Osage University Partners Expanding Its Novel Venture Firm Model

2/28/13Follow @Tansey_Xconomy

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 contribute $500,000 to a fundraising round that nets $10 million. If the school doesn’t contribute, its share of the equity will be diluted.

Some schools had begun to drop investment participation rights from the deals they made with startups, because they didn’t have the means to take advantage of them, Harrington says.

“The vast majority of universities don’t have accessible capital, or the management skills to assess which companies to back,” says Harrington. “The endowments are not in the business of making direct investments in startups.”

Through its agreements with research centers, Osage University Partners has the option to invest in about 1,800 companies that it tracks through a proprietary database. The venture fund partners get to know the technology transfer officials at each partner university, meet with the management teams of their spinout companies, and also follow the latest discoveries of innovative faculty members.

So far, Osage has selected 23 companies to add to its portfolio. Osage does not lead investment rounds, but joins syndicates made up of “top tier’’ venture firms raising new funds for a promising company. Osage prefers to make initial investment of about $2 million, and plans to spend an additional $2 million to $3 million investing in follow-on rounds for the companies that are doing well, Harrington says.

Soderstrom says the participation rights gained by Osage University Partners give the firm access to deals that might otherwise be closed to it as a VC firm without a long track record.

“They get to play in a game they wouldn’t otherwise be part of,” Soderstrom says.

Theoretically, the members of a VC syndicate might want to exclude Osage to preserve their share of a fundraising round, he says.

“If they have a really hot deal they wouldn’t get to take as much,” Soderstrom says. But in the discussions Soderstrom is aware of, most venture partners have accepted Osage’s participation after its arrangement with the universities has been explained, he says. Any potential conflicts may be lessened by the fact that Osage usually invests $2 million or less, while the other VC firms are more likely to put in $4 to $6 million each for a capital raise of about $15 million, Soderstrom says.

Harrington says Osage aims to be a “frictionless,” passive partner within a VC syndicate. It doesn’t try to influence the deal terms, or ask for seats on the company board.

Once established as a member of a VC syndicate, the venture firm is often able to invest more than the maximum it’s entitled to contribute under the university rights it has acquired, Harrington says.

“It’s the rare company that couldn’t use a little extra capital,” he says. Osage has participated in syndicates that included firms such as Clarus Ventures of Cambridge, MA; Alta Partners of San Francisco; and Sofinnova Ventures of Menlo Park, CA.

Life sciences firms make up 55 percent of Osage’s portfolio companies, while 45 percent are technology companies, including health care IT. Among the life sciences companies are Atterocor in Ann Arbor, MI; Immune Design in Seattle; Cleave Biosciences in Burlingame, CA; and Receptos in San Diego.

“We have a growing center of gravity on the West Coast,” Harrington says. Osage may launch its second fund by 2014 or 2015, when it would probably open a West Coast office, he says. The unit now has seven investment executives and is looking to hire one more.

Osage University Partners is also becoming a sort of catalyst for productive contacts among startups, university science programs, and venture firms, Harrington says. For example, when a company is looking for an expert in a particular scientific field or a new technology to license, Osage can quickly query its partner universities and check its database.

“We think we’ve become a valued player in the intersection of the university and VC ecosystem,” Harrington says.

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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

    This sounds like a really interesting model!