Incubating profit

Frazier and Delphi Ventures’ recent exit from a medical device incubator looks more like a private equity play than your typical start-up facility support. Dave Keating reports.

When venture capital firms help fund start-up incubation centres, they’re usually looking for an early introduction to promising young companies. Having good candidates for investment all in one place can make a venture capitalist’s job a lot easier.

The reasoning to get out is fairly simple; We were offered a very nice price for our stake.

Nathan Every, Frazier Ventures

But a recent transaction in Durham, North Carolina is putting that logic on its head. Synecor, a Durham-based innovation centre for medical device start-ups, has just been the subject of a sale that’s netted two early venture investors a supposedly handsome profit. Synecor was one of the many medical device incubators founded after the disappointing performance of such start-ups in 1995 and 1996 made both public and private investors turn tail and run from the sector. Though many of these centres have run into financing difficulties, Synecor has been successful in attracting investors for both itself and its spin-outs.

The centre attracted $10 million in investment in 2000, and since that time has produced one exit, the sale of BioStent to Guidant in 2003. Two additional companies have raised a good deal of funding, Manlo Park, California-based BaroSense and Research Triangle Park, North Carolina-based InnerPulse. But the biggest success story from the incubator thus far could be the profit two of its backers are going to receive from the sale of their stake in the incubator. Seattle-based Frazier Healthcare Ventures and Menlo Park, California-based Delphi Ventures are currently in talks to sell their stake in Synecor to Ascent Biomedical Ventures and Synergy Life Science Partners. According to Frazier general partner Nathan Every, the offer is fairly large.

“The reasoning to get out is fairly simple; We were offered a very nice price for our stake,” he says. “With any investment, when you’ve been in it awhile and you’re offered a good price for it, it’s time to get out.”

Nathan Every, Frazier Ventures

Assuming the two venture firms will be making a significant profit from this investment, this could be introducing a whole new methodology to investing in incubators in the same way one would invest in a company: an early investment looking for a profitable exit down the line.

“I haven’t heard of any others [making money off an incubator exit],” he says. “It’s pretty rare. But it’s been a good return for us.

Every adds that the firm will still be able to keep the relationships they’ve built with the entrepreneurs at the centre, and leverage those into still getting an early spot for investment. However he adds that the exit won’t enable the firm to both cash out and maintain first priority for investment.

“I think we’ve gone from being first-in-line to being second-in-line,” he says. “I think our relationships are strong enough with Synecor that we’ll call them for deals, they’ll call us for deals.”

Still, second-in-line is not a bad place to be after already making a profit on the incubator investment.