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In New Twist on VC Model, Texas’ Emergent Tech Opens Incubator for Portfolio Firms

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In what may be a new life-sciences venture-capital model, Texas-based venture firm Emergent Technologies last week unveiled its own laboratory space in Austin for its portfolio biotech companies, and also revealed the first tenants of the new space.
 
In addition Emergent, which has been trawling the University of Texas system for its technologies, this week made available a $50,000 award to support proof-of-concept development of a selected technology developed by researchers in the UT system.
 
Emergent, founded in 1989, calls its investment method “invention capital” to distinguish it from the traditional venture capital model, and said it is a streamlined funding approach meant to fill the cash gap between the university laboratory and traditional VC backers.
 
The company says that several aspects of its business set it apart from private-equity firms. First is its focus on early-stage technologies from universities and non-profit research institutes — investments that many traditional VC shops eschew because of their relatively higher risk compared with companies that have more mature life sciences technologies.
 
“Most start-up companies have to build their own lab space, or they’ll typically just rent space on the university campus where the professor first started the company,” Grant Gibson, vice president of market development for Emergent, told BTW this week.
 
“That may not be true in San Diego or Boston, where there is a lot of wet lab space available from startups that have built something and then failed or moved on,” Gibson added. “But in Austin, and, frankly, in 90 percent of the US and most universities, there is not such an opportunity nearby to the university.”
 
Since 1999, Emergent has invested an undisclosed amount of money in such technologies through different funds, with each fund focusing on technologies from a particular institution.
 
These include ETI Funds I, II, and II Annex, all started in 1999 to support technologies developed at the University of Oklahoma Health Sciences Center; Fund III, started in 2004 to invest in technologies from Texas Tech University Health Science Center; and its current Fund IV, started last year to focus on technologies developed within the entire UT system.
 
In addition to capital, Emergent provides what it calls a “turnkey solution for converting university science into high-return ventures.” This offering includes technical and business expertise, established industry relationships, and marketing and communications support, among others.
 
Room to Grow
 
Now, Emergent has added another component to its investment model: incubator space. Located on the first floor of a new three-story ETI building in Austin, the approximately 7,200-square-foot space includes wet labs and business offices for current or future portfolio companies. Currently, Emergent has 13 portfolio companies across its four funds.
 
For a VC shop to provide such space “is a first — at the very least in the Texas biotech world,” said Gibson. “I don’t know of anybody that really houses lab space for their portfolio investments.”
 
Emergent also announced that the first occupant of the space is Beacon Sciences, a spinout of UT-Austin developing commercial healthcare applications for a chemiluminescence-based molecular recognition technology.
 
Emergent invested an undisclosed amount in Beacon last year to help it obtain an exclusive license from UT-Austin for the chemiluminescence technology, which was developed by UT chemistry professor Eric Anslyn (see BTW 4/16/2007).
 
Reveal Sciences, a subsidiary of Beacon developing personal care products based on the same technology, has also moved into the incubator; and Gibson said that a third occupant, an undisclosed UT-Austin spinout, is likely to move in this summer.
 

“Most start-up companies have to build their own lab space, or they’ll typically just rent space on the university campus where the professor first started the company.”

Overall, Gibson said that the space can “easily” fit four companies such as Beacon with equally distributed space, although in some cases, “very little equipment and bench space is needed to do basic prototype development and basic laboratory work, so it’s possible that it could be expanded to six or more,” Gibson said.
 
Anslyn, who serves as chief scientist for Beacon in addition to his professorship at UT-Austin, told BTW that when Emergent first approached him and the UT-Austin tech-transfer office with its proposition, there was some discussion of possible future lab space, but nothing set in stone.
 
“There was some discussion of renting potential lab space from various companies that were already here in town,” Anslyn said. “It wasn’t so clear in the very beginning what the ultimate plan would be and how it would take shape. But the way it took shape is about as good as it can possibly get. The mere fact that the lab is right out here with the offices of Emergent and Beacon, and that it’s a beautiful lab — I couldn’t be happier.”
 
The arrangement may make it easier for Anslyn or any other similar entrepreneurial professor to more easily balance involvement in a startup based on their technology with their everyday duties as a researcher and teacher. In fact, Anslyn said, Emergent’s model provides such a safety net.
 
“I’m not a businessman,” he said. “I know very little about how to run this kind of organization. So I am delighted that someone else that knows what they’re doing is doing it.
 
“For me it is a perfect match, because I don’t ever want to leave the university,” he added. “But acting in this consulting role to see the science that we do get translated into a real-life project is a perfect combination for me.”
 
‘Not for Everyone’
 
Emergent’s model may not be for everyone, however. Although it is meant to fill the funding and business services gap between the university laboratory and traditional VC funding, Emergent exercises even more control over a firm than a traditional VC firm might because it puts its own management in place from the outset.
For example, Gibson and Thomas Harlan, president and CEO of Emergent, both serve managerial roles for Beacon. In fact, five members of the six-person management team at Beacon are Emergent managers (with Anslyn being the sixth), although Gibson said that Beacon has recently hired several other employees, including a senior laboratory manager, that will be dedicated to Beacon.
 
“It’s possible that it’s not for everyone,” Gibson said. “I think the traditional approach is investing $5 million to $10 million to just get the company started, and then building something with a market need in mind.” He said that there is very small window of opportunity from the time a company is started to the time that something should be delivered to the market.
 
“If it takes you 24 months, that market need may have been met by something else,” Gibson said. “The reason we do this streamlined model and this burn-rate reducing model is because we feel that we deliver early access to the market through partnerships.
”That’s not how Amgen and Genentech were formed,” he added. “They wouldn’t be where they are if they didn’t do what they did. But I think for the vast majority of technologies, this model is way more effective in getting the technology out without losing your window of opportunity.”
 
Prove Your Worth
 
Emergent also said this week that it will be offering a $25,000 cash award and up to $25,000 in business services on a competitive basis to a scientist or team of scientists from the UT system that provides a winning proof-of-concept proposal for a commercially promising life-sciences technology.
 
The award is part of Emergent’s current focus on UT system campuses through its Fund IV. The company disclosed details about the award during a webinar highlighting opportunities for the UT system.
 
Key criteria for evaluation of POC proposals will be market need, current or potential intellectual property, previous funding, published papers, and well-defined value and differentiation, Emergent said.
 
Submissions will be non-confidential, Emergent said, and should be made through the appropriate UT campus tech transfer office by May 16. ETI will award the best proposal on or about June 15, it said.

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