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ARCH Development Fund I Addressing the Void in Seed Venture Capital in the Midwest

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Timothy Lathe-National City Bank-Kalamazoo. Gerald Siegert-University of Cincinnati. Douglas Stewart-National City Bank-Peoria. Duties/Relationship: Meet annually ... – PowerPoint PPT presentation

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Title: ARCH Development Fund I Addressing the Void in Seed Venture Capital in the Midwest


1
ARCH Development Fund IAddressing the Void in
Seed Venture Capital in the Midwest
Thomas L. Churchwell Teri F. Willey Christopher
E.V. Quinn
Locations in Chicago, Illinois West Lafayette,
Indiana Kalamazoo, Michigan Peoria, Illinois
www.archdevelopmentpartners.com 350 W.
Hubbard, Suite 400 Chicago, IL 60610 312-828-9970
2
ARCH Development Corporation 86-June 01ARCH
Venture Partners 94-present
ARCH Development Partners - Fund I June 01-present
  • ARCH Development Corporation (ADC) is a
    not-for-profit wholly owned affiliate of the
    University of Chicago committed to realizing
    commercial value for innovative early stage
    scientific discoveries.
  • ADC was formed in 1986 to license UC and ANL
    inventions to existing companies as well as start
    new companies.
  • ADC was formed to assist the University in
    bridging the funding gap as well as
    implementing the Bayh-Dole Act.
  • ARCH Venture Partners (AVP) is a mid-90s venture
    fund spin-out of ARCH Development Corporation.
  • ARCH Development Fund I (ADFI) is year 2001
    venture fund spin-out of ARCH Development
    Corporation. The ADFI will be managed by ARCH
    Development Partners.

3
Fund Summary
  • Expected Size 30-35 million (50-75 million
    with SBIC leverage)
  • Currently 30 million under management
  • LPs Banks, Corporations, Foundations, Hospitals,
    and Universities
  • Strategy
  • Strategically partner with communities to create
    start-ups
  • Current partners Cincinnati, Lafayette,
    Kalamazoo, Peoria
  • Make pre-seed investments (50,000 to
    1,000,000)
  • Structure deals for optimal early exits
  • Primary Deal Sources University and Corporate
    spin-outs
  • Investments Biotechnology, information
    technology and education
  • Geographic Focus Upper Midwest IL, IN, OH, MI
  • General Partners Experienced investors and
    entrepreneurs

4
ADF I Principals
Team
  • Thomas L. Churchwell - Managing Partner ARCH
    Development Fund I
  • 10 years starting high-tech companies 10 years
    operating experience
  • Raised and managed ARCH Venture Fund I
  • Started or actively assisted starting 40
    high-tech companies
  • BA DePauw, JD Northwestern, AMP Harvard
  • Teri F. Willey - Managing Partner ARCH
    Development Fund I
  • 15 years technology transfer and start-up
    experience
  • Invested in and worked with 25 start-up
    companies
  • Past President of Association of University
    Technology Managers (AUTM)
  • BS U Idaho, MBA Indiana State
  • Christopher E.V. Quinn - Managing Partner ARCH
    Development Fund I
  • Founder NetFuel Ventures, an information
    technology consulting firm
  • Invested in and worked with 15 start-up
    companies
  • Co-Founded the Oppenheimers Emerging Business
    and Technology practice
  • BS Washington University, JD Washington
    University

5
Community Proposal Summary
  • ARCH Development Partners leverage investment
    from an area to help establish a vibrant start-up
    community by
  • Investing in 2-3 life sciences start-ups
  • Establishing a local presence (co-located with
    community partner)
  • Establishing and running monthly networking
    meetings
  • Assisting in the formation of an angel
    network/local fund
  • Working with community to create and populate an
    incubator
  • Bringing other venture funds to community

