Sunday, February 21, 2010

A Tale of Three Cities

The following first appeared in WTN News. I had a great time writing it, and enjoyed the feedback it received from readers. You can see the originally published version here. Let me know your thoughts!
Quick, spot the similarities: Silicon Valley, New York City, and….Madison, WI? Let's see. Smog levels aren't quite the same. Slight differences in population base, local cuisine, and fashion sense. But at one investment event in Oct. 2009, it was all about the tech.

Biotech, specifically. Life science entrepreneurs in hot pursuit of funding was the focus of the All Things Life Sciences VC forum, in which female biotech start-up leaders vetted by Springboard Enterprises made pitches to investors in three different cities. Madison was first on the road show, followed by Silicon Valley on 10/15 and NYC on 10/30.

Biotech and Regional Economic Development

At first glance, it seemed an incongruous grouping of locales. Not to cast aspersions, but how does Madison - est. population just under 230,000 - measure up to Silicon Valley and New York City? “Madison is an important biotech center,” said Lauren Flanagan, Managing Director of Phenomenelle Angels Fund. In comparison to larger Midwestern cities, Minneapolis is known for medical device companies; Chicago, for general and medical IT; and St. Louis for agbiotech, chemicals and pharma. Madison's niche is arguably still evolving, with strengths in microbial sciences, stem cells, lab research tools, and diagnostics. But in particular, there is growing recognition that in addition to being a good place to grow cell cultures, Wisconsin is a good place to grow early-stage companies.

Business Bargains
“You can get angel funds in Wisconsin, and keep the burn rate low,” says Flanagan. “Having started four companies and having grown up in the Bay Area, what I like about Wisconsin is the rich repository of talent.” Similar sentiments are echoed in irrepressible fashion by Penelope Trunk, who bluntly titled a Brazen Careerist blog post, “Starting a company in Silicon Valley is stupid”. A 2009 salary survey of life science professionals by The Scientist reported that the average Madison salary was, at $63,050, lower than all other U.S. cities for which data was collected aside from Charlottesville, VA. (However, the reader survey did not use random sampling, so it's entirely possible that entry-level or lower-paying public sector scientific positions were overrepresented.) Considering that the Ph.D. density in Madison is among the highest in the nation, one could speculate that the region is a great place to employ skilled talent on the cheap. Small comfort to job seekers, and likely a topic that state and local politicians would rather avoid, but encouraging to firms wanting to stretch their seed money as long as possible.

And certainly, the cost of living in Madison is miniscule in comparison to Silicon Valley and New York City, allowing a far lower salary-induced burn rate for early-stage companies. But the cost of lab and office space also has significant impact on start-up burn rate. Whether leased or owned, lab space in New York City is the most expensive in the nation, and the Bay Area isn't far behind.

When weighing time versus money, shorter commutes also play a role in lifestyle and work productivity. The average work commute in Madison is 16.4 minutes; in the Bay Area, consider yourself lucky to have a commute time at least double that; and NYC? Unsurprisingly, the longest in the nation.

Show Me the Money

However, a lower bottom line doesn't help much if you can't attract funding to begin with. And this is where the dominance of the carefully cultivated Silicon Valley venture capital scene really makes an impact.

“There's more money in one hallway of a VC firm on Sand Hill Road [in Silicon Valley] than in all of Wisconsin, Michigan, and Illinois combined”, says Flanagan. This is not an exaggeration. Venture capital investments in 2002 in the state of California were 145-fold higher than in the state of Wisconsin.

Seed money and initial funding is however possible to land in Madison. “I navigated the boy's club in Madison enough to know there's tons of money here,” said Trunk during a panel discussion at the ATLS forum. And with angel investor support comes invaluable business advice and mentoring. Recently, state support in Wisconsin in the form of the Act 255 Venture Capital Tax Credits program has helped spur funding as well. But it's not enough; the “black hole” of fundraising from approximately $3-$5 million looms large in the Midwest. Entrepreneurs unable to traverse it will see their companies fail. And despite earnest efforts from state and local government leaders and some progress made by groups of angel investors pooling resources and closing bigger deals than individual angels could have undertaken, this is unlikely to change anytime soon. Wealth creation doesn't happen overnight.

Silicon Valley Redux?

During a Gilson Series seminar in February, a provocative question was raised from the audience. Is Madison at a stage similar to 1975-era Silicon Valley, and if so, what transformative events are needed to propel further its development? Joe Kremer, Director of Wisconsin Angel Network, cited the Vision 2020 report produced by the Wisconsin Technology Council as one potential road map, but cautioned, “We're Wisconsin. We're never going to be Silicon Valley…our strategy will be different than those of the coasts. We'll do it the Wisconsin way.”

