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VENTURE CAPITAL:
Pulling Tech Companies Through the Pipeline
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By James Nicholson
A talk with Andrew Hoyne, the Chair of the St. Louis Capital Alliance
and partner in the Armstrong Teasdale law firm, and you’ll receive
a coherent crash course in venture capital funding and how it affects
business development in the St. Louis region. Hoyne immediately
elucidates the difference between venture capital funds (“professional
companies whose day job it is to make investments”) and Angels (“private
individuals investing in developing companies”). The Alliance was
organized in 2005 through the Regional Chamber and Growth Association
(RCGA) to serve as a vehicle for enhancing the region’s venture
capital environment.
Angels often “fly below the (economic) radar screen” and their economic
investments are difficult to track. Consequently, investments by
venture capital funds can be a ready measure of progress. Overall,
Hoyne explains, $20+ billion a year in venture capital funding is
invested in the United States. As approximately $7 billion of that
will go to California’s Silicon Valley and $3 billion will go to
the Boston metropolitan area, the rest of the country is left to
battle for the remaining $10 billion.
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...exciting
progress is happening here and we’re becoming increasingly
recognized as a center where things are going on.
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Andrew Hoyne,
chair, St. Louis Capital Alliance,
partner, Armstrong Teasedale |
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St. Louis, according to Hoyne, is still an emerging player in that
$10 billion market, but, “exciting progress is happening here and
we’re becoming increasingly recognized as a center where things
are going on”. He notes that although St. Louis venture capital
activity might not be in the league of Silicon Valley or Boston,
it is relatively healthy compared to the nearest centers of competition
such as Chicago, Indianapolis and Kansas City.
Hoyne points out that attracting funding is “a complicated process”
and that, “successful companies spin off companies”. An easy example
would be Seattle. If Bill Gates had grown up in, say, Memphis, many
of Seattle’s techno-dollars and spin-offs might still be residing
in southwestern Tennessee. “If you can’t get really lucky”, Hoyne
shrugs, “you have to pay your dues. Part of the process,” he continues,
“is to learn from experience and to build on that to pull more technology
and companies through the pipeline.
Hoyne cites the Center for Emerging Technologies, the Nidus Center,
the new Arch Angels, BioGenerator, the Technology Entrepreneur Center
and Saint Louis University’s fostering of new companies as examples
of programs and organizations that have developed over recent years
to encourage local technology-company development. He refers to
Washington University and its School of Medicine as entrepreneurial
“sleeping giants” with exciting potential. In all, he believes that
the region is “poised to explode” as the various projects come together.
Further, he notes that “we’ve also got major corporations and industry
here and we can leverage our positives to foster and encourage funding
for new companies.”
Bryan Muehlberger, one of the authors of the St. Louis Capital Alliance’s
2005 venture capital Annual Report, published annually by the RCGA,
points out that a venture capital initiative is “a challenge on
a number of different fronts”. The investments of St. Louis-based
venture capital funds and venture capital firms with St. Louis-based
branch offices are fairly easy to track, but not all venture capital
firms investing in St. Louis-based companies are located here and
those numbers and trends are harder to track.
Speaking of trends, according to Muehlberger, “most of the activity
is in biotechnology. We’re gearing up a campaign to start a very
substantial national media relations initiative for 2006 that touts
St. Louis as the center of the BioBelt.” The Capital Alliances goal,
Muehlberger explains, “is to find ways to bring exposure to the
activities and the assets in the region of interest to venture capitalists
and, in return, to bring (into the region) more of their funds”.
One way to attract those funds is “to bring venture capitalists
into the area for a one day visit”—a strategy that has already worked
well for the RCGA with real estate executives and that, in return,
could work well for the Midwestern Region. And Saint Louis, one
need not point out, is perfectly centered in both the Midwest and
the continental United States.
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Without
the money, we wouldn’t be in business. We don’t
sell a product. We’re in the development stage.
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Mitchell Seyedin,
president & CEO,
ISTO Technologies |
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And how do the companies receiving the funds react to the inflow
of venture capital? “Without the money, we wouldn’t be in business,”
admits Mitchell Seyedin, president and CEO of ISTO Technologies.
