Editor's note: This is the 17th story in a continuing series on innovation in Minnesota.
The idea was to build a university-driven incubator that could breathe life into new biotechnology startups. Instead, Minnesota got the University Enterprise Laboratories (UEL).
The $20 million facility in St. Paul, which opened with great fanfare in 2004, has been struggling to forge a new identity amid a severe economic recession and a diluted, if not ambiguous, relationship with the University of Minnesota.
For one thing, none of the 25 or so companies that inhabit the UEL originated from university research, even though the building is home to the school's Office of Technology Commercialization and the U contributed $2 million to the project.
Minnesota has long flirted with the idea that incubators can stimulate a bioscience industry. In 2007, the Mayo Clinic and the university inaugurated a $25 million, three-story genomics research facility at a Mayo building in Rochester. There have been a few licensing deals, but no companies have yet emerged from the partnership.
The U is also spending $233 million over the next decade to construct four major bioscience buildings in "Discovery Square" on its Minneapolis campus, just a few miles from UEL.
Meanwhile, Tower Investments, a major real estate developer, is also building an ambitious biosciences park at Elk Run in Pine Island, a project backed by veteran San Francisco-based biotech investor Steven Burrill.
Experts caution it takes time for biotechnology start-ups to develop. Still, the experience of University Enterprise Laboratories offer a cautionary tale that buildings alone can't create companies and industries.
What makes incubators successful is a risk-taking entrepreneurial culture, plenty of venture capital money, and strong financial support from the state, none of which are currently present in Minnesota, argues Peter Bianco, director of life science business development at Halleland Health Consulting in Minneapolis.
"It's natural to [construct buildings] because that's what you can see," Bianco said. "It's the physical embodiment of our hopes and dreams. But we don't have the talent or capital here."
Bianco was the first CEO of the UEL before he resigned in 2005. He was an enthusiastic supporter of the project at first, but in hindsight said the project lacked some ingredients crucial to a successful incubator. To facilitate easy interactions with students, researchers and faculty with companies and investors, a university-related incubator should be located on or next to the campus, he said. Also, the UEL predated efforts by the U to repair its then-lackluster commercialization program.
"We were out of sync with the U's tech transfer overhaul," Bianco said.
Analysts also say the enormous size of the building, 120,000 square feet of lab and office space, means UEL has to charge higher rents. And in today's economy, start-ups are trying to conserve cash and are likely to work out of homes or cheaper offices, said Mike McKee, a partner with the Minneapolis office of Baker Tilly, an accounting and consulting firm.
UEL building faring well
Joe Shaw, CEO of Syntiron LLC, said he is satisfied with his UEL lease but says a less-established start-up probably couldn't afford it.
UEL officials say the facility is faring well, even in a difficult economy. More than 95 percent of the space is leased, and bad debts have been limited, said Andrew LaFrence, a partner at KPMG and chairman of UEL Board of Directors. The facility is home to promising start-ups like Syntiron, which is developing a vaccine against anthrax and bubonic plague, and Cima NanoTech Inc., a nanotechnology start-up that was named a Technology Pioneer by the World Economic Forum.
Segetis Inc., a green chemical company in Golden Valley funded by prominent Silicon Valley venture capital firm Khosla Ventures, also has its roots at UEL.
Doug Johnson, who heads the university's Venture Center, said the building's attractive design impresses companies and investors who visit his office.
"Without a doubt, the board is very satisfied," LaFrence said. "UEL has been wildly successful."
Though the U's commercialization problems have forced UEL to "zigzag" its strategy of hosting university-bred companies, the building still hosts student clubs, and some of the tenants have hired students as part-time workers, said Bob Elde, dean of the school's College of Biological Sciences and a past UEL chairman.
Elde says the facility, at University Avenue and Hwy. 280, is ideally located between the St. Paul and Minneapolis campuses.
"It's the hub of very critical activity and the desired spot for start-ups to be there," Elde said.
Nevertheless, the incubator has not met its initial expectations, said Dale Wahlstrom, CEO of BioBusiness Alliance of Minnesota.
"UEL has produced some great companies," Wahlstrom said. "But it has not stimulated the bioscience industry the way that we hoped," such as developing spinoff companies from the U and Mayo Clinic.
The incubator also faces some serious financial challenges. Though the building generates positive operating cash flow, it remains heavily dependent on donations, which accounted for nearly 60 percent of its revenue in 2007, according to financial documents.
Most importantly, UEL faces a 2012 deadline to repay a $13.8 million bond it primarily used to fund the renovation of what was a Target Corp. distribution center. The board is trying to refinance the bond but given the weak commercial real estate market, LaFrence says he's not sure what will happen. There's been speculation that the UEL shopped itself to the university, but LaFrence said there were no serious discussions.
As a result, UEL is trying to cut costs. It laid off its general manager and hired a real estate firm to manage day-to-day operations.
"To be more efficient, it made sense to go toward more of a real estate model," LaFrence said.
But that strategy carries its own risks.
"In too many cases, the incubator also is a real estate project that has to make real estate sense," Lesa Mitchell, a vice president at the Ewing Marion Kauffman Foundation in Kansas City, wrote in a report. "If filling the space becomes a concern that trumps serving the entrepreneurs, much of the value is lost."
Thomas Lee • 612-673-7744
The Patent Pending blog looks at the difficult relationship between the University of Minnesota and the University Enterprise Laboratories at startribune.com/blogs/pending.