Aug. 25–CHAMPAIGN, Ill.–Harry Arader has 18 months to prove himself.

As vice president of operations for Urbana-based Nanodisc Inc., he’ll be trying to convince major drug companies that a clever biochemical technology developed at the University of Illinois can pave the way for rapid advances in drug development.

“My objectives are to complete the technology license (from the UI), to raise the initial round of funding and to get the company’s first deal, or couple of deals, with pharmaceutical companies for drug discovery and development projects,” Arader said.

It’s an exciting mission, taking Nanodisc technology developed in the lab of UI biochemistry Professor Stephen Sligar and making it commercially available to companies that can create new drugs with it.

Launching such a company won’t be easy, but Arader and Sligar, Nanodisc’s president, are getting help from the UI that wasn’t available a year ago. Through the IllinoisVentures program, the company is receiving financial assistance and counseling about what it needs to do to survive and thrive.

“IllinoisVentures has already had an enormous benefit to the company in several ways,” said Arader, whose office is in Chicago.

First, IllinoisVentures recognized the value of the technology and moved quickly to deal with it. Second, its staff counseled Nanodisc officials about “the right kind of structure for the company, the right business plan and the right contacts, not only for fund raising, but also for doing business with pharmaceutical companies,” Arader said.

Then there’s the funding itself.

IllinoisVentures is making a six-figure investment in Nanodisc in the form of convertible debt. When the company reaches the point it can attract private investment, IllinoisVentures can turn that debt instrument into equity in the company.

IllinoisVentures has been around for only 10 months, but it has already poured $375,000 into companies with ties to the university.

In the next six weeks, the program expects to more than double that amount, according to Rob Schultz, senior director of the program.

IllinoisVentures has “active relationships” with 19 different startup companies, Schultz said. The four that have progressed the furthest in attracting outside funding are: Renew Power, a fuel cell company that aims to build on the work of Richard Masel, a UI professor of chemical and biomolecular engineering. Masel has developed fuel cells that run on formic acid, and Renew hopes to market them as power sources for laptop computers and cellphones. IllinoisVentures has approved investing $175,000, the current maximum allowable, in the company.

Kim Laboratories, which is developing a way for food-processing companies to test foods quickly for the presence of salmonella, listeria and other pathogenic bacteria. The company is the creation of Myung Kim, who received a doctoral degree in microbiology from the UI in 2002.

iCyt Mission Technology, which plans to distribute and sell a solid-state laser system for flow cytometry equipment, such as cell sorters and cell analyzers. The laser system was developed by its sister company, iCyt Visionary Bioscience. Both companies were founded by Gary Durack.

Nanodisc, which became a legal entity in May and is now in the process of raising $500,000 for its first year of business.

Schultz said he’s “tremendously enthused about the deal flow.” But he said it’s too early to venture a guess when IllinoisVentures will reach its benchmarks.

“We don’t have any stated return objective,” he said. “We do look at opportunities that have commercial merit.”

Generally, IllinoisVentures is concentrating on ventures that seem likely to achieve some degree of commercial success in three to five years. But, he added, “we do not expect to get our money back or to exit (from that investment) within that time horizon.”

One of IllinoisVentures’ goals is helping faculty members with no business experience to build businesses based on the technologies they’ve developed.

But not all ventures that come IllinoisVentures’ way may be suitable for start-up companies, he said. Some may be better suited to licensing agreements.

Schultz and John Banta, the Chicago-based chief executive of IllinoisVentures, can award up to $25,000 to a company without specific approval from the program’s board of managers. Any award above $25,000 must be approved by the board.

The board’s members include: James Foght, co-founder of Vector Securities; Warren Holtsberg, co-founder of Motorola Ventures; Michael Tokarz, chairman of The Tokarz Group and former general partner in Kohlberg, Kravis, Roberts & Co.; and David Wilhelm, a former Democratic National Committee chairman who also founded a venture capital company.

Companies that have gotten help from IllinoisVentures said the assistance has taken many forms.

Myung Kim of Kim Laboratories said IllinoisVentures helped his company identify potential areas of focus. It also helped him realize how much it would take to sustain the company for its first 18 months.

Together, Kim and IllinoisVentures figured he would need $400,000, in addition to $100,000 he had already raised. To that, he could add $175,000 from IllinoisVentures.

IllinoisVentures offered to take Kim on a “road trip” to meet venture capitalists. But he said he went a different route and found several “angel investors, the majority of them from Chicago and some in Champaign.”

