Honing the Edge

Badger State's tech boom

  • Article by: THOMAS LEE , Star Tribune
  • Updated: March 23, 2011 - 4:52 PM

Part 2: A look under the hood at Wisconsin's biotech start-up machine reveals a powerfully successful combination of academic and commercial cooperation.

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Carl Gulbrandsen, managing director of the Wisconsin Alumni Research Foundation, which commercializes University of Wisconsin-created technologies.

Photo: Glen Stubbe, Star Tribune

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MADISON - There was a time at the University of Wisconsin-Madison when starting a company ranked somewhere between gambling and arms dealing.

Faculty members shunned entrepreneurship because it seemed to conflict with the school's true mission of conducting research and educating students, a debate that still rages at schools across the country, including the University of Minnesota.

"Prior to 1992, very few faculty started companies," said Thomas (Rock) Mackie, chairman and co-founder of TomoTherapy Inc., who still teaches medical physics at the University of Wisconsin-Madison. "It was almost frowned upon. But now it's actively encouraged."

What changed? Experts point to a number of factors -- luck, generous tax credits, research breakthroughs. But say ''innovation'' in Madison and one word repeatedly surfaces: WARF.

Founded in 1925, the Wisconsin Alumni Research Foundation is a private, nonprofit organization that commercializes technologies created at the University of Wisconsin. The group, along with University Research Park (URP), is widely praised for creating one of the country's most dynamic and successful environments for entrepreneurship and tech transfer over the past 30 years, one that rivals top schools such as the Massachusetts Institute of Technology and Stanford University.

Wisconsin's track record has caught the attention of business, political and academic leaders in Minnesota, where repeated attempts to create the climate to grow high-tech start-ups -- the so-called "next Medtronics'' -- have stalled. Indeed, Minnesota has lost start-up companies to the Badger state, where entrepreneurs often can find more financial support.

WARF's unique structure -- it's independent but works closely with the university -- allows it to avoid school bureaucracy and adopt a fast-and-flexible approach to tech transfer. Many schools often jealously guard their intellectual property, which can scare off outside investors and companies, experts say. Critics often knock the University of Minnesota for these reasons.

"We're like an 85-year-old start-up," said WARF managing director Carl Gulbrandsen. "It permits us to take risks. We can think more commercially. We aren't academics. We allow the university to focus on academics."

In some ways, Wisconsin's sense of urgency and Minnesota's lack of one is not surprising.

Minnesota is home to 19 Fortune 500 companies spread out across multiple industries, including heavyweights like Target Corp., 3M Co., UnitedHealth Group and Medtronic Inc. Wisconsin is home to 10 Fortune 500 companies, about half of them in manufacturing.

Stung by lower-cost competition from India and China, industrial Midwest states over the years have tried to expand into high-tech growth industries like biotechnology, especially in Wisconsin, home to the country's most industrial workforce.

More pressing needs

"Wisconsin was a Rust Belt state with heavy manufacturing losses sustained in the early 1980s," said Randy Olson, a vice president for economic opportunity for the Initiative Foundation in Little Falls, Minn. "Leaders in government and education realized that the economy had to transform itself and become less reliant on manufacturing, with an emphasis on technology development."

Olson said WARF jump-started a tech boom.

"Aggressive licensing of UW intellectual property through WARF created a valid and reliable pipeline" of tech start-ups, he said.

Gulbrandsen says WARF tries to be very friendly to entrepreneurs. For example, students and faculty own their technologies and are not required to go to WARF. (However, U.S. law requires WARF to manage any technology created at the university that's funded with federal research money.)

"If we invent it, we own it," Mackie of TomoTherapy said.

The organization can take equity stakes in start-ups, resulting in lower licensing fees for them to develop the technology. Faculty and students can receive both founders shares and royalty rights to their inventions. WARF also pays entrepreneurs 20 percent of the start-up's gross income upfront, before it deducts expenses. If WARF chooses to liquidate its shares, it will pay entrepreneurs 20 percent of the proceeds upfront.

