Tobacco Settlement Investment Board Health Venture Account Request for Venture Capital Qualifications
The Tobacco Settlement Investment Board is searching for a General Partner(s) to manage a portion of the Health Venture Account focused on the South Western Region of the state. In addition the General Partner should be prepared to make investment decisions to support achievement of the vision and strategic intent established by the Board for the Account. This partnership role represents a significant opportunity to participate in the advancement of Life Sciences in Pennsylvania. The Pennsylvania Life Sciences market has traditionally been underserved, in both start-up and early-stage venturing, despite strong biomedical research facilities and a large concentration of life sciences professionals. In recent years through the efforts of a $2 billion commitment to the life sciences Pennsylvania has become a national leader in the development of the industry.
POTENTIAL HEALTH VENTURE ACCOUNT PARTNERSHIP BENEFITS
Transition to Commercialization
The Tobacco Settlement Investment Board hopes to use the Health Venture Account as a catalyst to address the second major stage of a company’s development - early-stage institutional investing. By partnering with the Commonwealth, the General Partner will have access to Pennsylvania’s collective strengths and assets to help bridge the gap between “great ideas” and “great companies.” Sample potential benefits for the General Partner may include: • The opportunity for select access to a robust stream of opportunities that will have been nurtured by a variety of Commonwealth Life Science initiatives (e.g., The Life Sciences Greenhouses, Ben Franklin Partners, The Pittsburgh Tissue Engineering Initiative); • The opportunity to develop and drive the venture capital network in Pennsylvania as the leadinvestor in the first institutional rounds for an underserved, yet highly promising intellectual property (“IP”) market; and • The potential to be the lead investor across the full life-cycle funding continuum, identifying and participating in multiple financing rounds.
HEALTH VENTURE ACCOUNT VISION AND STRATEGIC INTENT
To best enable the Commonwealth to develop the Life Sciences industry and reach its goals, the Tobacco Settlement Investment Board has developed a clear vision and strategic intent for the Account. Most importantly, the Board expects that the Account will contribute to significant economic development in Pennsylvania by directly and indirectly influencing the development of new early-stage Life-Sciences companies over the next 10 years. Venture Capital Goals:
The vision is that the Account, in this instance of up to $10 million will serve as a direct and indirect catalyst to raise $30 million or more of incremental funds, as well as attract the required later-stage capital to ensure a healthy funding continuum. In the first three quarters of 2003 $183 million has been invested in Pennsylvania-based life science companies. This sector has demonstrated growing momentum and this $10 million investment will assist to continue that growth.
Venture Account Projected Focus
Funding Stage Focus: The focus of the Account will be for investments in early-stage companies seeking their first traditional institutional series of funding. It is expected that investment in such companies will typically range from $1-10 million, with an expected average of $5 million per company. In addition to playing a significant role in these early series, the General Partner(s) will be responsible for solidifying upstream leads to ensure a healthy deal flow and for managing downstream networks to bridge the funding continuum. Accordingly, bringing an already established investment syndicate for early and later stage deals will be a critical success factor.
Gaps/ Barriers
Heath Venture Account Vision:
Bridging the Gaps in the Venture Continuumrt-up Mature
Company
Market Segment Focus: The fund has targeted Life Sciences market segments that reflect existing regional strengths within Pennsylvania. This RFQ is to complete the geographical coverage in the state by having the SW Region served by a focused Venture Capital effort. The goal is not to dictate portfolio mix, but to help ensure, as much as possible, segment alignment and geographical balance, in the context of the Commonwealth’s emerging specialties/focal areas. Accordingly, the General Partner’s strength/experiences in any/all of the following segment/regional strengths will be an important asset: • Human Biotech Products and Product Development Platforms: Companies focused on developing diagnostic/therapeutic products leveraging organic/inorganic compounds and/or living organisms; • Medial Devices and Diagnostics: Companies producing physical devices used to deliver biopharmaceutical products and/or equipment used to facilitate diagnosis or therapy; and • Product Enablers: Companies producing/providing tools, technology and/or services, which support the growth of Life Science product/device market segments.
