insights (2006-29)

Venture Capital Comes to Knoxville

A dearth of venture capital can no longer be cited as a reason for the Knoxville area’s failure to parlay more inventions emanating from ORNL and UT into homegrown high-tech enterprises.

Two new venture capital funds with resources totaling more than $65 million have established a presence here that should bode well for enabling fledgling companies to get the financing they need to flourish.

One is Innovation Valley Partners, which was formed last year with a $35 million commitment on the part of about a dozen prominent Knoxvillians. But it took until this May to get a venture capitalist in place here to begin evaluating prospective investments of these funds. He is Glenn Kline who moved here from North Carolina’s vaunted Research Triangle area where he served as managing partner of a fund that has invested $40 million in nearly 30 start-up ventures there.

The other is Meritus Ventures, which has just succeeded in raising upwards of $10 million privately in order to qualify for a two-to-one match of federally guaranteed funds. The fund’s Oak Ridge-based Executive Vice President Grady Vanderhoofven foresees final approval of the match by September after which Meritus will commence operation as a Rural Business Investment Company. As the name connotes, its federal charter calls for concentrating the resultant $30 million-plus of new venture investments in the rural areas of Appalachia. But the definition of rural is a liberal one. So a company based in Oak Ridge could qualify, though one in Knoxville couldn’t.

The president of the area’s foremost high-tech booster organization, Tom Rogers of Technology 2020, exults at the potential for filling what has been a near void of locally managed venture funds. But Rogers also cautions that, “There’s no guarantee that any of the money will be invested locally, and we still have work to do in getting companies good enough to attract capital.”

Kline says his role is to coordinate with ORNL’s and UT’s overseers of technology transfer and the companies to which it’s been licensed for commercialization. “We’re looking for investment opportunities all the time,” he says. But he won’t set any timeframes for finding one.

Innovation Valley Partners, while locally funded, is actually an affiliate of Battelle Ventures and participates in all of its investments from a $185 million venture pool managed by BV’s seven general partners, the other six of whom are based in Princeton, NJ. BV was established in large part to further commercialization of research at the five national laboratories that Battelle manages, including its joint venture with UT that runs ORNL. But of the 10 investments that BV has made since its inception in 2003, only one involves ORNL-licensed technology and that was in a company based in Parsippany, NJ.

Meritus Ventures also involves a collaborative arrangement in this case between Kentucky Highlands Investment Corp and Technology 2020. Raising the $10 million need to qualify for the federally backed match took KHIC’s president Ray Moncrief and Tech 2020’s Vanderhoofven more than a year and involved tapping investors from as far away as Phoenix and Puerto Rico.

A smaller predecessor to Meritus, the Southern Appalachian Fund, has been virtually the sole source of venture capital to Knoxville area start-ups in recent years (though many new businesses have obviously obtained financing by other means). Only two local companies are among the seven in which the Southern Appalachian Fund has invested upwards of $1 million each, and both of these ventures, Eonstreams and Protein Discovery, have fared well.

Eonstreams, which provides software for audio and video streaming on web sites, was acquired earlier this year by a California-based counterpart, Vital Streams. Vanderhoofven reckons that the value of the Vital Streams stock received in this acquisition yielded Southern Appalachian a 242 percent return on its investment. However, this return is purely on paper at present because the stock is restricted from being sold for a year.

Protein Discovery appears well on its way to becoming the poster child of local high-tech enterprises seeded by venture capital. Founded in 2001 by then 25-year-old Chuck Witkowski, this biotech firm received $4 million in R&D funding from Southern Appalachian and others to get it to its present state of readiness to launch sales of two distinctive products. Both drew upon mass spectrometry technology licensed from Vanderbilt University, and both are aimed at facilitating cancer diagnosis that involves analysis of proteins.

To support the product launch Witkowski is now looking for an $8 million to $10 million infusion that will go primarily to ramp up the company’s sales and marketing capabilities. Although all but one of Protein Discovery’s nine present employees are now located in offices and a lab in a Gay Street loft, the sales force that Witkowski is assembling will be based on the east and west coasts with a presence in the middle-west as well. “That’s where most of our pharmaceutical company customers are,” he explains.

Tech 2020’s Rogers identifies several other promising start-ups that could be candidates for venture capital but adds that they may not be far enough along in proving the market potential of their products to qualify as yet.

At least, the availability of venture capital in this area should be greatly augmented when they are.