By contrast, the University of Minnesota, which owns all inventions, determines compensation on a case-by-case basis. If a start-up is sold or goes public, entrepreneurs receive one-third of the school's stake in the company.

WARF-bred companies have scored huge payouts. Hologic Inc. acquired Third Wave Technologies Inc. for $580 million. Drug firm Roche purchased NimbleGen Systems Inc. for $272.5 million. That success helps inspire other faculty to start companies, said Doug Cameron, a former clean-tech venture capitalist who's now chief science adviser to Piper Jaffray & Co. in Minneapolis.

'WARF was extremely helpful'

"WARF encouraged faculty to start companies," said Cameron, who taught chemical engineering and life sciences at the University of Wisconsin-Madison for 12 years. "But it needed role models to make it easier for faculty" to do so.

Mackie, the medical physics professor, co-founded TomoTherapy in 1997. The company developed a dual CT scanner/radiation therapy device that could better target cancer cells. Under WARF's guidance, the company went public in 2007 and raised $180 million, one of the state's most successful initial public offerings. Today TomoTherapy generates annual sales of $200 million and employs 650.

"WARF was extremely helpful," Mackie said. "They found us our first VC money. They have a progressive spirit. WARF really has a culture that's not about whether we should start companies based on university technology but how."

WARF has built a portfolio most investors would envy. In 2007, the organization's net assets totaled $1.95 billion, a 17.3 percent gain from the previous year, according to federal tax documents. That includes $53.7 million in licensing and royalty income and $282.9 million from the sale of assets. WARF donated $83 million to support university research that year.

That financial prowess gives WARF clout with investors. Venture capitalists will often ask WARF to invest in their start-ups and vice-versa, Mackie said.

"VCs come to them," he said.

Soul and shape

If WARF can give start-ups a soul, then University Research Park provides them physical shape. The 300-acre park is home to 115 companies, including start-ups working on diagnostics, gene therapy and pharmaceuticals. Those companies collectively employ 4,000 workers who enjoy an average annual salary of $62,000. URP also hosts the WiCell Research Institute, a WARF subsidiary that controls the university's patents on human embryonic stem cell technology.

Like WARF, URP is also an independent nonprofit organization but closely works with the university and WARF.

"We get the best of both worlds," said URP director Mark Bugher. "The model is extremely efficient. We try to replicate what an entrepreneurial real estate company would look like. ... We're joined at the hip with WARF. We create the physical infrastructure for faculty to create companies."

Minnesota's University Enterprise Laboratories tried to emulate URP. The St. Paul facility is also run by an independent nonprofit organization, for example. But it's lacked state support and a strong connection to the University of Minnesota. The Biomedical Discovery District is the U's latest attempt to spur commercialization by clustering its research buildings and entrepreneurial facilities together on campus, a model that resembles URP.

The Madison-based research park is a small city. It hosts a small business bank, a venture capital firm, a website development company, and two child-care centers -- services start-up firms might find useful. URP is also building a 90,000-square-foot "Accelerator" office for more developed start-ups and recently opened a 6,000-square-foot Metro Innovation Center in downtown Madison for student entrepreneurs and computer engineers.

Next week, the Madison Planning Commission is expected to approve plans for University Research Park II, a 270-acre site that can field 200 more companies. The city is already spending $6 million in federal stimulus money to build roads and intersections near the park.

WARF and URP have created a real culture of innovation and urgency that's missing in Minnesota, said Peter Bianco, director of life science business development at Halleland Health Consulting in Minneapolis.

"There is a real desire to succeed in Wisconsin," Bianco said. "The state has no stodgy culture. It's a culture of newness, a desire to try new things. Minnesota is like the sleeping giant. We're not living up to our potential."

Thomas Lee • 612-673-7744

  • about this series

  • A continuing series on innovation in Minnesota.
  • related content

  • A bio border battle

    Wednesday March 23, 2011

    Part 1: Wisconsin has biotechnology investment down to a science, bounding ahead of Minnesota with a broad, tax-friendly strategy. Coming tomorrow, part 2: Badger State's tech boom.

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