Art Pappas

JASON VARNEY | VARNEYPHOTO.COM

It might lack the intellectual cachet of life science in Boston-Cambridge and the Bay area, but North Carolina boasts a significant amount of research in biomedical fields. The work consistently produces both intellectual property and scientist-entrepreneurs eager to exploit it by forming startup companies. However, the state faces a significant shortage of traditional sources of startup funds. "The ratio of research dollars to venture capital dollars in North Carolina and the southeast is higher than elsewhere in the country," says Garheng Kong, general partner at Durham-based venture capital (VC) company, Intersouth Partners.

Nonetheless, most life scientists in North Carolina who want to take their research to market have been able to find sufficient startup support. Universities, state-government centers, VC companies, and even firms in the life science industry have provided the early money that promises to make North Carolina a significant starter of new businesses in biopharma and biotechnology.

"We're fairly robust in terms of angel networks and seed funding," says Art Pappas, managing partner at Pappas Ventures, another Durham VC. "The North Carolina Biotechnology Center puts out a fair amount of money and even preseed opportunities. The center has been a very important catalyst helping to build North Carolina business and economic development. You are also finding that the universities themselves are putting together pools of capital to do their own seed funding."

Troy Knauss

COURTESY OF WAKE FOREST UNIVERSITY, THE AURORA FUNDS, AWNC

Those investors have responded to the quality of life science research at the state's private and public universities. Last year, consulting firm Ernst & Young identified North Carolina as one of the nation's hot spots for biotechnology. "We feel that North Carolina has a lot of great opportunities in research universities like Duke University, the University of North Carolina, and Wake Forest University, as long as funds are available to start them off," says Troy Knauss of the Piedmont Angel Network, a Greensboro source of early funding. "We want both to get money and to build a process around it," says Robert Taber, vice chancellor of corporate and venture development at Duke University. "In the last four years, we've started companies that are worth more than $4 million."

Wherever they are located, entrepreneurs need capital to set up their companies. Early investment typically takes three forms: seed money, angel funding, and venture capital. Seed money serves to get the new enterprise started. Angel funding has the purpose of moving embryonic companies to the stage at which they can qualify for the significant money - the millions of dollar in venture capital that financiers invest in firms that show the potential to succeed in the market.

The classic picture of an entrepreneurial team that uses funds from family and friends to start up a company in a garage doesn't apply to biopharma and biotechnology. Corporate life science and biomedicine require complex laboratories and equipment, as well as time-consuming testing. "You can't do a prototype clinical trial," Kong points out. "It's particularly difficult for a biopharma to get angel funding because of the large amounts of money needed and the long time [necessary to get to market]," adds Jeff Clark, managing general partner of Aurora Funds, yet another Durham-based VC.

Jeff Clark

COURTESY OF WAKE FOREST UNIVERSITY, THE AURORA FUNDS, AWNC

To date, entrepreneurial activity in North Carolina's biopharma and biotech communities has been largely restricted to the eastern and central areas of the state. However, that has begun to change. "We have very strong programs at Western Carolina University, the University of North Carolina, Ashville, and Appalachian State University," says Dale Carroll, chief executive officer of the AdvantageWest Economic Development Group. This group also spun off the Blue Ridge Early Investment Network.

Biopharma and biotechnology startups typically need a few tens of thousands of dollars in seed money. Angel-funding requirements can exceed hundreds of thousands of dollars and perhaps a million dollars for biopharma and biotechnology. And VC firms routinely expect to put up more than $10 million for a promising new enterprise.

Because of the high capital requirements and long lead times, even VC firms alter their ways of operating when they invest in commercial life science. "Biopharma is a team sport," Kong explains. "One venture firm can fund an entire software startup. But in biopharma it always takes a team of financing partners, along with management and scientists."

That factor helps would-be entrepreneurs to overcome North Carolina's relative lack of significant VC firms. Local VCs - Aurora, Intersouth, and Papas - plus Southern Capital Ventures, a new fund offered by self-made billionaire David Murdock, inevitably call in partners from outside the state to help finance their biopharma and biotech deals. The state's growing reputation for research excellence helps. "When I call a colleague in San Francisco or Boston to put together a round of financing for something located in North Carolina, the hesitation is no longer there, which was not the case 10 years ago." Kong says. Pappas agrees: "I don't think a week goes by that we don't get a call from a western or northeastern VC firm that has an interest in a North Carolina company."

Dale Carroll

COURTESY OF WAKE FOREST UNIVERSITY, THE AURORA FUNDS, AWNC

The major issue for life scientists looking to commercialize their research is finding sufficient seed money. Since few families or friends can offer the levels of capital required, the entrepreneurs-to-be must rely on less traditional sources. Universities offer one option. "We are in the process of raising money and setting up an infrastructure to commercialize our research," Taber says. Other universities in the state are doing the same.

Another source of early funding is the state-run North Carolina Biotechnology Center, which has invested roughly $16.5 million in about 100 companies since the late 1980s. "The loans are designed to help biotechnology companies in their inception to do research and grow," says the center's vice president of business and technology development, John Richert. "We're trying to fill gaps that other sources don't get to."

Companies already in the biopharma business have also come to the aid of startups. "Quintiles and PPD, two of the largest contract research organizations in the world, are based here. They have large in-house funding mechanisms and will do clinical development," says Pappas. And Cato, another local CRO, is willing to provide seed money."

The state's angel-funding groups also help biopharma projects at earlier stages than they usually support. "We'll invest $250,000 to $350,000 initially, and up to $750,000, says Knauss. "The biggest hurdle is whether our companies can get to the next round of funding. We like to have the first look at prospective companies." VC companies also provide early money. Intersouth Partners, for example, seeded and venture-funded Sphinx Pharmaceuticals, which was spun out of Duke University in the 1980s and was eventually acquired by Eli Lilly and Company.

Garheng Kong

COURTESY OF WAKE FOREST UNIVERSITY, THE AURORA FUNDS, AWNC

The early funders provide more than money. "We bring together the important stakeholders involved in starting up biotechnology companies, including lawyers, accountants, technology-transfer officers, and CROs, who will provide in kind or pro bono or subsidized services," Richert explains. "We're involved in a lot of repositioning of discoveries, such as repurposing drugs," Knauss adds.

Donald McDonnell, professor of pharmacology and cancer biology at Duke University, has personal experience of the difficulties of obtaining early funds. "We've developed a technology that allows us to identify the activity of compounds in vitro, to target drugs for treatment of breast cancer or prostate cancer" he explains. "We have one drug that has completed Phase I trials for breast cancer and another that will be ready for Phase I for hematological malignancies."

McDonnell and his colleagues pitched the idea of the company to more than a dozen funding firms. "There was a lot of interest, but most people thought we were relatively early, even though we have drugs in development," McDonnell recalls. "A lot said come back later. Some funds that finance early-stage companies said they would be more inclined to back us if we moved to San Francisco or Boston." Eventually, a local VC company put up the seed money for the company, Integrated Oncology Solutions.

Though few in number, the state's VC companies have already logged several successes in biopharma and biotechnology. Intersouth recently funded Inspire Pharmaceuticals, a developer of drugs for respiratory and ophthalmic conditions spun out of the University of North Carolina. Papas Ventures is working with Liposcience, a company that uses NMR technology to assess cholesterol levels and is in a position to go public. Aurora Partners has at least half a dozen local companies in clinical trials.

If you research it in North Carolina, it seems, the money will come.