Biotech Activity Acts as Magnet to Out-of-Town Venture Capital

By Rachel Melcer
Of the Post-Dispatch

For years, cash-rich venture capitalists flew over St. Louis on their way from one coast to the other. Now, they're here sniffing out deals in biotech business incubators, research parks and university labs.

The enticements: life-sciences research that could spawn new companies and a growing number of smaller, local venture-capital firms to help with supporting them.

The combination, which wasn't here even a couple of years ago, is proving irresistible, these investors say.

"The issue is whether there are enough good deals to attract us, and historically, the answer has been no," said G. Steven Burrill, chief executive of Burrill & Co., a San Francisco-based venture-capital firm that has raised $400 million to invest in life-sciences companies. "But the success of some of the local industry has clearly placed St. Louis (among) places that should be major beneficiaries of changes in biotech."

Burrill is investing an undisclosed amount in a startup that just set up shop at the Nidus Center for Scientific Enterprise, a life-sciences incubator in Creve Coeur. Tentatively named Nutrition Discovery Co., it aims to verify the medical or health benefits of plant-based and herbal compounds and then to supply them as active ingredients to makers of dietary supplements and nutraceutical remedies, among others.

The science, some of which spun out of Monsanto Co. research labs, is compelling, said Burrill, who is regarded as a biotech industry expert. But equally important is the role being played by co-investor Prolog Ventures, a $34 million early-stage venture-capital fund based in Clayton.

In deals such as this, which are becoming increasingly common in St. Louis, out-of-town venture capitalists count on local counterparts to serve as hands-on advisers for the startup firm. One provides deep pockets and connections to potential business partners on the coasts, while the other offers day-to-day help in getting the young company over bumps in the road.

"I'm surprised at the quality of the local venture capitalists I've met, since they're so new," said Rana Quraishi, a partner with New York-based ITF Global Partners, a venture capital and startup advisory firm. Last week, she gave a talk on investment trends and eyed tenants at the Center for Emerging Technologies, a high-tech and biotech incubator near Forest Park.

St. Louis has four venture-capital funds focused on early-stage medical and biotech investments: Prolog Ventures, RiverVest Venture Partners, Oakwood Medical Investors and Ascension Health Ventures. The funds, all less than 3 years old, collectively have raised more than $280 million.

"Having them here means there's more potential for deals. . . . In the next two or three years, I'd expect a lot more venture capital companies coming here from outside," Quraishi said.

That's because once a deal is done, it paves the way for further involvement.

"It's a snowball effect," said Ilya Nykin, managing director of Prolog Ventures. "Once a venture fund is in town, its people become more familiar with the assets, and they begin to be more inclined to look at other deals in the area. And it's about (investors) knowing each other and trusting each other: You work on one deal together, so you're more inclined to look at something else."

Burrill is evaluating another investment, led by Prolog.

He said that if he finds enough potential deals and additional local investors, his firm will open a St. Louis-area office as an entry point to the Midwest.
"We have a really large checkbook right now that's open — and have plane tickets, will travel," said Burrill, who is nationally known for his annual industry report, often referred to as the bible of biotech.

"We'd be happy to dump some or all of (our money) in this area, if we see good investments," Burrill said.

That is music to the ears of those who are working to develop St. Louis into the BioBelt, a national hub for the biotech and life-sciences industries.
With incubators and research universities in place, and infrastructure such as commercial wet lab buildings in the works, a lack of access to capital has been the last big barrier, said Richard Fleming, president and chief executive of the St. Louis Regional Chamber & Growth Association.

"It's part of a long-term strategy to position St. Louis as a central hub; we need venture relationships," Fleming said. "We want venture capitalists on the coasts to look to St. Louis as a nerve center for the middle of the country."

When respected venture capitalists from the coasts invest in a city such as St. Louis, "it's a validation of the technology and the commercial prospects . . . and recognition that there's enough local expertise here to foster company development," said Tom Melzer, managing director of RiverVest.

The caveat is that big investors, who look all over the country for deals, invest in only a fraction of the companies they see. So a city must have a rich and varied menu of startups to hold their attention.

What's more, funds with hundreds of millions of dollars to spend must do so in large chunks, to ensure a big enough return and avoid spreading their support resources too thinly. They typically invest, therefore, in companies with proven technology that are ready to market and expand.

St. Louis still is building its base of such companies. While recent efforts to commercialize university research have intensified, it will take a while for the pipeline to fill, said John McDonnell, co-chair of the capital formation committee of The Coalition for Plant and Life Sciences, a joint effort by the RCGA and Civic Progress.

"The deal flow is not particularly high at this point," he said. "But we're doing well as a region in instilling that entrepreneurial spirit and in having venture capital as something that's considered important."

St. Louis has a high concentration of scientists and intellectual property, particularly in biotech and plant science, that will form the basis for new companies. The quality of potential investments is high, even though the quantity is still building, Quraishi said.

"There's been a lot of activity in California and Boston, but a lot of the good intellectual property is exploited," she said. "Here, the markets are open, and there are a lot of good universities" producing new research.

Bob Calcaterra, president of the Nidus Center, said his tenant companies have collectively raised $21 million in venture capital, half of it from local venture capitalists, and half from far afield.

"People all over the country are really crying in their beer. I've been to both coasts, and there are a lot of upset people who are not getting any investment, period," he said. "But we seem to get the money we need."

Published in the Business section of the St. Louis Post-Dispatch on Wednesday, November 13, 2002.
Copyright (C)2002, St. Louis Post-Dispatch

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