ROCKY MOUNT,After a nonprofit foundation announced plans in August to pump more than $40 million into the venture capital market to boost the biotechnology industry across North Carolina, a parade of venture firms met with officials to pitch their services, touting their investing expertise and their past experience in biotech.

In the end, Golden LEAF, the organization responsible for using a portion of the state’s tobacco litigation settlement money to promote economic development activities, chose to give the bulk of the money to two venture firms with very little investing experience and limited exposure to the biotech market.

Golden LEAF officials announced this week that $30 million would go to Durham-based Catalysta Partners to form the basis of a new $120 million fund, called BioVista, targeting later-stage biotech and biomanufacturing companies. Another $10 million would go to the fourth fund now being raised by Aurora Funds of Durham, and $2 million would be invested by Tryon Capital of Chapel Hill, both for early-stage deals, officials said.

But Aurora Funds is the only one of the three with a track record of successful biotech investments, having backed public companies companies such as Natus Medical and ViroLogic and promising startups like Nobex, Merix Bioscience and Cropsolution through its first three funds, which totaled $70 million.

Between them, Catalysta and Tryon Capital manage about $6 million and have made less than a dozen early-stage investments, some of which have been in software companies, according to information the firms provided earlier this year to Local Tech Wire.

Track record not considered

Valeria Lee, executive director of Golden LEAF, says the foundation’s investment committee interviewed a number of venture firms, including powerhouses like Intersouth Partners and A.M. Pappas & Associates and smaller firms like Franklin Street Partners and Eno River Capital before selecting the three funds to support.

“We considered many recommendations and talked to everybody we could, and we think we’ve got a group (of funds) that will accomplish our goals,” she says. Lee also adds that the venture capital investment is part of a proposed $85 million economic stimulus package designed to build biotech companies and create related jobs in rural parts of the state.

Still, Golden LEAF’s decision stunned many people in the investment community, who felt more experienced investors like Intersouth or A.M. Pappas would get a chunk of change from the foundation.

“I don’t know who’s making the investment decisions over there, but I would think that a track record would count for a lot more than being able to draw up a nice plan,” says one industry insider.

Lee counters by saying that Catalysta is assembling a team of biotech experts to run the BioVista fund – people who have experience in running later-stage companies in that market, if not investing in them.

“If you look at the people involved with the company … it’s a very impressive group,” she says.

Team approach

Catalysta partner Clay Thorp, who will serve as general partner for BioVista, is a co-founder and former president of Xanthon, a defunct drug discovery technology company, and was director of business development for Novalon Pharmaceuticals, which was sold to a Swedish firm for $106 million two years ago. He currently serves as interim chief executive for Synthematix, a Durham bioinformatics company.

“This will be a much larger entity than the Catalysta organization,” Thorp says of BioVista. “We’re building a team with the requisite life sciences experience, M.D.s and Ph.D.s.”

The fund already has signed up Ken Lee, who formerly headed Ernst & Young’s national life sciences practice and was president of A.M. Pappas, as a venture partner.

It also is assembling a scientific advisory board and a business advisory board to review information and make investment recommendations, Thorp says.

Tom Shenk, a Princeton University molecular biology professor who sits on the boards of Merck and Cell Genesis, will chair the scientific committee, while Tim Gupton, a Raleigh CPA who has worked with numerous startups, will head the business panel.

Although Catalysta’s investments have been limited to seed-stage deals, Thorp says the firm has done a lot of consulting work with later-stage companies and that he and his partners are experienced entrepreneurs.

One person familiar with Catalysta calls the Golden LEAF investment “a tremendous coup” for the firm, saying, “This completely transforms them from a management services company to a legitimate venture fund.”

No strings attached

Golden LEAF is giving BioVista six months to raise a $90 million match to its $30 million investment, although that deadline could be extended, Lee says. If the firm can’t put the fund together, “we may have to revisit the matter,” she says.

Thorp is confident BioVista can launch its fund next April, saying that other institutional investors, whom he declines to identify, have expressed interest in participating.

After earlier saying that the foundation would give preference to venture funds committed to investing the money in North Carolina-based companies, Lee says Golden LEAF put no restrictions on any of the three funds. Tryon Capital has committed to invest only in Tar Heel startups, she says.

“We’ve learned a lot about venture capital in recent weeks,” she says. “If you put strings on an investment, you’re setting yourself up for failure and the firm up to not deliver.”

And Lee still believes most of the Golden LEAF money will remain in the state, even without strings. For example, Aurora typically invests about 70 percent of its funds in North Carolina companies, she says, and the foundation’s money will accounts for just 13 percent of the firm’s total fund.

Thorp anticipates finding numerous deals close to home. But he says investing in biotech companies located elsewhere can still impact the state economy since they might have close ties to clinical trials or pharmaceutical companies here.

“I see a large number of ways money can be invested in North Carolina-affiliated companies, even though we have no mandate to invest a certain percentage of funds that way,” he says.