6
We are especially interested in
  • Type Science/innovation based company. Prefer
    university or corporate owned intellectual
    property as the basis for the spin out (vs
    independent inventor). Life Science
  • Stage Pre-business plan and management team is
    fine. We prefer to act as founders at this
    stage, assist with company formation and
    management and board recruitment and the
    acquiring the necessary intellectual property
    rights.
  • Funding 50k to 1 million for the purpose of
    squeezing risk out of the venture and positioning
    it for further investment or revenue generation.
  • Market The product(s) the company is proposing
    to develop should have a market of 200 million or
    more (that is the companys sales are expected to
    be 200 million or more annually in a reasonable
    time after product launch.)
  • Clear commercialization strategy and competitive
    advantage There should be a realistic idea of
    who and what the competition is and how the idea
    will reach the market in the form of a product.
  • Intellectual property protection The proposed
    product should be based on a proprietary
    position, preferably a strong patent position or
    the potential for one.
  • Management team If the innovator/scientist does
    not have relevant business experience, then a
    willingness on his/her part to participate as a
    scientific/technical advisor and work closely
    with qualified management is required. We love
    to work with experienced start-up company
    managers but are very willing to recruit
    management and work very closely with the company
    to move it forward.
  • Exit. The company or proposed company should be
    one poised for an acquisition exit or in some
    cases an IPO exit.
  • Referral The plan or idea has been referred by
    well respected potential investor or similar.

7
so far
  • 7 rounds of financing. Led 4 of the rounds. 2
    bridges to series A (rounds in process) and 2
    more rounds in the works
  • We said we would concentrate on university
    science-based deals and that we would use our
    network to find qualified co-investors early.
  • Of the 10 companies in our current portfolio, 8
    are university spin-outs and all deals in the
    pipeline are start-ups based on university
    science.
  • Co-investors invested in all financing rounds
    since the first close. We have successfully
    leveraged our investments by more than 4 to 1
    through successful syndication with other
    qualified investors.
  • We said we would balance the portfolio between IT
    and Life science and we would concentrate our
    efforts in communities in the upper Midwest.
  • Of the 10 companies in our current portfolio, 6
    are IT or software related and 4 are life science
    or healthcare related.
  • Five currently reside in Illinois, 3 in Michigan,
    1 in Indiana and 1 in Washington (as a result of
    a merger). Three of the 4 deals in our pipeline
    are life science related. One is in Cincinnati 2
    in Michigan and 1 is co-located with us in
    Chicago for now.

8
Portfolio Companies
Electronic systems level design tool to help chip
designers to dramatically reduce design times of
complex electronic chips www.accelchip.com Prod
uctized/Packaged systems integration solutions
www.adeptia.com Three-dimensional optical
tweezers www.arryx.com Mobile resource
management software solution to optimize and
manage dynamic information. www.mobitrac.com
Growth factor based therapies
www.nephrxcorp.com Sophisticated briefing
service www.nexcerpt.com Enabling tools for
genome research and personalized
medicine www.rubicongenomics.com Sensor
validation and fault detection www.smartsignal.co
m Web-based collaborative corporate training
for profit enhancement www.wisdomtools.com Nove
l therapies for auto-immune diseases
www.xcyte.com
9
Strategic Limited Partners
  • ADM
  • Borgess Health Alliance
  • Bronson Health Care Group
  • Bradley University
  • Caterpillar, Inc.
  • The Dow Foundation
  • Duchossois Technology Partners
  • Illinois Central College Foundation
  • Kalamazoo Community Found
  • Methodist Medical Center
  • National City Bank
  • Purdue University
  • Silicon Valley Bank
  • Southwest Michigan First
  • University of Cincinnati
  • University of Chicago


10
LP Advisory Board
  • 4-5 representatives from major LPs
  • Herbert (Ted) Doan-Dow Foundation
  • Timothy Lathe-National City Bank-Kalamazoo
  • Gerald Siegert-University of Cincinnati
  • Douglas Stewart-National City Bank-Peoria
  • Duties/Relationship
  • Meet annually
  • Conflict of interest resolution
  • Review strategy and valuations
  • Not paid, but expenses reimbursed

11
ARCH Model
  • Partner with Midwestern Universities and
    communities to create start-ups from world class
    technology
  • Apply Time-tested Traditional VC Disciplines
    to
  • Identify Platform Technologies
  • Create Patent Strategy
  • Recruit the CEO
  • Identify and Quantify the Market
  • Create the Business Model
  • Recruit BOD and SAB
  • Raise
  • Manage to Milestones

12
Accelerating New Business Growth
Investment Focus
Focus
Pre-Seed
Seed
Early Stage
Mid-Stage
Exit
  • Raw
  • Technology
  • Technologist /
  • founder/business development
  • Identifying technology via relationships
  • Determining commercial viability
  • Accessing rights/Recruiting CEO