Emerging Pennsylvania Specialties/Focal Areas By Regional Biotech Market Segments LEGISLATIVE REQUIREMENTS ATTACHED TO THE HEALTH VENTURE ACCOUNT
In addition to helping enable the strategic vision the Tobacco Settlement Investment Board has set for the Health Venture Account, prospective General Partners will need to respond to specific legislative requirements outlined by the Tobacco Settlement Act [Act 77 of 2001, Section 305 (f) & (g)]: Act 77, Section 305(f) At least 70% of the investments must be made in companies located primarily in Pennsylvania or in companies willing to relocate significant business operations to Pennsylvania; Act 77, Section 305(g) (1) (i) Each general partner must contribute 2% of the aggregate committed capital as a general partner; (1) (ii) Each general partner must subordinate 5% of the Board’s contribution in terms of the distribution schedule, putting the general partner in a first loss position with respect to the Board; (2) The partnership must provide a preferred return of no less than 5% to all limited partners; (3) The partnership must agree to operate under a prudent expert standard of care; (4) The Board must be given a seat on any limited partner advisory/valuation committee; (5) The Board must be reimbursed for expenses for attending limited partner advisory/valuation committee meetings and partnership annual meetings; and (6) The partnership must issue, to the Board, audited financial statements on the basis of Generally Accepted Accounting Principles.
KEY REQUEST FOR QUALIFICATION EVALUATION CRITERIA
The Tobacco Settlement Board will be evaluating candidates for this investment focusing on a variety of criteria and has identified several that will be particularly important in the ultimate assessment process. These include: • Ability to enable achievement of the Account’s Vision and Strategic Intent (component criteria listed in order of relative importance): 1. Demonstrated capacity, or clearly definable strategy, for serving the Pennsylvania marketplace, including specific geographic areas and/or market segments, especially those located in Western Pennsylvania. 2. Ability to provide additional leverage for the Account. A minimum $3 to $1 match is required but proposals demonstrating additional leverage will score higher. 3. Expertise/experience in Life Science market segments 4. Expertise/experience in Early-Stage investing 5. Strength of upstream/downstream funding networks, relationships, or syndicates
• Ability to meet outlined legislative requirements • Ability to have a first close on an investment fund within six months of a ‘Go Forth’ notification.
SAMPLE QUESTIONS TO FACILITATE RFQ RESPONSE
To assist interested firms in developing a response that assists the Board in understanding that firm’s ability to meet the above-mentioned criteria, the Board has assembled a sample listing of potential questions candidates might consider: Demonstrated Capacity or Clearly Definable Strategy for Serving the Pennsylvania Marketplace, Including Specific Geographic Areas and/or Market Segments: • What experience have you had generally with venture investing in Pennsylvania, and in SW Pennsylvania in particular, with venture investing in Life Sciences? • What non-venture related experience have you had in cultivating businesses in Pennsylvania? • Comment on your firm’s physical presence in Pennsylvania. Does your firm have an office (main or satellite) in Pennsylvania currently? Are any planned for the future? Do any of the firm’s partners reside in the State? Do you have partnerships or other relationships with investment firms that reside in the State? Will you locate dedicated resources in the SW Region of the state? • What is your view of the capacity of Pennsylvania to generate high quality Life Sciences deal flow and spur broader reaching economic development for the next 5-10 years? How do you see your firm fitting into that vision? • What do you regard as the most critical venture challenge for SW Pennsylvania in the LifeScience Industry? • The Health Venture Account will be targeting the early-stage, Life Sciences industry segment and expects to invest most, if not all, of its capital in businesses located in Pennsylvania. (70% minimum in total Portfolio) Describe how these requirements will affect your investment strategy. What are the risks involved in this strategy and how will you manage them? • List the characteristics you would require for a company to be considered as an investment prospect for the Health Venture Account. Ability to Provide Additional Leverage for the Account • Describe your total funding target for a projected fund that would include the Health Venture Account. How would you reach this targeted fund goal? What previous experience demonstrates your ability to reach such a goal? • Indicate whether you would incorporate all or part of the Health Venture Account into an existing fund you currently manage or would form a separate new fund; discuss the rationale for your preferred approach.