Certainly, the allure of Silicon Valley lucre is intoxicating to economic development gurus. The problem, points out Darian M. Ibrahim, Assistant Professor at the UW Law School, is that the Silicon Valley scenario is incredibly difficult to replicate. Its history as a high-tech economic powerhouse is relatively short and serendipitous. As late as 1950, the region was most famous as “The Prune Capital of America”. Shifting from an agricultural economy to a technical economy occurred in several stages, the first having more to do with air - radio airwaves, that is - than silicon. Electronics manufacturing exploded in Bay Area just prior to 1970, spurred by specialty firms producing components that found a voracious market in the U.S. defense industry. Interestingly, this early phase of wealth and labor pool establishment (leading to a skilled electronics work force of 58,000 by 1970) didn't rely on heavy-handed guidance from politicians or economic development gurus. It relied on spontaneous proliferation of companies that just happened to have specialty products, the right organizational structure to out-compete everyone else, and an eager market. Money made in the initial stages began to be funneled back into VC investments for later-stage firms in the burgeoning IT field. While the role of technology transfer from Stanford University and other Bay Area academic institutions is often credited with facilitating technology transfer in Silicon Valley, a 2001 analysis by Christophe Leguyer concludes that academic tech transfer played only a small role in the first critical stage of wealth creation.

So, in that respect, public sector efforts to replicate Silicon Valley may be unlikely to achieve the same effect; certainly, other attempts in the U.S. have failed. If true, this may turn out to be disappointing for politicians and economic development leaders in Wisconsin. For example, the Vision 2020 proposal lays out a plan for hand-picking technology clusters across the state and establishing a research arm of “futurists” and leaders to guide tech transfer envisioned as flowing from the Wisconsin Alumni Research Foundation and the UW System. But will this allow enough flexibility? Arguably, such a plan is more akin to efforts taken in Research Triangle Park in North Carolina, which was inspired by state and local leaders from its inception. But it may not spur the level of explosive growth, market responsiveness, innovation and creativity seen in Silicon Valley.

No Envy for the Big Apple

Still, things could be worse. You could be trying to grow biotech in NYC. As home to Columbia, NYU, Mount Sinai, and Memorial Sloan-Kettering Cancer Center among others - not to mention 19 Nobel Prize winners and 39 Howard Hughes Medical Investigators - there's no shortage of research and potential for technology transfer. But while technology transfer offices in NYC institutions have found a niche in making licensing and royalty deals ($791 M in 2007 revenue for NYU alone), the number of spin-off biotech firms that establish within the metro area is astonishingly small - a city-wide total of 21 in 2007 across seven colleges and universities. (For comparison, WARF/University of Wisconsin alone facilitated 6 start-ups in FY2006-2007 and another 6 in FY2007-2008.) The high cost of labor and real estate certainly has a chilling effect on entrepreneurial activity within NYC. But even competition for the relatively low-lying fruit of SBIR/STTR grants has been lackluster. NYC companies landed only 43 SBIR grants in 2006. Wisconsin firms landed 77 in the same year.

Nature and Nurture

One has to wonder how much cultural norms come into play. Is risk tolerance simply higher in the Bay Area than the Midwest, and if so, will this ultimately limit entrepreneurialism in this region? On the flip side, could “West Coast tunnel vision” lead investors there to overlook high-quality opportunities elsewhere? Could a stereotypical hard-driving NYC negotiation style coupled with a desire for fast payoff be behind the push for licensing revenue over entrepreneurialism, which requires far more patience?

And if Midwestern economic development leaders and politicians are to do some difficult self-assessment, how helpful are our deeply ingrained state rivalries? When press releases trumpet the relocation of tech firms within the Midwest, there is a hint of football-induced jubilation: Wisconsin 1! Michigan 0! Score!

But economic growth is likely to require cross-regional collaboration on a far longer timescale than the next political campaign. As Flanagan noted, “There is a need for strategies like funds-of-funds, where private and public capital are invested into regional opportunities, so that there is sufficient follow-on money for entrepreneurial success.” This takes a long view, collaboration, and stomach for risk.

Game on.


In 2004, Forbes Magazine ranked Madison 1st in the nation for Ph.D.s per capita. In 2009,Forbes Magazine ranked Madison 12th for percentage of population age 25 or higher having at least a bachelor's degree.

PriceWaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree Survey, 2002

Leguyer C, “Making Silicon Valley: Engineering Culture, Innovation, and Industrial Growth, 1930-1970”, Enterprise & Society 2001 2, 4:666.

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Friday, February 12, 2010

Youthful Ideas

'Tis February, and a college student's thoughts turn to.....innovation?