Description Team Needed Keys to Success
  • Product-in-development
  • Plus first senior mgmt team member
  • 250K to 1M
  • Finding development partners
  • Developing business strategy
  • Recruiting BOD SAB
  • Product at beta clients
  • Senior mgmt team formation
  • 1M to 5M
  • Growing the sales pipeline
  • BOD and SAB in place
  • Full customer pipeline
  • Senior mgmt team in place
  • 2M to 20M
  • Managing growth
  • Becoming profitable
  • Identifying exits
  • Business Expansion
  • Public Markets

13
Relationships with Premier Midwest Institutions
Investment Focus
  • Western Michigan University
  • Kalamazoo College
  • Michigan State University
  • University of Michigan
  • Wayne State University
  • Kalamazoo Valley CC
  • Van Andel Institute
  • University of Minnesota
  • Mayo Clinic

Michigan
  • Ohio State University
  • University of Cincinnati
  • Battelle Institute
  • University of Wisconsin
  • Medical College of Wisconsin
  • Argonne National Laboratory
  • Bradley University
  • National Center for Ag Utilization
  • Illinois Central Collage
  • Northwestern University
  • University of Illinois
  • University of Chicago
  • Indiana University
  • University of Notre Dame
  • Purdue University
  • Rose-Hulman Institute of Technology

14
Relationships with Early-Stage Midwest VCs
Investment Focus
  • Avalon/Ardesta
  • EDF Ventures
  • Essex Woodland
  • North Coast Technology
  • Sloan Ventures
  • Tullis-Dickerson Co.
  • Waypoint Ventures
  • White Pines Ventures
  • Coral Ventures
  • Mayo Medical Ventures

Michigan
  • Blue Chip
  • Isabella Capital
  • River Cities Capital
  • SenMed Medical Ventures
  • Mason Wells
  • Venture Investors
  • ARCH Venture Partners
  • Dodi Management
  • Duchossois Technology Partners
  • JFM Enterprises
  • KB Partners
  • Kettle Partners
  • Open Prairie
  • Prism
  • Ravenswood Capital
  • William Blair New World Ventures
  • Centerfield Capital
  • CID Equity Partners
  • Gazelle TechVentures
  • Spring Mill Venture Partners

15
Financial Strategy
Financial Leverage
  • Raise 50-75 million (with SBIC leverage) to
    assure adequate resources to
  • Do the work of seed investing
  • Follow-on in winners
  • Avoid dilution
  • Exit through sales or IPOs
  • Achieve 30 net annual IRR

16
Financial Strategy
Early Exits
  • Determine product focus
  • Perform the early proof of concept experiments
  • Establish relationships with probable strategic
    partners
  • Negotiate license or partial sale to strategic
    partner
  • Reserve to comply with the terms of the
    license/sale
  • Dividend the balance to all shareholders ratably
  • Keep as much of the team together as possible
  • Determine the next most probable product
  • License in new technology if necessary
  • Raise new to develop new products
  • Position for ultimate exit

17
Financial Strategy
Current Market
  • Total investment dollars are falling, with the
    Midwest falling disproportionately (2002 PWC
    Moneytree)
  • California still gets almost half the money (PWC
    2002 Moneytree)
  • Midwest funds continue to invest most of their
    money outside the Midwest (2002 PWC Moneytree)
  • Grant money continues to flow into the Midwest
    (2nd largest region) (2001 DRI-WEFA)
  • IPO markets are quiet (e.g. 6 bio deals in last 9
    months)
  • Acquisitions continue at same historic pace
    (excluding 1999 and 2000 boom years), only
    valuations are lower (2002 PWC Moneytree)
  • e.g., acquisition market looks healthy in EDA (6
    largest players acquired 6 companies in last
    year for 100s of millions each). Five IPOs in
    2001 - 2002 (Internal EDA market research)
  • e.g., pharmaceutical MA actually rose in 2001
    versus 2000 and recent activity continues to be
    strong (2001 PWC Pharmaceutical Insight Report
    and recent internal market data)

18
Financial Strategy
Track Record
  • Three principals have started 35 companies
  • 40 biotech/healthcare, 30 IT/software, 30
    other
  • 20 exits, majority positive, 6 IPOs
  • Virtually all based on university technology
  • Principals take active role recruiting CEO,
    setting strategy, implementing business model
  • Combined net annual IRR 30

19
Summary of Partnership Terms
  • Seeking 2-5 million dollar investments from
    strategic limited partners
  • Final close 7/02 extended to 12/02
  • 80/20 profit split between LPs and GPs
  • 2.5 management fee
  • SBIC leverage may provide additional follow-on
    funds
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