• What IRR (or other performance metric) targets would you deem reasonable ranges for this Fund? • Who would the additional investors (e.g., other Limited Partners) include and how would you ensure their alignment with the Board’s strategic vision for the Account? What previous fundraising experiences demonstrate your ability to achieve this? • Is your firm currently raising a Biotech fund? If so, please describe that fund’s focus, targeted size, the date you initiated fundraising, progress to date, committed limited partners, and your plans if the fundraising goal is not met. Please describe the IRR range (or other performance metric) you are targeting for potential investors. Expertise/Experience in \Life Science Market Segments • Pennsylvania has certain regional market segment strengths or focal areas. Please indicate your experiences in working for/with companies that share similar focus area(s) to these targeted segments: Human Biotech Products and Development Platforms. Medical Devices and Diagnostics, and other Product Enablers. • Who are the members of the firm’s Life Sciences team and what are their segment strengths/focal areas? • How do you envision balancing the portfolio to enable some level of representation from the major Pennsylvania market/region segments? What kind of mix is feasible? How would this balance be achieved? Expertise/Experience in Early Stage Investing • Please comment on your Early Stage investing experience (generally and for Life Sciences in particular, if applicable). How has your performance in early stage investing compared to peer funds with a similar stage focus? • Describe your depth of experience as lead-investor for early-stage investments. How did you arrange and manage the syndicate/co-investors? • Describe the number of companies you estimate will be in the Health Venture Account portfolio when fully invested. What percentage of the Health Venture Account ‘s capital would you recommend holding for follow-on investments and what would be your basic strategy for making follow-on investments in Life Sciences companies? Strength of Upstream/Downstream Pipeline/Funding Networks, Relationships, or Syndicates • How would you establish/manage upstream (lead pipeline) and downstream (late stage investor) linkages to ensure a strong funding continuum for investments? • Describe your current, typical deal-flow process, including the volume of investment opportunities (Life Science and non- Life Science) your firm currently receives and considers each month and the pipeline management strategy/process your firm currently employs. • Who are your most significant VC/investor networking partners?
• Estimate the number of investment opportunities you would expect to review in the first year if you were involved with the Health Venture Account. What networks/relationships do you have that might supply the pipeline? General Insights on Firm Strategy and Performance • Please provide an overview of your firm, including its general investment strategy, and focus, history of working in Venture Capital, history of the key firm Partners, and general operating model. • Please comment on the performance of your fund(s) relative to peers. How would you expect the fund(s) in which the Account might participate to compare relative to the performance of your former/existing funds? Why? Ability to Meet Legislative Requirements • Please comment on your ability to meet the legislated General Partner requirements. • What challenges exist in meeting the requirements and how do you plan to manage them? Management of Potential Conflicts of Interest • What rules would you propose to avoid any perception of conflict of interest during the course of your partnership with the State?
DISCUSSION OF PARTNERSHIP MODELS
The Tobacco Investment Settlement Board considered various partnership models and dollar allocation approaches associated with the Health Venture Account. The Tobacco Settlement Investment Board has pursued an informal partnership approach of 2 to 4 VC firms to support the Health Venture Account strategy. Individual firms manage a portion of the Health Venture Account and an informal networking or partnership relationship has been established to collaborate on leads, share expertise, etc. • Will you be able to participate within this environment?
ADDITIONAL INFORMATION
The core response to the Request For Qualification is limited to 20 pages; and all material with regard to this Request For Qualification must be received by the Tobacco Settlement Investment Board at 400 North Street, 4th Floor, Harrisburg, Pa 17120 by close of business on March 25, 2005. Additional relevant information is welcomed which might help the board in its consideration of your qualifications. Please send this information in hard-copy form only as an accompaniment to the hard copy of your core response to the Request for Qualifications. • Examples of due diligence reports, ppm and annual reports prepared by your firm.
• Contact information for references including but not limited to, Limited Partners and portfolio companies from funds you have managed, VC funds that have been leads or co-investors for selected portfolio companies, and the accountant and attorney for your current fund. • Any other information you believe would best illustrate your qualifications and those of your firm.