“We don’t sell a product. We’re in the development stage. We combine
corporate financing with some venture capital money, and then we
have enough funding to sustain us for 18 months.” What happens after
18 months? “We need to repeat the cycle until we are in the commercial
phase”, smiles Dr. Seyedin. “Right now, it’s all about product development
and our upcoming clinical trials.”
ISTO’s product development focus is on tissue engineering. One of
the products is designed for the repair of cartilage in the knee
joints. “We can grow cartilage in the lab, then implant the cartilage
into an injured defect. We anticipate that our grafted product blends
with the host tissue and restores function to the knee.” This product
will be ready to test soon on human beings. If successful, the issue
of product development will be one of product marketing and all
companies invested in the product will emerge winners.
The second ISTO product concerns a cell-based technology application
for the spinal disc. The hope is to be able to inject the product
and regenerate the disc, thus alleviating both pain and the need
for complex surgery. “It’s an extremely exciting project, because
back pain is very common, and there is no effective treatment for
many patients. It is a very big market opportunity”, Seyedin enthuses
with due modesty. “We want to be the first to come up with the solution
to treat a degenerative disc.”
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We
plan to begin clinical trials this year, and we
couldn’t be doing that without some serious venture
backing.
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Robert A. Beardsley, president & CEO,
KEREOS |
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The story is much the same at KEREOS, where President and CEO Robert
A. Beardsley blatantly states, “We couldn’t do it” without investment
funding. “Drug development is an extremely expensive business. You
can’t just do it from your boot straps.”
KEREOS, which specializes in targeted chemotherapeutic and molecular
imaging for cancer treatment, has benefited from “quite a bit” of
seed from RiverVest, Barnes-Jewish Hospital, Bristol-Meyers, Squib
and Philips Medical Systems. “We plan to begin clinical trials this
year, and we couldn’t be doing that,” Beardsley points out, “without
some serious venture backing.” In fact, the company raised more
than $20 million last year in a private financing that included
local investors Prolog, Advantage Capital and Vectis, along with
RiverVest.
Investment money is obviously a core element when it comes to technology
company development and the St. Louis Capital Alliance is determined
to secure that capital for growing St. Louis-based business.
Pre-Venture
Capital Provided by Angels
In the summer of 2004, a group of interested St. Louis leaders
was organized by the NIDUS Center and the RCGA to address
early stage and seed capital formation in the metropolitan
area. They soon came to a consensus that there was a local
missing link, a pre-venture capital source of funding that
needed to be developed to encourage business development in
the region.
The resultant group, St. Louis Arch Angels, held its first
official meeting in March of 2005 and two incipient companies
presented their vision and product-to-be to an assembled group
of Angel investors. Currently, the Angel membership is up
to 48 and the Arch Angels have their own website (www.stlouisarchangels.com)
where companies can make their application for funding. The
St. Louis Arch Angels provides seed and early stage capital
in the range of $250,000 to $2,500,000, an investment amount
not generally served by the venture capital market. It is
the Angels’ hope that the organization could be a starting
point for entrepreneurs to come seek a path that suits their
monetary needs. So far, 82 companies have submitted applications.
According to Gilbert Bickel, the Arch Angel chairman and senior
vice president of Morgan Stanley, the application process
consists of three steps. First, a questionnaire (found on
the website) is completed and applications go to a Pre-Screening
Committee. It is here where it is determined whether they
are ready for Arch Angel funding or whether their business
is too much in process and/or their plans are not yet formulated
enough to qualify for that funding. Many of the latter may
be put on hold pending a new application.
Next comes the due diligence committee which might suggest
that the company link up with an incubator or a university
sponsored program or a governmental program. Even if they
are not found suitable for the Arch Angels, the group is going
to try to direct them to an organization better suited to
their needs. So far, the committee has seen approximately
60 presentations from 16 companies. Of those 16, to date,
two have received investments and two more are expected to
receive investments within the next thirty days. Five, meanwhile,
have received funding from outside the Arch Angel auspices.
The culminating step in the Arch Angel process consists of
dinner meetings where presentations are made and each member
Angel investor makes a decision as to whether or not to invest.
They then offer terms, negotiate and complete the financing
procedure.
The Arch Angels’ goal, Bickel says, “is to act as an intermediary
financial source for St. Louis area entrepreneurs and to continue
the stream of quality investment opportunities in the metropolitan
area.”
Gilbert Bickel,
chairman, St. Louis Arch Angels |
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