Georgia and the Georgia Research Alliance last week announced plans to create a $40 million venture capital fund designed to enable private equity firms in the state to invest in startup companies built around technologies discovered in the six Georgia research institutions that participate in the GRA.
The fund will have a particular emphasis on life science start-ups as part of a recent statewide campaign to increase support for its burgeoning biomedical research programs, and to translate those efforts into companies that will eventually contribute to economic development in the state, according to program officials.
The fund could include $10 million from the state, an investment recommended to the legislature by Gov. Sonny Perdue, but not yet approved. If lawmakers approve this contribution from the state’s coffers, the GRA said it would match it with a $30 million investment from the private sector.
Once the fund is live, it will invest in companies sprung from technologies developed in any of the GRA’s six member 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 particular, the fund will invest in companies that have passed through GRA’s VentureLab, a program launched in 2002 to identify university technologies with commercial potential and to provide seed grants and other kinds of assistance to startups built around those technologies.
Other components of the fund would grant investors a 25 percent income tax credit and a 10 percent income tax credit for those who invest alongside the fund. The aim is “to encourage other venture funds and other private investors to come in,” Fred Cooper, a GRA trustee who is spearheading the project for the GRA board, told BTW this week.
Cooper said that the fund is designed to provide early-stage capital to companies after their seed funding runs out, a problem that is endemic to many states other than California and Massachusetts, which together control a majority of US venture capital assets.
“What happens with someone who has a project is that they can’t get financing, or in order to get financing they go to friends, family, and angel investors,” Cooper said. “They may get some that way, but there is still this gap where you need more money.
“You can’t find any in Georgia, like in other states, so you go outside of Georgia to California or where there is more VC activity,” he said. “But they say, ‘We like your [proposition], but we don’t want to have to take the red-eye special to Atlanta, so you come out and start your business here, and we’ll finance it.’”
According to Cooper, the GRA fund, which will seek to link money from Georgia-based VCs with cash from the state Treasury, will try to compel these spinouts to remain in Georgia.
“So what we’re looking at is something that will have a meaningful way of growing economic development in this state in the long run,” Cooper said. “People will have the incentive to do the work, realizing that if they get it through the lab and it’s a meaningful innovation, then the money will be here to take it into commercialization.”
Michael Cassidy, president and CEO of GRA, told BTW that recent research revealed that California and Massachusetts VC firms control around two-thirds of all venture capital in the US, with the rest scattered over the other 48 states.
Cassidy said the GRA seeks to uncover “what could be done as a catalyst and, more importantly, what structure could we put in place to continue to invest in the deals that are being built around IP from our universities.”
He said the fund will guide the flow of investment from the earliest stages at GRA institutions up to early-stage private-equity financing. In particular, this flow will merge with the expanding research capabilities of the state.
“The life-science industry sector is what the state has targeted specifically to develop,” Cassidy said. “GRA is principally focused on three scientific or technical areas. We do some work in IT – specifically broadband communications. About two-thirds of our investment portfolio is in support of life science and bioscience; and we have a small initiative we are starting to develop in alternative energy.”
Specifically looking at the life sciences, GRA and other Georgia economic-development organizations sought to identify areas that share common ground with research capabilities available within the state, including vaccine technology, anti-infectives, public health, and clean energy. The goal, said Cassidy, is to transform Georgia into a leader in those categories.
“A lot of what’s going on here is just building a continuum of investing at the basic levels of building research capacity at the university all the way through to that first formal round of venture capital.”
“As we did the analysis, this whole broad area of global health, driven by a whole new resurgence in vaccine technology – we’ve got a lot of strengths there; in part because of the [US Centers for Disease Control] being based here,” Cassidy said. “Over the years, a lot of our universities have [recruited] in areas that relate to some of the science that’s being done there. But it also turned out that we already had significant capabilities there at our research institutions – we just had not connected all the dots.”
Last year, Georgia continued to develop its capabilities in this area by launching a targeted initiative backed by state funding to recruit additional scientific leadership in the vaccine, anti-viral therapy, and public-health space; and to build specialized infrastructure at its research institutions to support the development of these sectors.
“Then as we looked at the venture fund, we said, ‘Given that we’re putting a lot of emphasis on the scientific development in that space, we should be talking about that as a key component of this new venture fund as well,’” Cassidy said.
He added that investments from the new fund will come in after companies are nurtured through the VentureLab program, and after they’ve received smaller seed investments from GRA and other university and state sources.
“So a lot of what’s going on here is just building a continuum of investing at the basic levels of building research capacity at the university all the way through to that first formal round of venture capital,” he said. “As all of this gets more linked, ideally we’ll have discoveries coming out of the laboratory that has a ramp right up into getting funded as a business.”
The VentureLab will also try to ensure that companies reaching the GRA Venture Capital Fund stage are sound investments.
“We will not have a general partner [because] we don’t need someone out looking for these deals,” said the GRA board’s Cooper. “We’ve got deals coming through this pipeline. A lot of the due diligence can be done through this Venture Lab process.
“We’ll obviously have to have a sophisticated financial structure put together,” Cooper added. “But essentially the objective is to eliminate all expense, including not only the fee the general partner would normally have, but also any other expenses that may be charged against the investment. All of those expenses will be handled by GRA, so the investor will have a pure return on the actual investment dollar without any charge for expenses.”
Cooper said that it is too early to determine the amount of funding that might be awarded to individual companies, which, like traditional VC due diligence, will depend on a company’s technology and its financial needs.
Georgia’s state legislature went into session this week, Cooper said, so it will be a few weeks before it begins considering Gov. Perdue’s $10 million budget recommendation for the fund. He estimated that the legislature should finish its considerations by the end of March or early April.
“We will work in parallel with that,” Cooper said. “We won’t wait until all that is done. We are already working on the documentation. As soon as we know we have the state dollars and the credit, those will be fairly strong marketing aspects of going to the public for private funds.
“But this is not just an idea where we went to the governor and said, ‘Will you get the money, and then we’ll put it together?’” Cooper added. “We’ve had a great deal of conversation with the universities to make sure they’re on board with it. The presidents of the universities and a lot of competent business leaders are on the GRA board, and we’ve had conversations with all the VCs. So we believe it will not only work, but will enjoy a great deal of financial and other support from the community.”