When ARCH Venture Partners and four other firms led a $15 million second round of financing for Nanosys earlier this year, it looked a lot like any other funding announcement.
But Nanosys CEO Larry Bock says ARCH’s unusual approach to finding investments is as vital to Nanosys’ business plan as the money it contributes.
“ARCH is really networked into the university IP scene,” said Bock, a veteran of four other ARCH-funded companies. “We’re using a lot of their know-how and connections. Our company is based on a set of technologies that we’ve licensed from a number of different places.”
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Nanosys holds licenses from Harvard University, the University of California, Berkeley, and the University of California, Los Angeles, to manufacture electronic devices based on nanotubes, nanowires and quantum dots. ARCH also led Nanosys’ seed round of $1.7 million last year.
ARCH Venture Partners was investing in nanotechnology way before it was fashionable because its partners make it their business to recognize big ideas. If they think an idea can yield major applications and a fat sheaf of patents, they’re willing to make a bet.
“We consolidate the IP position early to mitigate our risk,” says Managing Director Keith Crandell, who has been with the firm since its founding and played a key role in perhaps the earliest nanotech venture investment: in Nanophase Technologies Corp. of Romeoville, Ill., whose most famous current product is nanoparticles for use in sunscreen. Nanophase was founded in 1989 and went public in 1997.
Crandell likes the IP potential in nanotech. “Most companies in nanotechnology are very deep innovations and they have very strong patent portfolios.”
Unlike many venture capitalists, who like to see a product idea, a management team and a business plan before they hand over money, ARCH Venture Partners prefers getting into an investment very early, as co-founder or leader of the first round of funding. The principals study top research institutions, looking for inventions that might flourish with a little seed capital and a large helping of business smarts and connections. They take a board seat and actively participate in managing all their companies, as well as leading additional funding.
By staying immersed in research environments, ARCH is able to track fledgling technologies long before they flutter across the radar screens of most investors. One of its investments, Caliper Technologies Corp., began in 1995 as the first company to develop lab-on-a-chip as a commercial proposition, based on research done at Oak Ridge National Laboratory. ARCH Managing Director Robert Nelsen serves on the company’s board.
“When we started, nobody was focused on lab-on-a-chip at all,” said Mike Knapp, Caliper co-founder and chief executive. “People didn’t know what we were talking about. Bob Nelsen and his associates had already identified that area as being of interest. That sets them apart.”
Its strategy is appropriate for a firm that had its roots at the University of Chicago, where several of its principals handled technology transfer for the university and Argonne National Laboratory, which U of C manages for the U.S. Department of Energy. ARCH is a quasi-acronym for ARgonne CHicago, and ARCH Development Corp., a wholly owned not-for-profit university subsidiary, was founded in 1986 to commercialize the bounty of intellectual property generated by the two institutions. Nanophase grew out of research at Argonne, and Crandell got involved with that investment when he was still with ARCH Development Corp.
Confusingly, not one but two groups of ARCH Development Corp. employees found the possibilities so tempting that they branched out on their own. ARCH Venture Partners was first, in 1992. A second, unrelated firm, ARCH Development Partners, launched in 2001. Subsequently, the university abandoned the subsidiary model (and the ARCH Development name) and now handles tech transfer through UCTech, an in-house office.
Headquartered in Chicago, ARCH Venture Partners eschews the usual Silicon Valley and Route 128 outposts in favor of offices in New York, Seattle, Austin, Texas, and Albuquerque, N.M. It has done deals with researchers at more than 30 top research institutions, including not only Argonne and U of C, but also six other Department of Energy labs and a plethora of teaching hospitals and universities.
“They have such strong expertise that they can identify technologies very early,” said Jim Downing, president of the Illinois Venture Capital Association. “They’re very, very good at it or they wouldn’t still be around. The limited partners are the ones that judge the ultimate success of a venture capital firm, and ARCH has been getting funding year in and year out.”
The firm has funded more than 90 companies since its inception and of those, 26 are currently public or have been acquired by other companies. It has put together five different funds and its long list of investors includes not only many of its peers, but also corporate giants like 3M, Hoffman-LaRoche Ltd, Dow Chemical and Johnson & Johnson.
Sniffing out new ideas is time-consuming, and ARCH has 20 full-time employees, which Crandell says is about twice what’s typical for a firm at ARCH’s level. It has $700 million under management.
With a successful exit from Nanophase, small tech continues to be a key investing interest. At any given time, three or four of about 25 portfolio companies will have some micro- or nanotechnology component, Crandell said. These days, his preference is for devices rather than materials. The firm’s investments include Illumina, which makes fiber optic arrays for use in genomics and proteomics; and Surface Logix, which is developing miniaturized bioassays for drug discovery.
“We may look at something two or three times before we go for it,” Crandell said. “It’s not like you have an existing market and an empirical test [for success]. But we’re trying to pick the things that will seem obvious three to five years from now.”