Minnesota ‘biotech incubator’ UEL has failed. It’s time to admit it

It’s time to call the $24 million University Enterprise Laboratories Inc. what it is: a successful landlord.

During the past six years, UEL has portrayed itself as a biotech incubator helping the University of Minnesota’s technology transfer efforts. But, for the most part, the university has been propping up what is a textbook case of how not to start an incubator.

UEL picked too big of a space in the wrong kind of building. It carried large debt from inception. And when the university didn’t create enough startups, UEL gave space to anyone in order to stay afloat. What’s more, UEL never tracked key metrics, like job creation, from startups that did flourish under its care. Now UEL is full and most new university spinoffs go elsewhere.

But UEL appears to want another shot at reclaiming its biotech incubator mantle. It wants state help for a $27 million expansion, which would include more wet lab space.

That wouldn’t be prudent. And unless there are major changes, the term “biotech incubator” should be permanently expunged from UEL’s description. Here’s why:

It failed from the start

UEL started in 2004 with $13.8 million in debt and an expectation that companies created from University of Minnesota’s technology would rent much of its 126,000 square feet.

But the university didn’t produce enough startups. So there were few renters and little revenue. In fact,  in 2008, as UEL’s very survival became a question, it laid off its general manager and an administrative employee. It saved itself by renting to whatever company would take space.

“We were left scrambling to fill this building in one way or another so as to service the debt that we were up against,” said Anthony Carideo, UEL’s chairman.

Now, many of UEL’s roughly 30 tenants have nothing to do with biotech or life sciences. Most tenants are more established companies that support the life sciences industry and are not true startups. Current renters include Minnesota Lions Eye Bank, University of Minnesota Institute of Child Development and VWR, a distributor of scientific equipment. Only three university startups currently occupy space there, include a French company that has licensed some technology from the university.

“We look at our tenant mix all the time and we recognize that it probably is not the ideal tenant mix,” Carideo said. “But it’s one that has allowed the facility to survive and grow and to move to positive cash flow.”

It’s on welfare

Positive cash flow, yes. But that cash on hand ($378,806 as of December 2010) would be wiped out if the university enforced a requirement for UEL to pay a fine if it did not provide space to school startups. The university has waived that every year since 2006 — the first year the payment was due.

The cumulative tab to date? $500,000.

“At a time when that whole operation was just getting off to a start, it would have been I think (unfair) for us to say we hold you responsible for the fact that we didn’t spin out enough companies to locate there,” said Tim Mulcahy, vice president of research at the University of Minnesota.

Over the years, the university and its foundation provided $3.75 million to UEL, with the foundation also extending a $750,000 line of credit, Carideo said.

The City of St. Paul also has some skin in the game. It provided a $500,000 grant to the nonprofit when UEL started and is potentially on the hook for up to $6 million if UEL fails to refinance $9 million of the debt that comes due in January. Carideo is confident that UEL will not only successfully refinance, but be able to reduce the city’s loan guaranty.

It’s too big

UEL is in a 126,000-square-foot former Target distribution warehouse that was completely renovated.

Based on general criteria for incubators outlined by Vernon George, partner at the economic development consultancy George Henry George Partners, UEL is too big and in the wrong kind of building.

“It’s much better to add 15,000 to 20,000 square feet a year for three or four years and to be always largely filled and have a waiting list than build a big building,” said George, who is not involved with nor has specifically reviewed UEL. “Newspapers will give you three weeks before they say what’s happening with that public white elephant down the street.”

George added: “It can’t be the old industrial building that’s not needed any more. Biomedical companies need very sophisticated plumbing and mechanical capacity in the space, or the ability to create it. But the incubator typically does not generate a positive cash flow through its own operations (to be able to afford that).”

It didn’t do the math

George also said the success of an incubator shouldn’t be defined by operational cash flow. That’s because the goal of the incubator is to provide subsidized facilities and services to startups — not in generating profit.

Instead, success should be defined by the number of jobs the incubator has helped to create, George said.

UEL has had four graduates — Segetis, Twin Star Medical, Harland Medical Systems and OrthoCor Medical — but it has never tracked jobs it helped create.

