Synergy in St. Louis

Backers of a new cluster of business incubators in St. Louis hope to make America's heartland a hotbed of new life sciences companies. Five venture capital funds are now operating in an area where risk capital was once a rarity. Three have raised more than $60 million to invest in technology and life sciences firms; two more plan to raise another $300 million. "It's astounding when you think about it-five funds trying to raise money at the same time, when our kind of money is very scarce in the Midwest," says Brian Clevinger, managing director of Prolog Ventures LLC, a venture capital firm set up to invest in companies nurtured by the St. Louis incubators. "The synergy here in St. Louis suggests we all believe that something amazing is going on." A few years back, few venture capitalists focused their radar screens on St. Louis, even though area employers spend $2 billion annually on research and development. But the Midwestern city has redrawn the venture capital map in recent years thanks in part to an old idea--business incubation. Incubators encourage scientists to take their dreams to the market by providing them a hub of new facilities equipped with state-of-the-art research laboratories and networks of experts to help develop business models. Incubator organizers increasingly look to budding biotechnology companies as sources of new revenue and of high-paying jobs that can draw young life science graduates. Of 850 incubators polled recently by the National Business Incubation Association, 42 are devoted to the life sciences or medical technology in whole or significant part, says Dinah Adkins, president and chief executive officer of the Ohio-based trade group. "There have been a batch of new life sciences incubators coming on line in the last two years," says Adkins, who is an advisory board member of one of the St. Louis incubators. At their best, incubators produce thriving, commercially successful businesses like Therics Inc., a Princeton-based biotechnology firm that started out with five employees in the Trenton Business and Technology Center. Therics sold to publicly traded Tredergar Corp. in 1999 for $13.9 million. In October 2000, Tredegar pledged to invest $60 million into expanding Therics' tissue engineering technology business over the next three years. At their worst, however, incubators milk young companies for the glory or profit of the sponsor, leaving them crippled as commercial enterprises. The Internet era produced a series of horror stories involving for-profit "incubators" that pumped cash into new businesses, then drained it right back out in the form of management fees. "The way things were being done in the for-profit incubators was problematic at times," says Susan W. Matlock, a veteran incubator manager, and president of the Entrepreneurial Center in Birmingham, Ala. "The not-for-profit has been around for 20 years, and things have been thought through. When I'm doing presentations, I always tell people we were part of the first fad of business incubation." The Effort is Worth Watching Besides its sheer size, the St. Louis effort is worth watching, according to Adkins, because of the work officials put into rounding up public and private backers. The state has contributed tax credits; corporate and university interests have anted up millions, and now the venture capital firms have put in much more than their two billion cents. St. Louis business and academic leaders have been trying to turn the former Midwest industrial center into a biotech boomtown for some time. Consultants hired last year by the St. Louis Regional Chamber and Growth Association to evaluate the city's business generating status found plenty to praise, but also identified potential for more progress.1 Specifically, the Battelle Memorial Institute, a think-tank devoted to science and technology research, criticized the region for "a risk-adverse mentality and lack of a fully developed entrepreneurial culture." The Battelle report warned that St. Louis failed to take advantage of the surge in biotechnology business development in the last decade and identified a lack of low-cost space for start-up and fledgling life sciences companies as a constraint to further growth. Incubator backers say their project will add a biotech sheen to the city. "I don't know anything like this in the U.S. that has this kind of potential in terms of life sciences," Adkins says. At the center of the St. Louis huddle are two incubators tied into a network of research facilities and funding sources. The Nidus Center for Scientific Enterprise, opened in late 1999, houses five life sciences companies and plans to include at least 10 more. The Nidus incubator neighbors the 170,000-square-foot Donald Danforth Plant Sciences Center, a $75 million research facility and potential source of new scientific discoveries for the incubators to turn into businesses. Six academic, research and corporate partners, including the Missouri Department of Economic Development, the City of St. Louis, and the University of Missouri, collaborated to found the Danforth Center. A second incubator, the Center for Emerging Technologies, which sits next to the Washington University Medical School, nurtures 10 new companies, most of them life sciences operations. Battelle analysts fretted over the heavy involvement of Monsanto Co., the bio-agricultural conglomerate that is one of St. Louis' dominant players. If incubation efforts did not demonstrate the ability to push away from the corporate mother ship, they warned, outside investors might avoid St. Louis. Besides contributing to the Danforth Center, Monsanto set up Nidus in a $10 million facility, contributes $1 million for the running budget, and keeps Nidus chief executive officer Robert J. Calcaterra on its payroll. Backers of the center, says Adkins, recognize the need to protect the incubator's independence. "The object is to make St. Louis a center for life sciences in the country and in the world. Monsanto realizes they have to make St. Louis a center or they won't have a window on what's going on," comments Adkins. Nidus does not pick companies for the incubator based on what technology Monsanto needs to run its business, Calcaterra insists. The corporation stakes out no claim on the young companies in the incubator. Of "130 to 140" companies that sought entry into the incubator, Nidus accepted five and is looking at two or three others, Calcaterra says. Nidus tenants include MedCentral, a firm that is working up a Web-based technology for small and mid-sized radiology departments, and Shurjo Medical Technologies, a start-up that is pioneering new cancer diagnostic techniques. "Monsanto has no rights to anything in here," says the Nidus CEO. "The entrepreneurs are not obligated and there's no right of first refusal, nothing." The ultimate proof that Nidus is a viable independent incubator, Calcaterra says, is the $30 million that tenants have raised in the first 18 months. Professional venture funds are interested in finding good deals for themselves, not subsidizing technology to feed Monsanto's pipeline, he explains. Among the collection of new venture firms gathering in St. Louis is Prolog Ventures LLC, created by means of an innovative state tax credit. Basically, for every dollar investors put into Prolog's venture fund, they get 50 cents in tax credits. The tax credit mechanism is Missouri's way of channeling the state's economic force into new business creation without investing directly. By early May, Prolog had raised $21 million and was on its way to a goal of $40 million in new equity for seed, start-up, and early stage life sciences and information technology firms. Other firms with staff and offices in the St. Louis area include Oakwood Medical Investors, with $24 million, and RiverVest Venture Partners, weighing in with $28.5 million for early stage firms on the point of commercializing their product. The Discovery Life Sciences Fund, a $100 million joint effort by a regional bank, Commerce Bancshares Inc., and A.G. Edwards and Sons, is still raising money. Auxyn Biosciences Ventures LP, with an ultimate goal of $200 million, is a month or two away from collecting. Success in attracting the venture firms is a sign that the St. Louis effort has effectively tackled some problems that have dogged the incubator industry generally, Adkins says. Nurturing new business takes both corporate and academic skills, according to Adkins, but it also takes attitudes that are hard to come by in big business and university environments. "Corporations have a really hard time incubating companies, because by nature corporations are not entrepreneurial," the trade group executive says. Neither, she adds, are universities. "Although there are some good incubators, everyone is on the state payroll," Adkins says. "Universities have not been entrepreneurial any more than corporations have." Peg Brickley (dbizpeg@bellatlantic.net) is a freelance writer in Philadelphia 1. Battelle Memorial Institute Technology Partnership Practice, "Plant and Life Sciences Strategies for St. Louis: The Technology Gateway for the 21st Century, September 2000, www.biobelt.org/battelle.html.

Synergy in St. Louis

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