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Venture Investors Leads $2M Seed Investment In UMich, UWisc Tissue-Regeneration Spinout

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Tissue Regeneration Systems, a spinout of the University of Michigan and University of Wisconsin, has closed a $2 million first financing round to further develop bioabsorptive implants for bone and soft-tissue regeneration.
 
The investment, led by venture capital firm Venture Investors, is the latest from a $115 million fund closed by the VC firm last year that has its eye on investing in early-stage technologies developed at research universities in the upper Midwest region of the US.
 
Venture Investors, whose investments also skew toward the life-sciences sector, is now more than halfway toward its goal of using its latest fund to back an estimated 20 seed- and early-stage firms, John Neis, a managing director at Venture Investors, told BTW this week.
 
“Many of our investments have traditionally come out of major research universities here in the Midwest, and that is where we continue to find our deals,” Neis said, adding that 11 of the 13 companies it has backed with its latest fund are spinouts of such institutions.
 
In terms of industry focus, Neis said that Venture Investors, which is based in Madison, Wisc., is “funding a mix: We have seven partners focused on different sectors. We’re probably a little more skewed toward healthcare than we first expected.” He added that his firm has done five medical device deals; four pharmaceutical startups; one IT deal; two energy-related deals; and an industrial tool company.
 
In 2006, Venture Investors announced it had closed on $69 million of the new fund, called the Venture Investors Early Stage Fund IV Limited Partnership. Last July, the company said it had secured $46 million in additional commitments from a combination of new and returning limited partners (see BTW, 7/23/2007).
 
At the time, Neis told BTW that Venture Investors, which also maintains an office in Ann Arbor, Mich., had hoped to use the new fund to invest in more companies spun out of interdisciplinary university research and in the process take advantage of its proximity to the University of Wisconsin-Madison and the University of Michigan.
 
“We have a long history of backing companies that have spun out of UW-Madison,” Neis said. Those companies have included TomoTherapy, NimbleGen, and Third Wave Technologies. UW-Madison, Nesi added, “continues to be our biggest source … [but] I would say that the number we’re seeing out of different universities has increased.”
 

“Quite frankly, there is very little capital in this region, so there is a lot of cream sitting at the top here, and there is an abundance of high-quality deals coming out of that space.”

Besides UW-Madison, Venture Investors has used the latest fund to back deals out of the University of Michigan, Northwestern University, and the University of Illinois at Urbana-Champaign.
 
Venture Investors is also somewhat of a rare animal in that it is a relatively large source of funding for very early-stage companies in a part of the country that historically has lacked startup funding for nascent businesses.
 
“We believe the model works here,” Neis said. “You don’t see funds with that kind of focus on the coasts because although there are a lot of spinouts from the MITs and the Stanfords of the world, there is also a ton of venture capital, and it is really challenging for anybody to completely focus on those types of opportunities and really see the best of class, because there is so much competition for that.”
 
Neis said that it especially tries to leverage the fact that the Midwest boasts some of the biggest research universities in the US. In terms of external research funding, UW-Madison is the second-largest and University of Michigan is the fourth-largest research university in the US, he added.
 
“Quite frankly, there is very little capital in this region, so there is a lot of cream sitting at the top here, and there is an abundance of high-quality deals coming out of that space,” Neis said. “So we feel like we’re seeing some of the best-in-class deals coming out of those institutions.”
 
Joint Venture
 
One such deal was with Tissue Regeneration Systems. The company, based on a conglomeration of intellectual property developed at UW-Madison and UM, has an exclusive option to commercialize products for the biocompatible- and biodegradable-implant markets, which includes joint implants.
 
Jim Adox, a managing director at Venture Investors and a TRS co-founder, described the company’s five-member founding team as very “diverse and cross-disciplinary. Everybody on the team brings a unique skill.”
 
Another of the founders, Frank La Marca, is director of spine surgery and co-director of the Spine Research Laboratory at the University of Michigan; while another, Stephen Feinberg, is professor, associate chair, and director of research in the department of oral and maxillofacial surgery at the UM School of Dentistry.
 
“These are like our two in-house customers,” Adox said. “They are doing these surgeries every day, so they really guide product development.”
 
According to Adox, Scott Hollister, a biomedical engineering professor at UM, designs and makes the implants, while Bill Murphy “brings the implants to life” with expertise in coating technology that gives the implants their osteoconductive properties.
 
TRS’ first products will be in the area of spinal implants, which Adox estimated is about a $3 billion market. All of the company’s products are currently in development and undergoing animal testing.
 
“We based our investment on some positive animal work that was done at the universities, that showed very good results in guinea pigs,” a widely used animal model for spinal injuries, Adox said.
 
“What’s unique about these products is that when you have anything in the spine made of an artificial material it is in there for life,” Adox added. “It doesn’t really integrate into the spine, which could cause a number of long-term conditions.”
 
TRS’ devices, on the other hand, are designed to be bioabsorptive while retaining their load-bearing properties. “They get absorbed by the body and the natural healthy bone eventually replaces it,” Adox said. “Over one to two years, the joint becomes all bone and none of our device. So there is nothing left behind.”
 
Venture Investors’ decision to invest was also spurred by approximately $500,000 in grant funding that TRS received from the universities and the Wallace Coulter Foundation to complete some of the early animal work.
 
“Ideas are great, but you want to see some data,” Adox said. “Something like this is a pretty complex system, and a lot of things can happen, good and bad.”

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