University support is inconsistent

Last year, the school’s Medical Devices Center was teaming up with UEL to create what would be tentatively known as the Medical Devices Center Launch Pad. The space would house early stage companies created through a fellowship program at the Medical Devices Center.

But the head of the university’s technology commercialization office apparently shot the idea down. “It was an innovative, collaborative idea developed by good-hearted folks, implemented in start-up speed, without buy-in from U of Minnesota leadership,” stated Marie Johnson, the former director of the Medical Devices Center’s Innovation Fellows program.

However, one startup created out of that program — Aria CV — has taken up space at UEL Garage, a 3,700-square-foot space that provides six-month leases at $12 a square foot, which is fully occupied.

The university created nine startups between July 2010 and June 2011, and two are based at UEL, including Aria CV. UEL is full and has no more space to offer to university tenants. But even when it did, none of the eight university startups launched between July 2009 and June 2010 chose to be there.

It costs too much

One reason startups don’t like it: The rent is too high.

“There was no financial discount because of our relationship with the university,” said Joe Mullenbach, co-founder of  NewWater, which is developing a product to take contaminants out of drinking water.

UEL typically charges $35.25 per square feet, including $11.25 per square feet in operational expenses, which is the total cost of being in the building and real estate taxes, said Greg LaSalle, who oversees UEL’s daily operations. For a Class A office building in the area where UEL is located, the average rent is $13.27 per square feet excluding operating expenses, according to commercial real estate services firm Northmarq.

Meanwhile, Minneapolis-based orthopedics incubator Excelen Center for Bone and Joint Research charges $19 per square feet with $9 of that for operating charges. Unlike UEL, Excelen doesn’t have wet lab space and instead guides people to a wet lab next door that charges $32 per square foot (including $12 per square feet for operating expenses), said Excelen’s CEO Tim Mowbray.

At the university, Mulcahy said he has heard complaints about high rent. However, he said he has been told by UEL officials that the facilities and amenities included within the rent make the facility attractive and at par with other real estate in terms of cost.

But Mike Haider, CEO of Minnesota stem cell company BioE, said the increased overhead was too much for him to move in.

“Is it a beautiful building? Absolutely,” Haider said. “(But) we don’t need to look like the Taj Mahal. We need something comfortable — like an old shoe.”

No hope without change

For all its shortcomings, UEL has wins. It’s full, for one — a feat in the morass that is the current commercial real estate market. Some life sciences tenants enjoy sharing expensive scientific equipment and the proximity to the university. Also, the facility’s Lunch and Learn seminars are enlightening and provide entrepreneurs a chance to network.

“UEL was especially accommodating because we were associated with the University of Minnesota, and for us to have access to nice conference rooms, and so forth for this kind of price is very nice,” said John Scandurra, co-founder of Aria CV, a recent university medical device startup, which pays $12 per square feet.

Robert Elde, an UEL founder and dean of the university’s College of Biological Sciences stated: “I think the UEL has, in fact, lived up to its original mission as a biotech incubator. This is evidenced by the fact that we are full (we’re at 99 percent occupancy) and that we have generated an estimated 30,000 square feet of additional demand from pure biotech and life science companies, suggesting that the facility itself is serving as a magnet for companies in this industry.”

But 99 percent occupancy isn’t job No. 1 for an incubator. It certainly wasn’t why UEL was conceived or why corporations and public entities came together to support it. Its anecdotal successes can’t overcome its institutional failures. It’s time to stop investing in this so-called incubator and pursue other efforts to harness the university’s intellectual property.

Yet, there are few —  if any —  villains at UEL. Viewed as a startup, UEL was smart in making adjustments to its business model based on the realities of the market and university’s lackluster tech transfer efforts at the time.

In the future, could it become a biotech incubator? Yes. If it manages to lower its rent, kick out some tenants and bring in someone with tech transfer expertise to run it. But Carideo did not seem particularly open to the idea of throwing tenants out even though Mulcahy, a supporter of UEL, said that having an exit strategy for tenants is important for any incubator.

In the end it was Mulcahy who best captured the essence of UEL.

“UEL was a great experiment in public-private partnership,” he said. “I think it has fulfilled some of its promise. I think it’s a different entity than it had been originally intended to be.”

Perhaps it’s time for UEL to recognize that there’s nothing wrong with being a landlord.