Over the past few weeks I have learned about an awesome micro-seed incubator in Cleveland called Goldstein, Caldwell & Associates (www.GoldCald.com) that is experiencing some impressive growth. While there are certainly other incubators in town, what makes GCA unique is their focus on young entrepreneurs, many of whom are still in college, who are launching companies with technologies ranging from clean energy to web-based businesses.

Modeled after incubators on the coasts such as TechStars (techstars.org) in Boston and Colorado, and YCombinator (ycombinator.com) in California, GCA’s goal is not only to provide companies with seed capital (typically in the $5k to $10k range), but also with a place to work, mentorship, and strategic assistance with simply getting a young business off the ground.

They have a number of companies in their portfolio already, including Flex Hire (flexhire.com) that streamlines the application process for job seekers, and Sunflower Solutions (www.sunflower-solutions.com) which created a way to manually re-position solar panels to capture more energy as the sun moves throughout the day. Both of which are run by young, passionate entrepreneurs.

They are always looking for new portfolio companies, so check out the site if you’re interested in finding out more and applying for a position in the incubator.

In great news for the Ohio biotechnology community, BioEnterprise reported today that Ohio lead the way in Midwest VC funding, attracting $137 million, which was closely followed by Minnesota at $134 million respectively.

However, some very interesting numbers on how the funding breaks down by metropolitan area. Yes, that’s right, Detroit was substantially ahead of Cleveland in raising funding!

•  Minneapolis, which attracted $133.3
• Detroit-Ann Arbor – $70.8 million million
• Cleveland $55.7 million
• Chicago $38.8 million
• Indianapolis $39.2 million
• Columbus $11.7 million
• Pittsburgh $28.9 million

The Equity Breakdown by section was as follows:

Biopharmaceutical companies: $295 million
Medical device companies: $173 million
Health care software and service companies: $125 million

Hey, at least Cleveland beat Pittsburgh!

Here’s a link to the story http://www.wwj.com/Midwest–Detroit–Ann-Arbor-Move-Up-In-Biotech-VC/5526288

In a quick follow up to my post yesterday on the state of biotech funding, Pittsburgh Business Times (HERE) reports that VC’s invested $4.8 billion nationally in the third quarter, in 637 deals. Not bad!

To give you some context, while investment is down about $2.4 billion from a year ago, with about  a third less deals, it is up 17% since the second quarter.

However, what I find really exciting for us in the biotech field is that biotech companies received the largest piece of the pie, with $905 million going into 104 deals, according to the quarterly MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association, based on Thomson Reuters data.

As the article points out, this is really showing a true shift in VC investment strategy, where investors seem to becoming more comfortable with investing in companies requiring multiple rounds of financing, and longer timetables to exits. Ergo, good news for biotechs.

However, with longer investment horizons, VC’s are undoubtedly going to continue pushing for tougher terms and lower valuations, so while the good news is that funding is indeed out there and growing, it remains to be seen how “expensive” that funding will be for biotechs.

Here’s a list of drug patents expiring in October 2009. Interestingly, the list includes Colgate Total and Flomax. Thanks to biotechblog.com for the information. Definitely check them out.

*Drugs may be covered by multiple patents

Just over a week ago, the Cleveland Clinic wrapped-up the 2009 Medical Innovation Summit after putting on an excellent event. As usual, the Summit gave attendees a peak at the latest innovations hitting the medical world, as well as a chance to mingle with industry heavy-hitters. The event also featured a panel of industry leaders discussing the state of funding in the biotech arena.

Shortly after the event, MedCity News ran an article covering the panel’s thoughts on funding, and also reached out to me for my insights on the state of biotech funding in Cleveland. (Click HERE for the article). I wanted to use this post to expand on what I said in the MedCity article, and to give a more thorough response to the question: What is the reality for Ohio biotech’s seeking funding?

 To understand where we are today, we really have to look back a couple years ago. While VC’s were still funding companies, they were starting to hold back from supplying capital at the innovation and proof of concept stages, and instead waiting to supply funding for the execution and growth phases, ergo, limiting their risk by waiting until after companies had already overcome the long (and expensive) clinical trial, regulatory and IP hurdles.

Obviously from the standpoint of an investor, such a “wait and see” strategy makes sense, the problem is that many companies (our clients among them) ran into a chicken and egg problem. In order to get more funding, they were being asked to prove the technology, protect the IP, and navigate regulatory mazes before they could receive capital. The problem: those steps are very involved and expensive, hence the need for capital. You start to see the problem.

However, once those stages were met and funding was raised, a company standing on the other side of the fence was looking at potential exits through going public (although still difficult), or more likely, through a sale to a strategic buyer.

 So that was then.

 Where are we now? Well, let’s talk about those strategic buyers. What we have seen is that “buyers” are now preferring to become “partners.” Instead of purchasing a company or technology outright, these larger players are accessing the R&D and technologies of smaller biotechs through partnerships, licenses and joint ventures, as opposed to through a traditional acquisition, and really only stepping forward to purchase truly game-changing technology.

So what does this mean for small biotechs out there with promising technology? A few things. Let’s start with the most obvious, which is that the days of developing a technology, proving it works, accepting VC money to get over those last hurdles, stepping back to field offers from multiple strategic buyers, and exiting through a nice payday are largely a thing of yester-year. Will they still happen? Sure, but they will be the exception rather than the rule, and reserved for companies with fantastic technology.

