Alabama Biotech Investment 101
A strong support network has led Alabama biotechs to land $101 million in venture capital since 2012. Working in one of the toughest investment sectors, research-based startups have well defined paths to commercial success on home turf.
At work in the GeneCapture lab, cofounders Peggy Sammon (center) and Krishnan Chittur (right) with senior scientist Paula Koelle.
Discovering a medical breakthrough and turning it into a viable commercial product takes brains. Perseverance. Business savvy. And capital. Lots of capital.
But raising enough capital to launch and grow a biotech startup can be a lengthy and somewhat arduous process for any scientist or innovator who spends more time in labs than boardrooms.
Moreover, biotech startups are, by their very nature, built on emerging technologies, which often come with inherent risks, the kind many investors shy away from.
Peggy Sammon knows. She’s one of the founders of the Huntsville company GeneCapture Inc., formerly SLP Diagnostics. The idea for the company was great. Working with his team, Krishnan Chittur, a chemical engineering professor at the University of Alabama in Huntsville, came up with the idea for a portable instrument that would detect infections in the body in less than an hour, rather than the days required by other methods. By speeding up the diagnostic process, doctors could deliver the right medications to patients sooner.
“Dr. Chittur, Dr. [Marc] Pusey and I founded the company with private funds and performed some early research on our own time,” says Sammon, “enough to know that we had a very promising opportunity in detecting a broad range of infections in a point-of-care setting.
“Our biggest challenge was overcoming the fear that investors had in biotech,” says Sammon, “the lack of tangible biotech successes, and the risks associated with getting FDA approval. Many investors and angel groups lean on others for technical knowledge in the biotech space, and since our platform is so novel, there was a learning curve.”
To raise monies for biotech startups and to keep the associated research moving forward, innovators go through several rounds of fundraising. Starting out, some inventors may rely on private monies to reach an early milestone, such as building a prototype.
For many, however, the first stage in fundraising is the “seed” round where innovators seek funding from angel investors and early-stage venture capitalists for product development, marketing or the product launch.
Once the startup’s product has a track record, entrepreneurs can raise monies in a “Series A” round. Here, venture capitalists invest their funds in exchange for a percentage stake in the startup. With the new cash infusion, the startup might use the capital for new projects like a study or clinical trial.
The Auburn-based Vitruvias Therapeutics Inc., which makes specialty generic pharmaceuticals, recently completed its Series A funding round of $11.5 million.
At the Series B stage, a biotech startup can raise even more venture capital for milestones, such as commercializing its products or developing new products.
As the biotech startup continues to succeed and the risk of failure continues falling, the company can attract more investors like private equity firms and large foundations for a Series C round. The additional funding can help a biotech company build a new facility, scale the business or expand its market base.
Eventually a successful startup can pursue an exit strategy by going public in an initial public offering or having a larger, more established biotech company acquire the business.
Initial public offerings, however, are rare and complicated due to SEC compliance, lock-up provisions, overall expense and external stock market uncertainty, says Larry Greer, the founder and senior managing partner of Greer Capital Advisors LLC in Birmingham, which invests in Alabama biotech companies.
“The best outcome is a strategic sale as an integration to an industry partner or affiliate,” says Greer. “Often, the parties are already working together on joint research contracts, which are an objective that we try to cultivate.”
Harvesting Seed Money
One source of seed funding is the federal Small Business Innovation Research (SBIR) grant program. SBIR awards seed money to early-stage technology companies or entrepreneurs engaged in early research and development who are working to start a company. Entrepreneurs can apply to one of 12 participating federal agencies, including the U.S. Department of Defense, Energy, Agriculture and the Environmental Protection Agency.
Another seed funding source is the federal Small Business Technology Transfer (STTR). Grant recipients, however, must work collaboratively with a nonprofit research laboratory or national laboratory.
In Alabama, biotech entrepreneurs can win seed funds through the Alabama Launchpad, a program of the Economic Development Partnership of Alabama. The Alabama Launchpad hosts statewide concept- and seed-stage competitions where ventures compete for cash prizes. The program’s aim is to help startups launch, grow and remain in the state.
In 2010, then-SLP Diagnostics won the Alabama Launchpad $100,000 prize.
“We used the funds to build an early prototype,” says Sammon, “and to demonstrate our proof of concept, which was critical to the next round of funding. Also, a local investor matched the Launchpad award as both a recognition and a show of confidence.”
