Triangle startups benefiting from growth of corporate venture capital

by David Ranii for Newsobserver.com

Agribusiness giant Syngenta dipped its toe into the venture capital arena in 2006 by investing in venture capital firms. It upped its game three years later by creating its own venture capital arm, Syngenta Ventures, that plows money directly into promising agricultural startups.

“We were surprised by the number and quality of investment opportunities out there,” said Alex Steel, who heads Syngenta’s venture capital efforts.

To date Syngenta’s venture capital investments have exceeded $100 million, including funding more than 20 early-stage companies. In the process, Syngenta Ventures has expanded from a pair of investment professionals to a team of seven – two at the company’s home base in Basel, Switzerland, and five in Research Triangle Park, which serves as global headquarters for its biotechnology research.

Although making money is certainly a goal for Syngenta Ventures, the No. 1 objective is gaining insights into “disruptive technologies that address the same issues and challenges that Syngenta is trying to address itself,” Steel said.

More and more large corporations are investing money into startups to keep abreast of innovation and get a firsthand look at what could become the next big thing in their industry. It’s called corporate venture capital, and the corporations involved typically invest alongside traditional venture capital firms.

Startups and early-stage companies, especially in the information technology and life science sectors, rely on these dollars to develop new products and ramp up sales and marketing efforts.

Corporate venture capital investments totaled $3.1 billion last year, well more than double the amount companies invested in startups in 2008, when the recession put a damper on corporate V, according to data compiled by PricewaterhouseCoopers and the National Venture Capital Association.

So far this year, corporate VC investments are on track to reach their highest level since 2000.

For the most part, the growth in these investments is outpacing the expansion of traditional venture capital investments. Corporate VC accounted for 10.5 percent of total venture capital investments last year, up from 6.6 percent in 2009.

The profits that corporations have enjoyed post-recession are driving those VC investments.

“A lot of corporations have cash on the balance sheet and are looking to deploy that,” said Bobby Franklin, president and CEO of the National Venture Capital Association.

Some industries are bigger players in corporate VC than others. The pharmaceutical industry, which is increasingly relying on smaller companies for new drugs, is especially active.

“I can’t think of any (big) pharmaceutical company that isn’t routinely investing in smaller companies these days,” said Clay Thorp, co-founder and general partner at Hatteras Venture Partners, a traditional venture capital firm based in Durham.

Corporate VC has become a valuable source of investment dollars for local startups, said Joan Siefert Rose, president of CED, a Triangle-based support group for entrepreneurs.

“I think it actually provides more options for entrepreneurs than perhaps they have had in the past,” she said.

According to data compiled by CED, seven early-stage Triangle companies have received corporate VC funding – up from five last year.

For entrepreneurs, it’s not just about the money.

Landing a corporate VC investor “provides validation from a potential user of the technology,” Rose said. The companies can tap into the expertise of a corporate VC’s parent company to gain a better understanding of industry trends and latest developments.

PrecisionHawk, a Raleigh startup with more than 55 employees, is looking forward to such a relationship with Intel. PrecisionHawk, which uses drones outfitted with special sensors and cloud-based software to collect and analyze aerial data, recently raised $10 million in funding from a group of investors that included Intel Capital, Intel’s venture capital arm.

“Intel can bring added technological expertise,” said PrecisionHawk CEO Christopher Dean. “Our technology team was very excited about being able to sit down with Intel and looking at their technology and how it can benefit us.”

Investor and customer

It’s not unusual for a corporation to collaborate with, or become a customer of, a startup that its VC arm has invested in.

Syngenta has forged collaborations with the majority of companies that Syngenta Ventures has invested in, Steel said.

Syngenta Ventures’ first-ever investment in 2009 was in Metabolon. Today, the Durham company employs 150 people, has two diagnostic tests on the market and tests medicines and other products for drug companies, universities and other customers.

Meanwhile, Syngenta also is a Metabolon customer.

“They were interested in what our technology could do in the (agribusiness) field,” said John Ryals, Metabolon’s founder and CEO. “We help them understand a new product – what is it that made that product work and what they can do to make it work better.”

Like most corporate VCs, Syngenta Ventures doesn’t demand any special rights, such as an option to license or acquire technology, from the companies it invests in.

It would be self-defeating for corporate VCs to attach such strings on a deal because the best of the early-stage companies could find funding elsewhere without those limitations, said venture capitalist Thorp.

In 2012, Raleigh’s Rex Healthcare created a VC fund and committed to invest $10 million fledgling health care companies – making it one of a relatively few community hospitals to wade into corporate venture capital field.

So far, Rex Health Ventures has invested in three companies – including the Morrisville-based Aerial BioPharma. The fund has proved to be a profitable one, thanks to Aerial’s sale earlier this year of its rights to an experimental for $125 million upfront and up to $272 million in milestone payments.

“It has been a very successful endeavor for us,” said Erick Hawkins, who heads Rex Health Ventures.

Insights from deal flow

Rex Health Ventures has scrutinized more than 350 companies nationwide in search of the right investments. Because the hospital taps its internal experts in different fields to weigh in on prospects, Rex officials say even the companies it passes on can be illuminating.

“At the very least, it is opening people’s eyes to a new technology or new device or new service that is out there on the market and gets people thinking differently,” said Bobby Helmedag, the fund’s director.

GlaxoSmithKline, a British pharmaceutical and health care giant whose North American headquarters is in Research Triangle Park, was an early adopter of corporate VC. It created its venture capital arm, SR One, in 1985 and last year invested about $55 million.

“It was started by a really visionary guy, Peter Sears, who understood that even if you have 1,000 or 10,000 or 50,000 of the best scientists that have a GSK coat on, there’s very, very exciting, interesting science that happens outside of the walls of GSK,” said Jens Eckstein, who heads SR One.

But one corporate VC fund wasn’t enough for GSK. Last year it created a new $50 million fund, Action Potential Venture Capital, that focuses on companies developing bioelectronic medicines and technologies. Bioelectronics is an emerging field that incorporates medical science with technology and engineering. .

A.M. Pappas & Associates, a traditional venture capital firm based in Durham, has found a way to tap directly into the growth of corporate VC.

It recently teamed up with Italian pharmaceutical company The Chiesi Group on a new corporate VC fund.

Pappas is managing Chiesi’s fund, Chiesi Ventures, and is an investor in the fund as well. Chiesi Ventures will focus on early-stage companies developing treatments for rare diseases.

CEO Art Pappas said his firm also is looking to partner with corporations and hospital systems, to create new venture funds.

“It’s likely that over the next year or so we’ll be managing other types of specialized funds like this,” he said.