For students on the University of Wisconsin-Madison campus, this is certainly the case. This week brought two very fun events: Innovation Days, a competition organized by the UW Department of Engineering; and the Wiscontrepreneur 100 Hour Challenge, offered by the UW-Madison Office of Corporate Relations. 

UW undergrads competing in Innovation Days are pursuing a total of $28,450 in prize money across four different contests. The top prize of $10,000 is for the Schoofs Prize for Creativity, which is intended "to awaken students to the potential embedded in their own talent, and thereby encourage creativity and entrepreneurship". Other categories include the Tong Prototype Prize and awards for best presentation and best design notebook, respectively.

This year’s contestants cover 23 inventions, with titles ranging from “Intelliwindows” to “Tri Crimp”. The presentations were open to the public on Thursday and Friday at the UW School of Engineering. The keynote speaker? Matt Younkle, serial entrepreneur. He co-invented the TurboTap – a device to pour draft beers rapidly – which won the Schoofs Prize in 1996. Younkle’s team later brought the TurboTap to market through their company, Laminar Technologies LLC, and the TurboTap was dubbed “Most Amazing Invention” by Time Magazine. If you’ve had a beer at a major sporting stadium in the past five years, it was probably used to pour your beverage.

And on tap for next week (ok, couldn’t resist that transition)….is the Wiscontrepreneur 100 Hour Challenge, running February 17-21. Taking a cue straight from “Junkyard Wars”, this event allows students a stipend of $15 to gather materials from the UW Surplus With A Purpose shop. Students then put their best creative foot forward to see what working inventions they can come up with in a 100-hour working period. Past winners include a team that developed a working water purification system using $10 worth of material that could be used for bacterial- or sewage-contaminated water.

I can’t wait to see what the kids come up with this year.

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Saturday, February 6, 2010

Strategy, advice exchanged at Biotech VC Forum

This is the second of three articles I wrote last fall for WTN News. You can read it as originally published here. Enjoy!

Forget the recession. Or perhaps, thrive in spite of it.

That seemed to be the prevailing mindset at the AllThingsLifeSciences 2009 Venture Capital Forum held in Madison on October 1, 2009. Total funding sought by all 18 women-owned life science companies presenting at the event exceeded $138.9M – but was nearly matched by total capital raised to-date of $136M. And while the majority of companies were early stage, six reported 2009YTD revenue, including $5 M YTD revenue for EraGen Biosciences, Inc. and $1 M YTD revenue for A&G Pharmaceutical.

That’s not to say that the recession hasn’t had an impact on business plans. Notably, nearly every presentation included mention of exit strategy by acquisition or merger. Given current financial conditions, IPOs seem a distant memory. “Really, it’s only been within the last few weeks that the public market has opened back up again,” noted Laura Strong, CEO of Quintessence Biosciences, Inc. “For 12, 14, 15 months, there were no exits….it creates a backlog in the system.”

After over a year of battered markets and upheavals in the financial sector, investors and entrepreneurs are adapting to the present reality. “Flat is the new up,” quipped Suzette Dutch, Managing Partner of Triathlon Medical Ventures. But while investors may be scrutinizing burn rate and re-calculating potential ROI, angel investors and VC fund managers alike remarked on the opportunities available in Midwest biotech. “We have good relationships with local co-investors and we are seeking to provide our next fund with more Wisconsin-based opportunities by deepening our relationships and forging new ones,” said Dutch.

Throughout the forum, as well as during the training workshop “Equity Matters: the Route to NASDAQ” offered on Wednesday September 30, investors offered strategic advice to entrepreneurs. “Part of what most investors are looking for are [entrepreneurs] who are open to being coached, that there is evidence of flexibility,” said Judy Owen, Managing Director, Calumet Venture Fund. Teresa Esser, Managing Director, Silicon Pastures encouraged entrepreneurs to network actively rather than relying on passive communication such as e-mailed business plans, stating, “I want to invest in people who can sell. You have to be capable of selling to your customers.”

Initial reports indicate that the event was fruitful for at least two of the presenting companies. “Eso-Tech and Michelle's Miracle each closed on investments during the Madison events,” noted Lauren Flanagan, Managing Director, Phenomenelle Angels Fund. Bonnie Reinke, CEO of Eso-Technologies, Inc., announced that the company had not only closed on its Series A round as a result of the forum, but that the series was oversubscribed by 20%. “Based on significant interest by a number of individuals, a major angel network and an out-of-state VC at ATLS, [Eso-Technologies] is considering whether to further increase the current round now, or wait and open a new round upon completion of its first human trial in the next few months,” remarked Joseph Hildebrandt, Managing Director of DaneVest Tech Fund. Funding was raised from DaneVest Tech Fund and its Side Fund, with additional contributions by Phenomenelle Angels Fund and Barbara Israel.

