two life sciences leaders — North Carolina, which enjoys the largest cluster in the region, and Florida, whose state and local governments have spent more than $1 billion combined to draw a half-dozen research institutes to the Sunshine State in recent years.

Panelists from those states — Ken Tindall, senior vice president of science and business development for the state-funded North Carolina Biotechnology Center, and Peter Policastro, senior director of business development for the Scripps Research Institute in Jupiter, Fla. — said that governors were as crucial as life-sci leaders in building the industry's presence in their respective states. Policastro noted that it was then-governor Jeb Bush who joined with Scripps President Richard Lerner to recruit his institute, using $600 million in state and local tax breaks, just as Tindall cited former North Carolina governors James Hunt Jr., a Democrat, and James Martin, a Republican, as establishing the biotech center, which this past fiscal year received $15.4 million in state funding.

Yet in Georgia's case, even brilliant leadership may not be enough for the state's life-sci industry without economic development policies focused more on long-term gains than generating short-term numbers, Callaway said.

"Unlike the states of Florida and North Carolina, which made 25-year bets, we tend to focus quickly and say, 'What's our return?' I think we tend to find employment opportunities faster in Kia plants," he said.

One reason why Georgia technologies migrate to North Carolina or further north to New Jersey, Callaway said, is because "unfortunately, we have yet to build that same level of expertise within the life sciences" that has sparked the growth of other industries in Georgia — from Ted Turner's creation of Atlanta-based CNN a generation ago, to the software and telecommunications industries more recently.

"We're working on that," Callaway said, adding that the state is lucky to have professionals with life-sci business expertise. He cited Russell Medford, who spent about a decade building AtheroGenics in Alpharetta, Ga., as president and CEO before the drug developer went bankrupt last year, following the failure of a Phase III clinical trial for the heart disease drug AGI-1067.

"We have a challenge with entrepreneurs. We need more entrepreneurs in our state, and that's always been a challenge — to develop and attract [them]," Callaway added. "I think as we generate more hits, or more successes around that, we'll start building that entrepreneurial class."

That class of entrepreneurs would expand the state's commercial life-sci segment, now dominated by two international corporate giants with US headquarters in Georgia — Japanese-owned Shionogi & Company, which is acquiring Atlanta-based Sciele Pharma for $1.42 billion cash; and Belgian-owned biopharmaceutical company UCB.

Importing Capital

Michael Wasserman, a principal in H.I.G. Ventures, and Garheng Kong, general partner with the Durham, NC-based VC firm Intersouth Partners, told the audience during the talk that they and other venture capitalists were willing to travel to life-sci startups based in Georgia, if they showed sufficient promise to justify VC investment in them.

Atlanta, Kong said, offered the advantage of originating direct flights to most major US destinations, including the nation's top two life-sci clusters, the San Francisco Bay Area and Boston/Cambridge, Mass. And like the rest of the Southeast, Atlanta offers another advantage — the potential for diversifying a portfolio of life-sci companies that otherwise would be too concentrated within the top bioclusters.

He cited several recent eight-figure venture capital deals in the Southeast in arguing VCs will invest in the region — most recently, the $46 million series C round raised by Cempra Pharmaceuticals of Chapel Hill, NC, and announced by the company on May 14. The region has seen a half-dozen VC deals of greater than $30 million over the past nine months, said Stephanie Adams, the panel's chair and the outgoing executive director of the regional life-sci group Southeast BIO, or SEBIO.

"If you think of the Southeast region as a whole, most of the money comes from somewhere else, whether it be Boston or San Francisco or Europe or Asia. We have to import most of our capital," said Kong, the chair of SEBIO's board of directors, estimating that probably between 75 percent and 80 percent of the capital is imported. "And even then, only when a local firm generates up to three or four times the amount it invested from out-of-town firms," Kong added.

"The infrastructure, the people, the science, those things aren't really mobile. You live where you live. Your lab is where your lab is. Money is really mobile," he said.

As a result, Kong felt it does not matter that Atlanta and the rest of Georgia have a dearth of locally based VC firms and investors. "Unless you live in the Bay Area or you live in Boston, that is true for everyone else. Any other state, any other region, they don't have enough."

Wasserman agreed, adding: "Wherever we go that isn't Silicon Valley or Boston, everybody laments the lack of venture capital, the lack of investors, the fact that they are net importers of capital.

"But the bottom line is, people will get on a plane for a good opportunity … We as investors really have one job: We get checks from our investors, and we have to give checks back to them. And those checks are supposed to be bigger than the ones we get. If that means going from San Francisco to Gainesville [Fla.] or from Miami to Atlanta or Augusta or wherever it may be, we're going to go where the opportunities to invest in good companies and make money are," Wasserman added.

Georgia life-sci companies, and the groups that represent them, stand a better chance of growing the state's life-sci cluster if they speak with a single voice in advocating for more state funding and other industry priorities, Tindall said.

While North Carolina has two life-sci groups — the biotech center and NCBIO, the state's chapter of BIO, the groups pursue similar priorities, in part because their leaders meet regularly.

"[NCBIO President] Sam [Taylor], and I, and others meet every Tuesday at 7:30 in the morning. We talk about where we are with what, especially as the Legislature is meeting. There is a point of communication and a point of making sure there's one voice. I think that cannot be understated," Tindall said.

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