The Alabama Launchpad also encourages contestants to consult with mentors, and the contest judges review the startups the way potential capital investors would, EDPA Vice President Angela Wier says.
“Even those who don’t win Launchpad funding,” says Wier, “use this experience to refine pitches and pursue other funding, often successfully.”
Innovators who work or study at universities may also find the path to funding and commercialization right on campus. The University of Alabama at Birmingham (UAB) Harbert Institute for Innovation and Entrepreneurship (HIIE) Commercialization Accelerator, for example, raises UAB researchers’ and innovative students’ and staffers’ opportunities to turn their cutting-edge research into “high-growth startups,” HIIE Executive Director Kathy Nugent says.
After an inventor discloses his or her intellectual property to the HIIE, the HIIE decides whether to pursue commercialization. If so, it assigns the inventor a licensing associate who determines whether to move forward with possible intellectual property protections and licensing strategies. The associate also approaches companies that might want to license the intellectual property.
“We want to take companies and make sure we’re equipping them with all of the right resources,” says Nugent, “including how to get funding or at least helping companies build proof of concept and increase the value of the technologies and products in the company before we send them out and off of our campus to be autonomous and independent.”
More than 40 companies began as UAB technologies, including BioCryst Pharmaceuticals Inc., Discovery BioMed Inc. and VectorLogics Inc., which was later acquired by DNAtrix Inc. Another UAB spin-off, Blondin Bioscience, has been working on a precision cancer diagnostic technology that doctors can use to determine the effectiveness of a chemotherapy treatment within just hours.
In Mobile, the University of South Alabama’s Office of Commercialization and Industry Collaboration assists faculty in turning their inventions into marketable products.
Sammon credits the University of Alabama in Huntsville’s Office of Technology and Commercialization with patent support and UAH with forging collaborations with HudsonAlpha Institute for Biotechnology in Huntsville, which later helped GeneCapture attract investors.
Another resource is BioAlabama. The nonprofit assists startups in a number of ways, including matching them with mentors and helping them identify sources of capital, from grants to early- and growth-stage equity funding.
“BioAlabama’s role is to support, promote and convene a collaborative bioscience ecosystem throughout Alabama,” says Blair King, BioAlabama’s president-elect and Alabama Power Co.’s manager of economic development and existing industry.
“Access to capital is critical to biotech startups and for the commercialization of technology developed at our key research institutions in Alabama,” King says.
Venture capital firms are another major funding source for biotech startups. These investors often invest in exchange for some governance over a startup’s operations, such as management of the business side or marketing.
“The pace of bioscience funding across [Alabama] has picked up steadily in recent years, although mostly by way of early stage equity financings,” says Birmingham attorney James Childs Jr., a BioAlabama board member and a partner and chairman of venture capital and private equity at the Bradley Law Firm.
Childs points to biotech startups like CNine Biosolutions, Vituro Health and Circulogene, companies that have raised several rounds of equity funding in the last few years. In 2017, IllumiCare Inc. closed on its Series B funding at $3.7 million.
In fact, since 2012, Alabama bioscience companies have received $101 million in venture capital funding, with investments focused in human biotechnology and health information technology, according to a 2016 state-by-state report by the Biotechnology Innovation Organization.
From Birmingham, Greer Capital Advisors has overseen an $18 million Southeastern Commercialization of University Technologies (S.C.O.U.T.) Healthcare Fund with investments in late- and growth-stage projects and mezzanine deals.
Another fund, the $21.9 million Birmingham Technology Fund (BTF), invested in commercializing technologies established at universities and research institutions. Its investments have included the Birmingham drug discovery firm Discovery BioMed Inc. and Vivo Biosciences, which LifeNet Health in Virginia recently purchased.
Greer says he seeks biotech firms in niche markets and those with novel technologies that have a competitive advantage or the potential for gaining a large share of an underserved or rapidly growing market.
“The ownership share percentage varies from deal to deal, and there is no set requirement,” Greer says. “We have received as little as 3 percent and as much as 72 percent ownership on a per-deal basis.”
For Sammon, after several years of navigating the biotech fundraising waters, she offers cash-hungry startups this advice:
“Find mentors,” she says, “and add experienced business players to your team.”
Gail Allyn Short and Dennis Keim are freelance contributors to Business Alabama. She is based in Birmingham and he in Huntsville.