WRF Capital, With Clock Ticking on Expiring Patents, Aims to Build Sustained Venture Fund
Ron Howell’s job forces him to think a lot about the year 2014. Howell, the CEO of the Washington Research Foundation, has no other choice, because that’s the year when the patents run out on an invention that has been his organization’s primary source of cash since the 1980s. It’s a big reason why he’s transforming the organization into one of the more active venture funds in the state.
The story of that journey is a complicated one, but the basic arc goes something like this. The federal Bayh-Dole Act of 1980 required universities to find a way to license their discoveries to industrial partners who might someday turn them into commercial products. The following year, two leaders in the Seattle business community, Physio-Control CEO Hunter Simpson and venture capitalist Tom Cable, founded the Washington Research Foundation as an arm’s length organization that could license discoveries from the University of Washington to companies. The idea was once it got a piece of the action, it could plow it back into the university to support more research and invention.
The big breakthrough came in the 1980s when UW researcher Benjamin Hall discovered a way to make genetically engineered proteins in yeast. This is one of the fundamental technologies of the biotech industry, and once the key patents were awarded, it enabled the Washington Research Foundation to capture royalties on GlaxoSmithKline’s hepatitis B vaccine, and various other biotech products, Howell says. It’s been the primary reason his organization has given back more than $228 million to the UW in its history, he says.
But patents don’t last forever, and these expire in 2014. The UW now takes care of its own licensing through its technology transfer department led by Linden Rhoads (an Xconomist), so Howell isn’t going to get another cash cow like this one to fall in his lap. That’s why, since the mid-1990s, he has been building his organization’s capability as a small venture capital fund called WRF Capital. It takes a piece of its $160 million in liquid assets—about $4 million to $5 million a year—to invest in startups in the region, with an eye on getting venture-capital returns that it can funnel back into the UW in the same way that the Hall patents have done for years. Instead of providing returns to traditional limited partners, like most venture capital funds, Howell thinks of research institutions as the limited partners of WRF Capital. If he’s successful, WRF will be sustainable for decades, like an endowment supporting research institutions in the state.
“We’ve had the advantage of many years of strategic thinking about the impact of 2014. We’ve had to ask ourselves, are we going to just close the doors and leave, or do we have an opportunity here to still make a difference?” Howell says.
The organization is pushing hard to make sure it has a future. WRF Capital counts 19 active investments in local technology and life sciences startups. The portfolio includes some of the most promising biotech companies in Seattle—Alder Biopharmaceuticals, Ikaria, Halosource, VLST, and Targeted Growth. Its list of big winners is shorter, although it did cash out its equity stakes when Seattle-based Farecast was sold to Microsoft for $115 million in April, and when Seattle-based Corus Pharma was bought by Gilead Sciences for $365 million two years ago.
Plenty of people in town have misconceptions about what the Washington Research Foundation is trying to do, Howell says. Some think it just handles technology licenses, or exists solely as a source of charitable gifts. Others say they hear that WRF is supposed to invest in local startups, but doesn’t like certain deals, so it is labeled as “risk averse,” Howell says. The firm has also had to work hard to brand itself as WRF Capital among venture capital peers, because when it was just called a foundation, “People would look at us, and say ‘Oh, you just give money away,’ and they’d turn around and walk away,” Howell says.
Like any venture capital fund, the WRF isn’t interested in putting its money to work in companies just to support local entrepreneurs or, like an economic development agency, to solely create jobs. “If there’s an early stage company coming out of the local institutions, we want to at least see it. When we see something that’s a good investment, we want to be a part of it,” Howell says.
WRF has a staff of 11, and three people whose job it is to make investments in startups. Thong Le and Loretta Little manage life sciences investments, and John Reagh handles technology companies. The goal is to put $1.5 million to $5 million into single companies, while getting enough equity in the company to someday get a meaningful return, Howell says.
Venture investing is only a part of WRF’s portfolio of stocks, money market funds and the like, but it’s an important element of its strategy to get the returns it needs to stay in business. In order to retain its status as a nonprofit foundation with the IRS, it needs to give away 5 percent of its net assets each year. That means the fund needs to average 8 percent to 9 percent annual returns on its net assets, Howell says.
Nobody can say for sure whether WRF will be able to pull off that difficult feat of getting those returns, especially in the current financial turmoil. But its fate—and ability to bankroll university research—will not depend on the next generation of inventors at UW like Benjamin Hall. Now it’s all about whether it has enough foresight to get in on the ground floor of the next Farecast or Corus Pharma being built in the Northwest.