The Arch approach to effective tech transfer

It’s been an exciting year and half for Arch, a venture firm spun out from Chicago University’s technology transfer office at the start of the nineties. One of its top bets in Juno Therapeutics – a company it was intrinsically involved in starting – has paid off big, raising the seventh largest round in biotech history before storming into an IPO 12 months after launch. In addition, the venture capitalist has now raised its eighth fund, attracting $400m. Keith Crandell, co-founder of Arch, sat down with GUV’s Gregg Bayes-Brown to talk about where it all came from, what makes Arch special, and where it is going next.

How did Arch come about?

In 1986, Walter Massey, vice president of research at Chicago University at the time and previously director of Argon National Labs, took the initiative to form the wholly-owned subsidiary Argon National Laboratories University of Chicago Development Corp.

Chartered with the brief to create new companies and to license technologies, the notion was that if there were spinouts created, there would be more jobs and more economic activity. This entity would then be shortened to Arch from Argon Chicago. We then went on to start a couple of companies and do some licensing, and quickly realised that we didn’t have much leverage for commercialisation without a venture fund. So, we went out and raised a venture capital fund which took around 14 months to raise $9m.

We eventually made about $50m for the university from the royalties and equity positions from our initial companies, and about 3,000 other licenses from that five year period. We became a private independent group in the early nineties following a friendly separation from the university, and renamed as Arch Venture Partners.

What drove the separation?

Venture capital funds inside of universities is not an inherently stable model. There were a lot of competing interests there, and also a not-for-profit running a for-profit venture capital fund is a remarkable balancing act. From the university stand point, the initial five years were an experiment to see what would work. After that, once you’ve got publically traded companies and drug companies, the profile of the entity evolves. The trustees of Arch were excited to continue, but it became more complicated in a university setting.

There was also the traditional J-curve. We’d had some losses, and at the time we spun out, our successes were still a year or two from showing cash. As a result, there was a question whether the capital backing Arch should be redirected to sponsoring research and education or used to commercialise. At that point, there needed to be some evolution.

Most universities don’t consolidate intellectual property particularly well across multiple institutions, and tend to see themselves as competitors. In Arch’s case, we understood how to do those types of deals. We gave everybody a piece of the equity, we gave everybody a small royalty, and we covered the patent expenses with performance payments in there. That made it easier for other universities to work with our startups as they were essentially co-founders of the effort.

That’s the formula that we ended up rolling out across the United States over the following 15 years or so. In the last ten, we’ve also been working in Asia and Europe.

What’s the relationship between Arch and Chicago like today?

We have to get up every day and go find new ideas, and Arch has about 200 companies we’ve co-founded with academics. I’d say we’re working with the top 1% of academics, and our job is to find six to eight new companies per year, so we’re not in a situation where we are trying to do every deal coming out of an institution.

In terms of the ongoing relationship between Arch and Chicago, we’re all alumni so we’re all active in that way. I’m on the board of the Polski Centre at Chicago University, and people like Bob Rosenberg over there can steer people towards us. We’ve had a number of companies out of the university over time.

So, we don’t have a formal relationship with Chicago – that ended with our second fund – but after 30 years, if we hear about something and can’t sell our way into the deal, we don’t deserve to be in it.

With Chicago exiting after the second fund, who invests in Arch’s funds today?

Major university endowments, foundations, state pension funds, wealthy individuals, some corporations, Asian and European limited partners. When you are raising venture capital funds, you want to have a diverse range of limited partners. It helps to have geographically anchored limited partners to introduce us. As an American, it can be very difficult if you show up in China or even the UK.

What sort of support do you offer your portfolio companies?

We do capital, we have some of our staff jump in as interim CEOs or chairmen of boards. Each deal is idiosyncratic, so each requires a different combination. We don’t expect academics to join the companies. We’ll generally try and take a couple of post docs or recruit out of the lab, and then we’ll go and find what we consider A-players in management and company building disciplines, so we spend a lot of our time trying to find the folks with the proven track record, and weaving them into the startup fabric.

We’ll be looking to own 20-30 per cent of a startup over time, so we do deals with other investors and we’re not a control investor.

We have to make sure that we’re in all the rounds of a company, from early to late, to make sure that the management has the insider option for finacing the company. In some special situations, we have jumped in where we knew the people really well, or there was a special technology opportunity. But if we do 25 companies per fund, there is ever only going to be one or two of those.

Juno Therapeutics must have been a very exciting deal for you – how did Arch find working with them?

My partner Bob Nelson conceptualised the Juno round. We had the anchor relationships at different institutions and with leading academics. Bob had a shared vision of how a company like Juno could be put together, and helped recruit some management to lead it. Bob did an exceptional job of attracting top people, both on the academic and business side. There were a number of thorny issues that had to be resolved on the licensing standpoint through combining the entities, and then he had to go out and make the introductions to the various investor groups to raise the larger funds of capital.

If all those institutions had attempted to go alone on it, then I think you would’ve had a sub-optimal outcome, frankly. All of them would’ve struggled and spent time elbowing each other to establishing some kind of leadership. By consolidating them and getting them all to work together and share in the success, they were able to build in a very short period of time a leading company. And when you’ve got that type of leadership, you are able to attract the talent and the capital.

There’s a lesson there, Christmas future in a way, for tech commercialisation. I’ve seen some extraordinary progress that universities have made in the past twenty to thirty years compared to how things were back in the day. But there is another chapter to this, another epic, and that is trying to fully understand not just what it takes to get the series A raised and send startups into the wider world and hope it all works out, but you want to be thinking a couple of steps ahead. That’s going to require even more growth and evolution on the part of universities’ commercialisation efforts to achieve that.

&n
bsp;

Do you perceive tech transfer in the future to be more collaborative and aimed at creating critical mass?

That’s right, particularly in the therapeutic and biotech areas. The second you start a biotech, you are essentially committing to raising nine figures. You can pretend that you’re not doing that, but that’s what it takes to get a product to value inflection points. You can imagine that you are doing wonderful things by starting a company up in the early stages and then stepping back and letting market forces take over. But the truth is that the whole package involves thinking through those additional steps.

What is Arch’s investment strategy for the years ahead?

We’ve been in biotech since our first fund, and most of our experience comes from biological or physical sciences. We really define ourselves as looking at the physical sciences as well as the biological side. And then we look at the overlap between those two areas, where most of the new knowledge is coming from. That’s been very exciting for us as it leverages all our understanding and has allowed us to create a lot of new companies in that area.

We co-founded Illumnia out of Tufts University, on the gene-sequencing side, and are doing $2bn in revenue today and have a market cap of $24bn. We want to be doing more of the same, which is to find the absolute top academics, couple those with the best management, syndicate with other venture capital folks, and then push those companies to be global leaders. Easy words to say, very hard to do.