The Space to Launch 1000 Biotechs

© Ned Shaw, nedshaw.com Like hopeful young mothers, state and local governments in partnership with universities, foundations, and local industry are hovering over new life science incubators where they expect to nurture biotech startups. Business incubators have been around for more than 20 years, mainly to stimulate struggling urban and rural economies. In the 1990s information technology incubators became trendy with the rise of the Internet, but they quickly fell from favor during the dot-com crash. Now the focus is on life sciences. Even though this type of incubator space is expensive to build and operate, governments increasingly are willing to plunge into high-risk biotechnology development with hopes it will pay off in new marquee companies and high-paying jobs. "We've seen an explosion of bioscience incubators in the last five years," says Walt Plosila, vice president of public technology management at Battelle Memorial Institute, Columbus, Ohio. Last year Plosila conducted a survey for the Biotechnology Industry Organization (BIO), which found that 41 states had biotechnology initiatives, including 15 with biotech incubators and another 19 with general-technology incubators that included wet labs.1 North America houses at least 63 biotech incubators, according to the National Business Incubation Association. Europe also has launched a multitude of biotech business starters in its quest to be more competitive in the life sciences. The incubator boom is due, in part, to an increasing desire by academic researchers to commercialize their products. But researchers' startups can be so small, often just one or a pair of scientists, that venture capitalists are reluctant to back them. Incubators can help new entrepreneurs raise funds to outfit expensive labs. Meanwhile, states and cities eager to spur new economic growth are financing incubators to generate new jobs and tax-paying companies. But these biotech berths, like the companies that occupy them, are risky and critics contend that government should not be in the business of bankrolling new businesses. "Government has never been very good at choosing what will work best," says Ken Anderson, editor of VentureWire, in New York. He questions the viability of publicly created biotech companies. "If the goal is employment, then I suppose it's better to have a company go out of business in five years rather than one year." INCUBATOR DIMENSIONS While each incubator is structured differently, it typically provides wet-lab space with high-tech equipment that would quickly devour a startup's initial capital. Biotech incubators can cost up to double what other technology or business incubators do, according to Plosila. Incubators also provide discounted professional services from local accounting and law firms that hope to build long-term relationships with potential home-run companies. Voluntary advisory boards provide kitchen-cabinet counsel to newcomers who may be world-class scientists but business neophytes. Photo: Courtesy of the Port of Philadelphia LAB OFFERINGS: Incubators supply the needed space for startups to gain a foothold in the biotech world. In return, scientists usually pay below-market rent and assign equity to the incubator to subsidize future startups. "The good thing is you can move in and get on with your life almost instantaneously," says Chris Copple, who five years ago founded Neurostem Biopharmaceuticals through the Technology Advancement Program, a state incubator in College Park, Md. "There's a double advantage because you don't have to spend your seed capital on equipment." The incubators can also save fledgling entrepreneurs time better spent seeking funds than looking for a lab. "When you're a startup you always have to do a couple of impossible things: One of them is find lab space," says Robert Puskas, president of BioProfile, a company housed at the Center for Emerging Technologies in St. Louis. Incubators are usually near a university or medical center with academic researchers ready to try their hand at commercializing ideas. "It used to be that commercial work was looked down upon--that all the interesting science was being done in academia or in the federal labs. That's not the case anymore," says Phillip Singerman, executive director of the Maryland Technology Development Corp., which oversees technology programs in the state, including six incubators. Incubators close to campus give faculty and graduate students a chance to work on risky commercial projects for brief periods without giving up their hard-won academic posts. "The conflict of interest is a big issue on the university side," says Carol Frankenstein, president of BIO/START, a public-private incubator in Cincinnati, which estimates it has saved companies $200,000 (US) in capital costs. "They want their employees to support the mission of the university first." Balancing academia and business can be challenging. "When these guys are spun out of the universities they are used to being coddled." says Matt McDevitt, president of McDevitt Real Estate Services, a Maryland firm specializing in biotech leasing. "When they come out into the real world they need a transition period. The incubator is perfect for that." But beyond providing a roof and chemical hoods over scientists' heads, incubators also try to link tenants with sources of capital, particularly in the early seed and preseed stages too risky even for venture capital investment. "There has always been a stage where basic research ends and before venture kicks in. What's happened over the last 10 years is that gap has widened," Singerman says. "It used to be that most venture capitalists wouldn't invest in companies that were so early you could only productively deploy $250,000. Now that's more like $2.5 million." As a result, government, universities, and others with an interest in building regional biotech firms have stepped in to help subsidize the early startups. David Webster, a pharmaceutical industry consultant in Bethlehem, Pa., says public money gives new companies more stability than they might achieve with purely private investment. "Biotech gets hot for a couple years and the money flows in, but these companies need longer-term commitments," says Webster. "When the market goes cold these companies are left high and dry." Webster says governments, with the goal of creating new companies and jobs, can afford to be more patient than can venture capitalists. McDevitt adds that most incubators charge below- market rates for space. At the Port of Technology, a $23 million incubator that opened in Philadelphia last year, rents range from $24,000 per year and 5% of the company's equity, to $116,400 per year for a company that wants sophisticated lab space while retaining all of its equity. McDevitt says the market price on the East Coast comes to about $70,000 per year for basic lab space. BIOTECH BLUES Sometimes, it is difficult to get the right rent and operating-cost formula. Andrew Salzman, who founded Inotek Pharmaceuticals at BIO/START in Cincinnati, says when the incubator was running low on operating funds, it began to squeeze its fledgling tenants. He says he was billed for discounted services whether he used them or not. His rent jumped from $25 per square foot to $40 per square foot. And when