Another day, another new local early stage fund.
Upwind Medical Partners is launching a $6 million to $8 million early stage fund that will focus on commercializing intellectual property from health care/research institutions like the University of Minnesota, Wisconsin Alumni Research Fund (WARF), Allina Hospitals & Clinics, and John Hopkins Hospital in Baltimore.
Founded by Jim O’Reilly, a former health care executive, venture capitalist, and software entrepreneur, Upwind hopes to create up to three companies a year and exit them in no later than four years. The goal is to create enough returns in a shorter period of time so Upwind can replenish the fund and keep investors happy, O’Reilly told MedCity News in an exclusive interview.
Minnesota, traditionally a land of scarce early stage capital, has suddenly seen a burst of activity in the past two months. Affinity Capital Management in Minneapolis is partnering with Triathlon Medical Ventures in Cincinnati to create a $10 million seed/early stage fund.
Coordinate Capital LLC, backed by veteran biotech investor Steven Burrill, is trying to raise $25 million partly to finance start-ups that will incubate at the planned Elk Run BioBusiness Center outside of Pine Island. And the University of Minnesota is collaborating with private real estate developers to launch a $20 million fund to back new companies housed at a planned accelerator adjacent to the school’s Biomedical Discovery District on the east side of the Minneapolis campus.
Twin Cities Angels recently raised an estimated $50 million for its second fund. And the Minnesota legislature is close to passing a $40 million, four year angel investment tax credit. Mayo Clinic officials also say they on working on new ways to partner with outside investors and to use internal resources to fund potential start-ups.
The activity couldn’t come at a better time. A weak economy and tougher regulatory requirements have scared away investors, leaving some of Minnesota’s most promising medical start-ups to cut back or wither away.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Since December, Transoma Medical, Leptos Biomedical, and Disc Dynamics have all shut down. Lumen Biomedical Inc. in Plymouth sold one of its two clot removing devices to boost its balance sheet.
Last week, VitalMedix Inc., a drug company spun out of the University of Minnesota, filed for Chapter 7 bankruptcy, citing the lack of investment dollars.
The dearth of early stage money is especially acute at academic research institutions who have great intellectual property but lack the financial resources to commercialize it, O’Reilly said.
“I think every tech transfer office has gotten more aggressive,” he said. “They haven’t had the success they had in the past. There’s all of this IP that is just sitting inside these institutions. They’re hoping some big company will license it but that doesn’t create companies or jobs.”
O’Reilly is a former partner at Space Center Ventures, who later became executive vice president at one its portfolio companies, VisionShare Inc., a Minneapolis-based health care software firm. He later founded Upwind Capital Partners, a consulting firm, and served as director of finance and corporate development at Healthcare IP Partners LLC, a firm that commercializes technology created by institutions like Mayo.
O’Reilly calls the venture capital model “broken.” VC firms in town have abandoned the early stage market in favor of more developed, less risky companies that delivers big returns.
Here’s how Upwind will work: the company will create companies based on near market-ready intellectual property that can deliver liquidity in a relatively short period of time (four years) either through a sale or licensing. While venture capital firms will typically fund one or two potential blockbusters over several years, Upwind will generate modest returns from developing many less ambitious companies in a lot less time.
‘We’re looking for lots of singles and doubles, not necessarily home runs,” O’Reilly said.
In other words, don’t look for Upwind to fund breakthrough stem cell therapy but rather diagnostic devices that can analyze blood for potential diseases.
Experts say Upwind, true to its name, will face a tough environment.
“It’s the right model but it’s very, very hard to do,” said Peter Bianco, director of lifescience business development at Nilan Johnson Lewis in Minneapolis who’s leading efforts to create the university accelerator fund. “You need a tremendous amount of skill and expertise. You need superstar type of guys.”
In addition, with the Food and Drug Administration likely to tighten its 510(k) medical device approval program, exiting a company in four years might not be realistic, Bianco said.
Doug Johnson, who heads the university’s Venture Center, also likes the model but wonders if $8 million will be enough money.
Upwind’s limited partners will not only own 70 percent of the fund but also receive a pro-rated percentage of each company in the portfolio.
For example, a $1 million investment in a $7 million Upwind fund earns an investor a 10 percent equity stake in the fund and 10 percent in each of the two or three start-ups it launches every year.
By contrast, a $1 million in a $25 million venture fund would net a limited partner a 5 percent stake in the fund. If the fund spends $1 million in a $3 million pre-money valuation deal to acquire a 25 percent stake in the start-up, the investor would own only 1.25 percent of the portfolio company.
And unlike a venture fund which shuts down after investing all of its money, Upwind will use some of the returns to replenish its coffers. The hope is to create a sustainable model to keep financing companies with a good shot at creating technology and local jobs in the near term future, O’Reilly said.
