Accelerator Corporation, a privately held Seattle-based biotechnology investment firm, has secured $22.5 million in new venture capital commitments to help it fund emerging biotechnology companies.
Accelerator, which employs a venture capital-cum-incubator model to nurture early-stage biotech companies, expects to use the new commitments to fund as many as six companies in the next two to three years, with a particular eye toward university spinouts, executives from the company said last week.
This is the third and largest round of investment commitments closed by Accelerator, and brings the total money raised for its portfolio companies to $130 million since it was founded in 2003. Existing investors Amgen Ventures, ARCH Venture Partners, and OVP Partners led the round, with participation from existing investor Alexandria Real Estate Equities. New investor WRF Capital also participated in the round.
Accelerator will now seek out candidate emerging biotechnology companies to fund, which typically involves disbursing the pooled investment cash in chunks of $1.5 million to $5 million, Carl Weissman, Accelerator’s president and CEO, told BTW last week.
“The idea is that these are all really early, emerging technologies, and they’re earlier than any of our investors would invest in independently,” Weissman said. “When we find an exciting technology, we put together a plan with the entrepreneur that will take it through a set of milestones that we all agree would be independently fundable. The amount of money that they’ll get is totally based on that R&D plan, and timelines and budgets.”
Accelerator’s value proposition, however, goes beyond actual venture capital; for example, it also provides its portfolio companies with laboratory space, akin to an incubator, “so you don’t have to go around looking for the right space, haggling with the landlord, and spending hundreds of thousands of dollars building it out,” Weissman said. “It is ready for you to do science the day you walk in.”
A key resource in this area is Seattle’s Institute for Systems Biology, whose founder, Leroy Hood, helped start Accelerator. Accelerator said that ISB maintains a role as the “scientific institutional anchor” for the company.
As such, Accelerator portfolio companies have their own lab and office space and access to ISB core facilities, which are equipped with instrumentation such as mass spectrometers, sequencers, proteomics platforms, and other pricey biotech research tools that would typically be unaffordable for a small biotech.
Portfolio companies are also guaranteed access to a “world-class syndicate” of investors, each of which invests pro rata in the first round of every deal, Weissman said.
Lastly, Accelerator offers experienced management candidates who are in charge of “everything from making coffee to making deals,” Weissman said.
“The combination of these things turns out to be a pretty compelling package, is a much more streamlined way to get a company started, and a much more likely route to success because these variables are taken out,” he added. “Basically, it’s a turnkey, one-stop shop for starting up a biotech company.”
Weissman added that companies will generally be at Accelerator for 18 to 24 months, during which they are expected to use the incubator’s resources to morph themselves into attractive options to the general investment community.
But such resources come with a price. “It’s all about being efficient and disciplined,” said Weissman. “If you hit your milestones, there is a good chance you’ll get funded in your Series B.” If you don’t, he cautioned, “rather than playing the VC, lingering debt, bridge loan game, we shut things down.”
Weissman also said that portfolio companies usually must accept a lower-than-expected assessment of what its business and technology are actually worth.
“You have to sacrifice on valuation,” he said. “I’ll freely admit that our valuations are aggressive, but you have a greater chance of seeing your dream realized in the end.”
In exchange for the financing and resources, both Accelerator and ISB receive an equity stake in a company.
“The investors are investing directly in the companies, so it’s not like we have a fund, per se,” Weissman explained. “Accelerator is a vehicle that was put together by the investors expressly for building companies for their portfolios. We’re not supposed to be profitable, but as a management team we do get a certain percentage of equity in the first round of each of the companies, and we do charge the companies a management fee, which doesn’t completely underwrite our cost of operations, but keeps us a little below cash-flow neutral.”
And although a company’s development would be strongly tied in with resources and know-how from Accelerator and ISB, Weissman stressed that the company would retain any intellectual property developed during its incubation.
The VC Perspective
Gerry Langeler, a general partner at Pacific Northwest-based VC firm OVP Venture Partners, told BTW that the Accelerator model has other advantages over traditional VC shops, especially when considering university spinouts, which are often too early stage and too risky for VCs to take on.
“It’s not to say that there aren’t great university spinouts that you can fund out of the box,” Langeler said. “But Accelerator serves as a filter. Carl Weissman and the entire team there have to bless any of the inbound groups. They select a very small amount of the groups that they look at. So they’ve already done a lot of the work that we frankly would typically try to tend to do of figuring out which are the most promising companies.”
Building upon that, Langeler said that if all goes according to plan, companies get a chance to prove they are worthy investments after spending some time further developing their business plan or technology.
“Of the six companies initially funded, it appears that at least four are going to make it to fully funded entities. That’s an extraordinary hit rate for one of these things. We thought we’d be delighted if we got two out of six.”
“Accelerator provides money, facilities, equipment, and interaction with peers for these groups to make progress for a year or two before major financing has to be decided upon,” Langeler said. “It helps get them from university research to something farther down the development path, so there is a better understanding of a drug candidate, and there are more in vitro trials, et cetera — something that can give you more or less confidence that this is worth throwing not a couple million dollars at, but $10 million, $20 million, or $30 million.”
Lastly, Langeler said that the management know-how of Weissman and colleagues instills more confidence in the investors than would a university professor attempting to manage his own spinout company for the first time.
Once the VCs make their initial commitments to Accelerator, if the portfolio companies pan out then each VC has the option to further invest in every deal.
So far, Accelerator has funded six companies – four university or non-profit spinouts, and two companies founded by independent entrepreneurs. The university and non-profit spinouts include VieVax, spun out of Iowa State University; Allozyme, from California Institute of Technology; Homestead Clinical Corporation, from the ISB; and Seredigm, from the University of Washington.
The other two companies are VLST Corp. and Spaltudaq, both of which recently “graduated” from the program, Accelerator said, and have since raised a total of $84 million in follow-on financing. In addition, Accelerator said that two additional undisclosed companies are expected to graduate this year, which will clear space in Accelerator’s physical facilities.
“I think the first pass at the Accelerator has been extraordinary — way beyond our expectations,” Langeler said. “Of the six companies initially funded, it appears that at least four are going to make it to fully funded entities. That’s an extraordinary hit rate for one of these things. We thought we’d be delighted if we got two out of six.”
Accelerator expects that at least some of the companies it will fund in the future will be university spinouts, offering those entities another option to bridge the so-called “valley of death” funding gap and become viable.
Furthermore, although all of Accelerator’s companies have thus far been based in the Western US, with a particular slant toward the Pacific Northwest, the firm is seeking funding opportunities globally, Weissman said.
“We’ve looked in Europe, Asia, and Australia, and are aggressively looking for deals wherever we can,” he said. “We are really trying to get the best emerging technologies anywhere in the world.”