Inotek moved out, it had to come up with a payment of $110,000 or hand over 5% to 7% of the company's equity. "They were chronically underfunded," Salzman says. "They were trying to raise money vigorously, but they also saw the tenants' cash flow as a critical component of their overall solvency. There was a bit of a landlord mentality. There's nothing wrong with that, but you may be killing the goose." Salzman says the Cincinnati incubator had another problem: Cincinnati. "The venture community in Cincinnati is parochial and very oriented toward manufacturing or maybe local services and consumer products," says Salzman, who moved his company to Massachusetts. "I don't think there was a single VC [venture capitalist] in the city who had made a significant commitment, and certainly none of them had transitioned a company to the public markets." Carol Frankenstein of BIO/START says a growing community of Midwestern venture capitalists also want to partner and work out small deals with Ohio companies. "The biggest hits on our Web site are coming from investors on the West Coast and the East Coast who are not finding everything in their own backyard," she adds. Webster says the Internet and other communications tools give science greater mobility, but states and regions hoping to nurture biotech companies still need an existing infrastructure that includes academia, private medical companies, and venture investors to be successful with the rush of incubators cropping up. "Biotech is growing fast, but I'm not sure its growing that fast," he says. Plosila says there is still tremendous opportunity for startups in the still relatively new field of biotechnology. But to prevent a glut of vacant incubators, regions need to specialize within the broader definition of biotech in areas such as bioinformatics or medical devices, he says. "There are various niches," says Plosila, "if everyone was out there doing the same thing, it would be a problem." Webster says incubators, like their startup tenants, are evolving. "In the 'old days' there were sort of sweetheart deals with real estate developers," he says. "But now it has really gotten serious." Photo: Courtesy of Dinah Adkins Dinah Adkins Dinah Adkins, chief executive of the National Business Incubation Association, says only recently have executives with experience in biotech helped cities and states with incubator programs. "People who are coming in to run these incubators now are not the traditional economic development types," says Adkins. "It's not the Chamber of Commerce executive in the old-boy network who plays golf." PERMANENT PUBLIC PAYER But despite an injection of private-sector experience, the incubator model remains dependent on public funding, though usually in combination with private investment and philanthropy. Plosila's study found that 16 states had already planned to tap their federal tobacco settlement funds to finance biotech. In Pennsylvania $100 million in tobacco funds will go to three "greenhouses" for life-science development. At the Port of Technology in Philadelphia, that funding would go largely to financial ventures since the building is already in place, says David Noteware, director of the Port, which received $6 million in government funds for capital development and another $1.5 million in operating assistance. Pennsylvania is also planning to create a $60 million fund, to be matched by an additional $60 million in private financing, to support life-science firms in the state. Noteware says that funds have increasingly taken advantage of the Small Business Administration's Small Business Investment Company program, which provides government leverage of as much as 300% for qualifying funds. Another key source of incubator funding is the Small Business Innovation Re-search (SBIR) program that sets aside funding from the National Institutes of Health and other federal agencies for small businesses doing commercial work. The program funded $411 million in grants last year through NIH. The companion Small Business Technology Transfer program allotted $24 million in NIH funds. The grants come in two phases, with as much as $100,000 to start and as much as $500,000 in Phase II. Jim Leyda, president of Emerging Concepts, a financial company in the BIO/START incubator, says about 80% of the companies in the incubator obtained their first money through the SBIR program. BIO/START owns 15% of Emerging Concepts. Singerman, of the Maryland Technology Development Corp., says there are advantages to giving firms visibility with funds located in or affiliated with incubators. But he says there are also dangers if a fund operated by the incubator finances a failing tenant to maintain its rental stream. "The difficulty [occurs] if there is a conflict between your role as investor and role as real estate manager," he says. Photo: Courtesy of the Port of Philadelphia PLANTING PROFITS: A scientist works with crops planted at the Port of Technology in Philadelphia. Peter Sepp, vice president for communications at the National Taxpayers Union, says government ventures are insulated from failure, which he argues is important to technology development. "Biotech, information technology, and pharmaceutical development are characterized by a cycle of innovation built on many failures and a few successes," Sepp says. "The successes are profitable enough to outweigh the losses induced by failures." The costs to taxpayers are often obscured, he adds. "State and local development authorities may brag about bringing millions of dollars of economic activity to their areas, without acknowledging the lost jobs, opportunities, and finance they took from others to achieve their goal," Sepp contends. But Steve Ray, of the Pennsylvania Economy League, a research organization, says government has always played a part in technology development. "Remember, computers and electronics were seeded by NASA and investment in the public sector," says Ray, deputy director of the League's eastern division. "Here's an opportunity to help fuel biotech early in the application of the technology." Susan Warner (swarner@comcast.net) is a freelance writer in Philadelphia. 1. "Biosciences and State Government Economic Development Trends Across the US" available online at 216.239.39.100/search?q=cache:f8FOmmejM34C:www.ebtc.org/plosila.ppt+BIO+survey+Plosila+2001&hl=en INCUBATOR INTELLIGENCE Incubators cannot guarantee the success of a startup. Each depends on the right mix of below-market rents, assistance with equipment costs, seed capital, and business-advisory talent. Before you sign on to an incubator make sure it: has a university or research community nearby with many other inventors to keep it full of companies and make it easier for you to find workers as your company grows; gathers public- and private-sector advisers to help scientists learn to run businesses; offers flexible laboratory space at competitive rents to conserve precious startup capital; has a network of local venture and "angel" investors to seed early-stage projects; is developing expertise in a biotech specialty that will set the incubator apart from the many others springing up around the world. plainly discloses exit or success fees and later equity contribution.

The Space to Launch 1000 Biotechs

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