May 8, 2006

'Launch' Pad

John P. McDermott  /  Post and Courier

High-tech business development plan ready for takeoff

The South Carolina Research Authority has operated under the radar for most of its 23-year history, an early stalking horse for the new economy.

To date, the state-chartered organization has served mainly as a contractor for dozens of federal agencies. It has grown to more than 170 employees and expects to pull down $83 million in revenue this fiscal year at the campuses it manages near South Carolina's three research universities. Its statewide economic impact has been estimated at nearly $7 billion in a study by Charleston Southern University.

Over the years, its brainy staff also has nailed the art of transforming academic research into marketable ideas, said Bill Mahoney, its new president and chief executive. "We can cross the chasm between the laboratory and the manufacturing floor," he said.

Now, Mahoney and the authority are looking to bridge another gap. Armed with $12 million in retained earnings, the agency is targeting young companies as part of "SCRA Launch, " a new program that provides promising startups with early-stage financing and, if necessary, office space and other nuts-and-bolts business support services. It is aimed mostly at cultivating so-called knowledge-based firms. "You probably won't see us invest in Hula-Hoops or the next-generation consumer product," Mahoney said.

Approved last year under the South Carolina Innovation and Research Centers Act, Launch is one of several efforts under way to create better jobs and expand the tax base by matching publicly funded research with private-sector needs. Other related measures include the creation of endowed professorships to attract high-profile research scientists to the state. They're all part of a broader strategy to raise the state's dismal average income and replace old-economy jobs being eliminated by machinery and cheap overseas labor.

"It is critical that South Carolina become positioned to grow ... in this new knowledge-based economy we're facing," said Rep. Bobby Harrell, who was a lead sponsor of the Launch legislation.

Mahoney said one way to catch up with high-tech hotbeds like North Carolina is to offer promising yet unpolished business prospects a source of capital that until now has been sorely lacking in the Palmetto State that is, to fill the funding gap for knowledge-based firms on the cusp of the "first product, first customer, first revenue," he said.

"In a nutshell, it's to get these companies from 'friends and family' financing to investment-grade venture capitalists," said Mahoney, who will be touting the initiative at ThinkTec, the Charleston Metro Chamber of Commerce's annual technology summit that gets under way today. "We're helping to cross that."

A private-sector venture capitalist, Robert Fletcher, applauded the Launch concept because it can help solve what he described as a classic chicken-and-egg dilemma for early-stage tech businesses. At the same time, it also could attract more deep-pocketed private investors to South Carolina, said Fletcher of Columbia-based Trelys Funds. "The more seed capital available, the more likely it is that companies get spawned," he said. "The more companies that can make it past that early stage ... the more likely it is that more venture capital will come into the state."

A former software entrepreneur, Mahoney is launching Launch under a strict mandate: He and his team of evaluators are required by state law to invest the first $3 million in the first year, another $4 million the next and the rest in the third. Each qualifying company can receive up to $200,000. The financing can be structured in several ways, such as a loan or equity stake, as long as the funds are technically "recoverable," said Mahoney, who took the helm of SCRA in August."What we look at is what each particular company needs at that particular point in time," he said.

The first checks already have been cut, including one made out in February to North Charleston-based Argolyn BioScience, which is working on a psychosis treatment based on Medical University of South Carolina research. That funding, in turn, triggered a matching grant from a private foundation for the young company, Mahoney said."That what it's all about," he said.

SCRA is reviewing about 50 other business proposals. Its stated goal for the Launch program is to assist or help set up 100 firms around the state within three years, Mahoney said. "We're not lacking in companies we can invest in," he said.

MUSC spin-off First String Research is a case in point. The company, formed by researchers Rob Gourdie and Gautam Ghatnekar, is seeking government approval for a wound treatment that dramatically speeds the healing process while reducing scar tissue. An obvious market is the plastic surgery industry, said Don Olson, an investor who became the firm's chief executive."Our intent is to grow the company until it's an investment-grade opportunity for a bigger company," Olson said.

At the moment, First String is waiting to see if its Launch funding request has been approved. It also is hoping to raise at least $3 million from private sources to conduct further tests. Meanwhile, the SCRA has given the company office space in its North Charleston campus, while spreading word about First String to other South Carolina businesses, such as pharmaceutical packaging companies."That brings credibility to a little organization like us," Olson said.

Mahoney said Launch represents the "third leg" of SCRA's original mission. The state created the authority in 1983, giving it $500,000 in startup money and about 1,400 acres in the Upstate, Midlands and Lowcountry. The idea then was to create an agency that would make South Carolina a player in the applied-research game. At the same time, SCRA was charged with managing its real estate, most of which has been either developed or sold. The authority's third mandate was to invest in and create new businesses for the state. But so far, it has had a spotty record on that front, as the state's Legislative Audit Council noted in a mostly favorable review of SCRA's operations last year.

Mahoney acknowledges SCRA is "playing catch-up ball" with the organizers of other established high-tech havens in the Southeast, such as Research Triangle Park, Georgia Tech and Oak Ridge Laboratories in Tennessee. But he also said his agency has a thought-out plan to speed the process along. "The way we'll catch up is with a high survival rate and a great mix," he said.

For instance, Launch's role goes beyond financing. Also, SCRA is setting up a network of professionals around its three research parks who will agree to work with the startups on various issues as they try to get on their feet. Intellectual property law is one likely example. Lastly, Mahoney said SCRA can draw on its experience as a federal contractor and help its Launch candidates win government work to build their businesses."This is not a short-term process," he said. "But I don't think it's going to take 20 or 30 years before you see a lot of companies come from this."