Thanks to hefty investments by local corporate giants, the Central Indiana Life Sciences Initiative has raised more than $70 million for Indiana Future Fund I, its new venture capital fund.

“Every potential investor who was involved in the original negotiations on this has invested,” said Charles Schalliol, founder and managing director of Eli Lilly and Co.’s Lilly BioVentures, the company’s venture capital arm. “That’s a testament to the resonance of this idea.” It took more than a year to organize Indiana Future Fund I, which is meant to spur Hoosier biotech commercialization while providing its limited partners healthy returns. Investors inked the fund’s first close on July 9, Schalliol said, and its $100 million target remains within reach.

Raising this kind of capital in the current economic environment was challenging, Schalliol said, particularly in Indiana. John Taylor, vice president of research for the Arlington, Va.-based National Venture Capital Association, confirmed those sentiments.

“For a seed and early-stage fund, that’s a fairly good piece of money anywhere,” Taylor said.

Historically, about 10 percent of all venture investments have been in the life sciences, Taylor said. But in recent years, investors have flocked to the sector, risking one in four venture dollars on biotech.

“What that says is the established large pharmaceutical companies are now looking at the entrepreneurial sector for the next generation of products,” Taylor said.

On July 7, IBJ reported that Indiana University, Purdue University and the Indiana State Teachers’ Retirement Fund had each committed $5 million to Indiana Future Fund. Ball State University invested another $2 million, and the Indiana Public Employees’ Retirement Fund pledged to invest 20 percent of the final total, up to $20 million.

But IBJ has learned that a lion’s share of the fund is coming from a handful of corporate investors that provided the remaining capital necessary to reach $70 million. They include Lilly, Guidant Corp., American United Life Insurance Co. and Anthem Inc. None of the corporate investors would reveal the size of their commitments, although Schalliol said Lilly “will probably be the largest investor.”

Credit Suisse First Boston, which manages Indiana Future Fund, and Baker and Daniels partner David Johnson, who organized it for CILSI, both declined to comment, citing Securities and Exchange Commission regulations.

Indiana Future Fund is designed so a majority of its investments will be in seed or early-stage life sciences deals within Indiana’s borders. Its “fund-of-funds” structure means it will invest in venture capital companies, not directly into startups.

More than altruism motivates these investors. They think the environment here will produce good returns. Indiana has historically been a venture backwater. Ironically, that provides Indiana Future Fund a competitive advantage, Schalliol said. In more efficient markets, numerous investors compete for deals and their bids drive down potential profits.

“Everybody’s chasing the exciting opportunity out there,” Schalliol said. “The expectation is we can find an undervalued market and produce greater returns.”

Now that investment capital is available, two main factors will determine whether Schalliol’s theory proves true, Taylor said. First, Indiana will need a great deal of raw research science to commercialize. Second, it will require sound management teams to build functioning new medical devices or pharmaceutical productsand implement the business plans to manufacture them.

“You have to have both ingredients, the basic underlying science and the people to create these companies” he said. “And the only groups that can analyze the local environment are the ones that are there, who know what’s in the laboratories.”

Investors are convinced Indiana’s market potential justifies their choice. Keith Brauer, Guidant vice president of finance and CFO, said he’s confident Indiana Future Fund will reach $100 million and deliver on its promise.

“As this gets a little bit higher profile, nothing begets success like success. I think they’ll get there,” he said. “It just takes one winner out of this thing and it’ll grow like wildfire.”

Indiana Future Fund’s goal of investing in Indiana life sciences companies makes its mission similar to Guidant’s, Brauer said. And Guidant’s investment in the fund-of-funds may not be its last local outlay. If any startups are successful, Guidant may invest in them directly.

The venture capital community is eager to put Indiana Future Fund’s cash to work. Several locally based players are quietly worried the bulk of the money may go to out-of-state venture firms hand-selected’ by CSFB. But Schalliol said Indiana Future Fund will likely select a balance of both local and national venture capital companies.

Even though Indiana Future Fund will supply seed and early-stage investments, Barnard said, Hoosiers still have much work to do and funds to raise before most of their primary laboratory research is ready for commercialization. Clearly, Indiana Future Fund can’t transform the state’s economic landscape alone.

“The issue we’re still going to have is developing the pool of

companies that will attract investments from the fund-of-funds,” said

John Barnard, CEO of local life sciences investor and consultancy

Barnard Associates Inc. “We have some real young startup companies

that need some real attention, and they’re going to probably want to

see some helping along.”

All questions aside, Barnard was impressed with CILSI’s achievement.

“We’ve been trying to raise chump change for companies around here.

It takes an incredible amount of time,” he said. “To raise $70 million is

a heroic effort for the Indianapolis community.”

Copyright IBJ Corporation Jul 21, 2003