Instead, companies must have the mindset that they are in for the long-haul. Specifically, they are going to develop formal relationships with multiple strategic partners, find capital through diluting (angels, VC’s) and undiluting (grants) funding sources, and look for singular opportunities for exits through selling and licensing stand-alone products. While VC money may come in down the line, ultimately, companies must also be prepared to bring technologies to market themselves. Perhaps most importantly, companies must become comfortable with taking cold, hard looks at their technologies (which are often the result of years of dedication) and knowing when to cut bait and move in another direction.

So that’s the “obvious” part. The not so obvious part is that companies must ensure that on their road to raising capital or being bought down the road, that they do not make themselves “unattractive” to future investors or buyers by making decisions that make sense in the short-term, but which could prove to be a hindrance down the road. What does that mean? Simply, every corporate decision, be it relating to a partnership, an IP issue, or a corporate structural matter, must be made in the context of asking “how will this affect our ability to raise money or exit down the road?” As one VC said at a recent TIE event, “we are always looking for a reason to pass on a deal, because there are many more potential deals than we could ever fund.” So while the road to biotech success has never been easy, it is now, more than ever, going to be a process that will require patience, and the wherewithal to identify and circumnavigate potential pitfalls along the way to a successful conclusion.

With all this being said, at least from our experience, there certainly is money out there, and our clients have been able to secure funding through angel, VC and grant sources, but it’s evident that investors are being much more selective with what they fund, and more aggressive with their terms and valuations.

That’s not to place the onus on VC’s for the shortage of financing, in-fact, it’s quite the opposite. VC fund raising hit a 16 year low this year, according to survey by the National Venture Capital Association and Thomson Reuters (Click HERE for an interesting article on the dearth of fund-raising in the VC world), development cycles for technologies seem to be ever-increasingly, IPO’s are near extinction, and strategic buyers are far and few between. In short, VC’s face a lot more risk now than they have in a long time, and therefore have had to adjust the way they make investment decisions.  

So while a company with cutting-edge technology and an experienced management team can still raise money, it’s just going to be a longer road than a few years ago. The reality is, what companies are really going to need is something not often mentioned: the will to persevere.

In closing, not that I have really mentioned anything of a legal nature, but I always feel compelled to at least say that this is not legal advice, and every situation is different, so always consult an experienced attorney before addressing any legal issues.

Maybe things are looking up! VC firms invested $228 million in 39 tech startups in New York City in the first quarter of 2009. It would be interested to know how that stacks up compared to other areas in the country. Of course, we don’t know how expensive that money was (ergo how much of the pie did start ups have to give up), but overall it’s very exciting to hear that such a large amount of funding is trickling down to worthy start ups!

http://money.cnn.com/2009/06/04/technology/vc.startups.nyc.fortune/index.htm?section=magazines_fortune

Another interesting SBIR Grant announcement to share:

This grant is meant to help companies overcome the gap between R&D and going to market. They are encouraging submissions to include preliminary pre-clinical work .  It’s quite an opportunity to gain some undilluted financing, as submissions can include a  budget of up to $1 million in total costs for up to 3 years . The NIH has committed $35,000,000 to the program, and  hanticipates awarding 10 grants in 2010.

The submission date is September 1, 2009 at 5PM local time, and while Letters of Intent are not required, they are encouraged and due by August 3, 2009 .

For more information, go to http://grants.nih.gov/grants/guide/rfa-files/RFA-OD-09-008.html

An interesting funding opportunity opened up at the NIH. This is similar to SBIR Phase I, but only applicants who haven’t received SBIR before are eligible. It is an early stage technology development program – “high risk reward”. Details are pasted below. The full announcement is available at http://grants.nih.gov/grants/guide/rfa-files/RFA-OD-09-009.html. 

 Recovery Act Limited Competition: Small Business Catalyst Awards for Accelerating Innovative Research (R43) Letters of Intent Due Date: August 3, 2009 Application Due Date(s): September 1, 2009 Budget requests are limited to $200,000 total costs for a maximum project period of one year Research Plan: not to exceed 6 pages, including tables, graphs, figures, diagrams, and charts The Small Business Catalyst Award for Accelerating Innovative Research funding opportunity: Applications are solicited for support for projects that have the potential to generate high impact results (e.g., products, processes or services) and/or innovative research applications, research tools, techniques, devices, inventions, or methodologies. The outcomes of the research supported should have potential to lead to products that will improve public health and create significant value and economic stimulus. This FOA solicits early-stage ideas that promise to lead to major leaps forward in capabilities important to serving the mission of NIH rather than incremental improvements of existing technologies. In accord with the funding priority of this initiative to attract applicants without a history of SBIR/STTR support from NIH, the focus of the projects solicited by this FOA is on early stage technology development.

Hey everyone,
Shockingly, it’s never been easy to get people to remember our name with the generic wordpress address, so we went ahead and picked up our new name…drum roll….www.EmergingBiz.com

We wanted to get the idea of emerging tech through without losing sight of the fact that our focus is less technical, and more business, while being easy to remember. We feel pretty good that we were able to do that.

Tell every scientist, business person and bio-nerd you know about www.EmergingBiz.com

The Ghannoum Law Firm is excited to announce the launch of the Ghannoum Law Speaker Series. The First talk is on April 15th, and is titled, “SBIR Grants and the Financial Crisis: Why Now is a Great Time for Companies to Pursue Federal Funding.” Giving the talk will be Dr. Mahmoud Ghannoum of University Hospitals. Dr. Ghannoum has been continuously funded by the NIH since the early 90’s, and has been successful securing both public and private funding for multiple biotech ventures.

Please RSVP by email: Afif@Ghanlaw.com or by calling 216.973.9903