insights (2005-33)

Venture Capital Sprouts in Knoxville

Making the Knoxville area a hotbed of high-tech enterprises has long been the holy grail of economic development hereabouts—all the more so since UT and Battelle jointly took over management of Oak Ridge National Laboratory in 1999. 

Yet while more than 30 area-based ventures have been hatched since then, drawing upon the fruits of ORNL research, most of them remain in a fledgling stage of development.

A big impediment to their growth has been a dearth of venture capital needed to fund the progression of their ORNL-licensed technologies into marketable products. An effort to launch a $30 million TennesSeed Fund to meet this need foundered in 2003 (though a smaller offshoot has recently invested upwards of $1 million in each of two Knoxville ventures.)

Hopes arose when Battelle dug into its deep pockets and committed $150 million to a venture capital fund intended to spur commercialization of Battelle’s own Columbus, Ohio, research endeavors and those derived from the four national labs it manages. But the managers of this Battelle Ventures fund, who are based in Princeton, N.J., have not yet seen fit to include any ORNL licenses among the five start-up companies in which somewhere between $10 million and $20 million has been invested to date.

Nor have the several sizable venture capital firms based in Nashville, Memphis, and Atlanta shown much inclination to invest in the Knoxville area. Until quite recently, the one local company that’s known to have received funding from any of these firms was Sarcon Microsystems, which got $7.5 million in 2001 for perfection and production of infrared cameras and fire-fighting detectors derived from ORNL technology. But the company to whom Sarcon had outsourced its manufacturing couldn’t deliver, and Sarcon went down the tubes in a way that can’t have helped the climate for venture investing here.

Today, however, that climate is about to take a dramatic turn for the better. Announcement of the formation of a $35 million venture capital pool funded entirely by local investors is a great credit both to the individual investors involved and to ORNL’s director of technology transfer and economic development, Alex Fischer, who shepherded the fund to fruition. The idea for the fund hatched when Knoxville business patriarchs Jim Clayton, Jim Haslam II, and Rodney Lawler visited Batelle’s headquarters in Columbus and got excited about the workings of Battelle Ventures.

“This was just what I have been looking for. Let’s establish a similar fund in Knoxville,” Clayton said. But it was Fischer who devised an organizational structure that gave them comfort putting their money into the high-tech arena foreign to their own business experience and who then attracted a total of 12 investors into the fold. “Alex Fischer can herd cats,” said Lawler, who is one of them.

The new fund has been christened Innovation Valley Ventures, drawing upon the moniker for the area coined by the ballyhooed Jobs Now! Initiative, which Fischer also chairs. But Innovation Valley Ventures won’t operate independently or exclusively in the valley. Rather, it will be run in tandem with Battelle Ventures, whose four Princeton-based partners will make all of the investment decisions in conjunction with a fifth, yet-to-be-selected partner, who will be based in Knoxville.

Having a seasoned venture capitalist here to oversee local stakeholdings is expected to boost the area’s investment appeal not just to Battelle Ventures but also for other members of a venture capital fraternity whose biggest brothers are in places like Boston, Austin, and Silicon Valley. Those fraternity members frequently co-invest in each other’s deals with diversification of their holdings as a prime objective. So Innovation Valley Ventures will be taking stakes in ventures elsewhere in the country as well as pulling money in.

Clayton says formation of the new fund is not a philanthropic or even an economic-development undertaking. “This is designed to be a money maker, and we shouldn’t apologize for that,” he says. “But we all feel good about it because it should benefit the area because of its expected national visibility, with the inflow of funds to ventures here just about equaling the outflow over time.”

Batelle Ventures partner Jim Millar says that investing in companies with ORNL-licensed technology is “just a matter of timing, of finding the right technology with a large enough market potential.” He’s frank to say that none of ORNL’s licensees presently fit the profile but hastens to add that “several could, prospectively, depending on which direction they take. They are going after markets that aren’t yet well defined.”

The investment needs of fledgling ventures conventionally get divided into three stages: 1) seed money to perfect a technology into a product and assess its potential; 2) bridge money to sustain a company until its products are tested and ready to be rolled out; and 3) growth money to support full-scale production and marketing efforts. Some venture capital firms invest only in stage-three companies that are already generating revenues, but Millar says Battelle is interested in participating at all three stages.

Venture capital is by no means the only source of financing a new enterprise, and many entrepreneurs recoil against it. “We’ve avoided venture capitalists because they want to own too much of our company and take too much control,” says Mike Crabtree, CEO of Idle Aire Technologies, which is progressing with by far the largest start-up of any company in the Knoxville area in recent times. Idle Aire, which provides an array of creature comforts to truckers in their cabins at rest stops without having to idle their engines to power them, has raised $115 million in equity capital through private placements by investment bankers and is close to consummating $160 million in bond financing to extend its reach to more than 100 truck stops in 28 states.

On the other hand, the founder and CEO of the one ORNL licensee to have gotten a recent infusion of venture capital professes to be well satisfied with its terms. He is Chuck Witkowski, and his biotech company Protein Discovery closed last month on a $2.1 equity investment on the part of a Memphis-based firm in conjunction with the local Southern Appalachian Fund. That investment was the sixth by Southern Appalachian in start-ups scattered across East Tennessee, and with three other pending it will have fully committed its $12 million in resources that has been the region’s sole source of venture capital up to now.

© 2005 MetroPulse. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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