Osage University Partners Expanding Its Novel Venture Firm Model

2/28/13Follow @tanseyverse

Discoveries at the Yale School of Medicine are helping nearby Kolltan Pharmaceuticals in New Haven, CT, to try to keep cancer drugs working by eliminating the resistance that patients often develop to current cancer treatments.

Kolltan is the kind of company routinely spun out by Yale and other top research universities, which often hold the right to profit from the progress of such startups by investing in their rounds of fundraising as they grow.

But universities rarely exercise these valuable “participation rights,” often for lack of cash to pitch in. So they miss a certain share of the profits when their breakthroughs make a bundle for other investors.

“We don’t directly invest in our startups,” says E. Jonathan Soderstrom, managing director of Yale’s technology transfer arm, the Office of Cooperative Research. He says Yale doesn’t usually have the opportunity to make follow-on investments in companies such as Kolltan, which was formed to commercialize faculty inventions.

However, Yale will see some extra upside if Kolltan succeeds, due to an innovation in the venture capital world initiated by a former University of Pennsylvania technology transfer director, Louis Berneman.

Instead of merely lamenting the lost investment opportunities when universities bypass their participation rights, Berneman came up with a new idea for a venture capital fund. It would buy the investment rights from the schools and put its own cash into the growing companies founded to develop campus intellectual property.

Osage University Partners LogoIn 2010, Berneman formed Osage University Partners with Robert Adelson and his associate Marc Singer as a unit of Adelson’s venture firm Osage Partners of Bala Cynwyd, PA. Since then, the firm has helped to capitalize university-originated companies from Cambridge, MA to Seattle, WA. It has agreements to acquire investment rights from 49 top schools, including Yale, Rockefeller University and Columbia University in New York City; Princeton and Rutgers in New Jersey; seven campuses of the University of California, and the Fred Hutchinson Cancer Research Center in Seattle.

Osage University Partners closed its first fund with $100 million in January 2011. The venture fund has since invested or reserved about half of that $100 million, says managing partner Bill Harrington (pictured above right), an experienced life sciences venture firm executive who joined the firm in 2012.

The fund’s life sciences portfolio companies include Kolltan; MC10 of Cambridge, MA, which is adapting stretchable electronic circuits for medical devices and other products; and Aerie Pharmaceuticals of Bedminster, NJ, which has three experimental glaucoma drugs in Phase 2 trials.

While Osage University Partners helps research centers expand the returns they get from their IP holdings, it gains an inside look at hundreds of potential investments, Harrington says.

“What we value most about our university connections is the access to a large, generally high quality pool of companies about which we have the ability to accumulate a great deal of information due to the nature of the relationship,” Harrington says.

In return for assigning their investment rights to Osage, the universities share some of the fund’s profits under a proprietary formula that takes into account the success of each school’s spinout companies, Harrington says. Soderstrom, a member of Kolltan’s board, says Yale stands to profit if Kolltan is sold to a buyer or completes an IPO.

Universities often acquire an equity stake in their spinouts of about three to ten percent as part of their compensation for the use of their inventions, Harrington says. Their participation rights allow them to maintain the same percentage ownership if they invest cash in subsequent funding rounds. For example, to maintain a 5 percent stake, a university would need to … Next Page »

Bernadette Tansey is a freelance journalist based in Berkeley, CA. Follow @tanseyverse

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  • http://www.lacertabio.com Carlos N Velez/Lacerta Bio

    This sounds like a really interesting model!