“I went out and raised about $580,000, which is $180,000 more than they expected me to do,” he said.

Kim Laboratories moved into the new EnterpriseWorks facility in the UI’s South Research Park in late May. In recent months, Kim has been rounding up equipment and supplies for his laboratories and getting UI approval for experiments.

He has also been identifying key customers.

“We are targeting food manufacturing and food processing companies, and we’ll be doing more research and development to branch into medical customers such as hospital settings,” Kim said.

A significant revenue stream is probably nine to 12 months down the road, he said.

IllinoisVentures played several important roles in the start-up of iCyt Mission Technology, said Tim Hoerr, that company’s chief executive officer.

“They provided an initial $50,000 equity investment debt convertible to equity at their option,” Hoerr said. “They also worked diligently to put together a small investment syndicate for us.”

Altogether, that produced about $200,000, which iCyt combined with traditional Small Business Administration funding through Busey Bank, for a total of about $400,000.

IllinoisVentures now has a seat on iCyt Mission Technology’s board of directors. And Schultz, who fills that seat, arranged for sales and marketing consultant Bob Calvin to visit iCyt for a day and evaluate its strategy.

“I found that really helpful,” Hoerr said.

IllinoisVentures has also hooked iCyt up with a couple potential customers, he said.

“They’ve been really active and really supportive,” Hoerr said. “They’ve come with an attitude of providing not only financial assistance, but also strategic assistance to help us realize our vision.”

The creation of IllinoisVentures is one indication that the UI is better positioned to commercialize technologies than it was five years ago, said Arader, the Nanodisc vice president.

At that time, Arader was working with BioDisplay Technologies, a company built from technology developed in the lab of UI biochemistry Professor David Kranz. BioDisplay was sold to pharmaceutical giant Abbott Laboratories in 2001.

“The University of Illinois not only with IllinoisVentures has completely changed its act in terms of early-stage companies,” Arader said. “(With BioDisplay), it took us 22 months to get to the same point we’ve gotten to in four months (with Nanodisc).”

“Plus, we have Illinois Ventures funding, which we never had with BioDisplay Technologies,” Arader said.

With that money in hand, Nanodisc can move quickly.

“We are raising a half-million dollars for the first eight to 12 months of the company’s existence, to pay for things like my travel, the administration of the company and proof of principal experiments,” Arader said.

The last is particularly important, he said.

“To get big pharmaceutical companies interested, you have to prove to them your technology works as a practical matter,” he said. “The more you prove, the better deal you get.”

For now, Sligar and Arader own 100 percent of the company. But the ownership may broaden soon. Another investor, besides IllinoisVentures, is committed to Nanodisc, Arader said. And the company is in discussions with three venture capital firms, one in Chicago and two on the East and West Coasts.

Arader said IllinoisVentures’ investment is important in helping determine a company’s valuation.

When any new technology is introduced, “an inventor believes it’s worth millions, but only one in hundreds of technologies has any value at all,” he said. “There’s an enormous spread in the valuation of the company.”

It makes an enormous difference knowing what a company is actually worth, he said.

Thanks to IllinoisVentures’ investment, “the valuation can be done a little later, when you have a better sense of how much the technology is actually worth,” he said.

Schultz said IllinoisVentures’ investments also help reduce a firm’s risk when the business is in its “preproduct, prerevenue, premarket valuation” stage.

Hoerr, the iCyt chief executive officer, said no one else really fills the gap that IllinoisVentures’ bridge financing fills.

“A lot of small entities seed-stage or start-up companies aren’t candidates for equity funding, either because it’s too early for the technology or the venture is too small,” he said. “Venture capitalists are generally looking for more robust companies they can sink $1 million or more into.”

“It meets a real need in the marketplace,” Hoerr said of IllinoisVentures financing. “It’s money you can’t get from a bank, and it’s not available from the venture capital market.”

In coming years, IllinoisVentures may be able to extend further help.

Schultz said IllinoisVentures is raising money for a private equity fund that can provide later-stage funds to UI-related companies. The Illinois Emerging Technology Fund, to be managed by IllinoisVentures, is expected to have at least $10 million and ideally $25 million to invest.

“It could help keep these companies in Illinois first and hopefully in Champaign-Urbana,” Schultz said. “They’re going to need a local lead investor as a meaningful way to support the growth of the company.”

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(c) 2003, The News-Gazette, Champaign-Urbana, Ill. Distributed by Knight Ridder/Tribune Business News.