Presenting entrepreneurs who are still seeking funding partners will have further opportunities. The forum’s road show will head next to Silicon Valley, CA on October 15 and New York City on October 30.

Companies presenting at the ATLS2009 Madison forum were: A&G Pharmaceutical; Ativa Medial; Avaxia Biologics, Inc.; CanFel Therapeutics, Inc.; Closys Corp.; Curemark, LLC; Epicardial Technologies; EraGen Biosciences, Inc.; Eso-Technologies, Inc.; Ibogen; Kemeta, LLC; Michelle’s Miracle, Inc.; Moerae Matrix, Inc.; PharmaJet, Inc.; Quintessence Biosciences, Inc.; Sequella, Inc.; SPR Therapeutics, LLC; and Stemina Biomarker Discovery, Inc..

Entrepreneurs presenting 2-minute fast pitches to angel investors at the Equity Matters workshop were: Nancy Fraser of Med Legal Consulting Source; Bobbi Gallina of Divine Baby; Merrill Guerra of Real Kidz; Sarah Manski of PosiPair; Jodi Soriano of Ohmx; and Christine Wheeler of Drazil Food.

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Tuesday, February 2, 2010

Women Biotech Entrepreneurs Take the Stage

While I haven't had a chance to catch up on entries for a while, this is the first of three articles I wrote last fall for Wisconsin Technology Network News (WTN News). The AllThingsLifeSciences VC conference proved to be a fascinating glimpse into the biotech entrepreneurial scene, with a twist - all of the entrepreneurs giving pitches were women (and not just peripherally involved, but women who are founders and/or CEOs of their companies). You can see the original article in context here.

Having been a reader of WTN News for some time, it was rewarding to contribute as a writer. Look for future articles!

- Women CEOs of 18 early stage life science companies will gather at the Fluno Center in Madison on September 30th thru October 1st to compete for venture capital at AllThingsLifeSciences 2009. Attendees will include regional and national investors seeking out promising early-stage companies.

“To our knowledge, this is the first such venture capital forum with this focus," said Lauren Flanagan, Managing Director of Phenomenelle Angels Fund.

Similar events will be held in New York City and Silicon Valley.

“This is unique deal flow, not generally seen in Wisconsin,” said Flanagan, who has roots in the San Francisco area and is currently based in Michigan. Flanagan said that the Midwest offers distinctive opportunities for angel and VC investors. “Silicon Valley and NYC don't see many Midwest companies and will be impressed with the talent, generally lower pre-money valuations, and with the non-dilutive financial support that Wisconsin and some other Midwest states provide early stage companies - benefits which can make investment more attractive to coastal investors grown weary of competing for high priced startups.”

Judy Owen, General Partner of Calumet Venture Fund said, "I am so impressed with the quality of women entrepreneurs I have found in the Midwest focusing on Information Technology and Life Sciences.”

Flanagan and Owen are among investors who are bullish on the Midwest technology start-ups. They believe early-stage companies based in the region are undervalued in comparison to startups on the coasts. Skilled talent is readily available in Wisconsin due to proximity to research universities such as UW-Madison and UW-Milwaukee. State support includes the Act 255 Venture Capital Tax Credits program administered by the Department of Commerce, in which certified funds investing in qualified new business ventures can claim a 25% income tax credit on the investment. The result may be a win-win for investors and entrepreneurs alike.

Single-region investment where money flows from Midwestern investors to Midwestern start-ups, however, may not suffice in the long term as more private equity is available on the coasts than in the Midwest, a point not lost on entrepreneurs seeking to take funding to the next level.

Beth Donley, CEO of Stemina Biomarker Discovery, said, “We are a little more than a third of the way to raising a $3 million round…We hope that at the Springboard events…we will attract the remaining investment need to complete our fundraising [and] make contacts on the coasts for future fund raising and eventual exit through acquisition.”

Echoing the need for cross-regional investment approaches, Suzette Dutch, Managing Partner of Triathlon Medical Ventures, said, “We find the best coastal investments often have competing term sheets as there is significantly more venture money chasing the quality opportunities. For this reason we invest in later stage opportunities there and find that coastal investors prefer investing close to home for early stage opportunities. Being based in the Midwest, we are in place to work hands on very early to shape the investments that have true venture scale return possibilities.”

Since 2001, Springboard Enterprises has presented 18 forums highlighting 383 companies chosen from over 4,000 applicants. Of these 383 companies, 82% have received funding and seven have had IPO's.