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Autogenesis scores in venture capital pursuit.

Autogenesis Scores In Venture Capital Pursuit

The Anchorage developer of orthopedic hardware has secured more than $1 million in startup investment funds.

Juliann Perrigo, a partner in an Anchorage firm expecting to gross $128 million over the next three years, tells the story of trying to get a venture capitalist to invest in her fledgling company: "You'll never find the money,' he told me. |You'll never make this thing fly.'"

Perrigo says she looked him "straight in the eye and said, |Don't tell me I can't do it. Just tell me how to do it.'"

That was two years ago. Today, her company, Autogenesis Inc., has amassed nearly $1 million in investment dollars from two venture capital firms, the Alaska Science and Technology Foundation, and private investors. It also expects to find the $3 million it needs over the next nine months to go into production.

How did the owners of Autogenesis snare the capital they needed? With a solid business plan, a skilled management team, a unique product, thorough market research, and -- as her retort suggests -- a lot of grit.

"We look for staying power and determination during the startup phase of a company," says Timothy Draper, managing partner of the Polaris Fund based in Palo Alto, Calif. Polaris has just committed $342,000 to Autogenesis. "We talked to the Autogenesis people for more than a year before we put any money into the company and saw that they really knew how to make their cash last."

Autogenesis President John Pursley and his partners talked to more than 50 venture capital firms before getting two of them to buy in. But he now believes Autogenesis talked to the money men too early in the company's development. "Today, I'd do it differently," he says. "Back then, we didn't even have a prototype to show them."

The prototype is a set of computer components that work to automate a technique for regenerating damaged bone, tissue and muscles. Soviet physician Gavriil Ilizarov discovered in 1960 that, if a broken bone is put under tension by orthopedic hardware, it will grow and new tissue cells will regenerate along with it.

The Autogenesis computer components automate the Ilizarov process. They can be attached to several kinds of orthopedic hardware, and they eliminate the need to adjust the stretching devices manually. Because the components enable a physician to stretch the bone in minute increments, the approach also reduces pain, explains Pursley.

"The technique itself was a real stumbling block to our getting money," says Perrigo, "because the process -- growing new bone and flesh -- sounds like a miracle not to be believed. We had to convince both the medical community and the investors that the Ilizarov process really works and that our computer components enhanced the technique."

In December 1989, the Alaska Science and Technology Foundation believed enough in the concept to give Autogenesis $226,000 in seed money to do the basic research and development of the idea. Seed money -- the kind the foundation offers -- is the hardest type to get. Although venture capital firms do sometimes fund basic research, it is becoming less common as the venture capital industry shrinks.

"The heydays of the 1980s are over," says Gaylord Nichols, who chairs the Caltech-MIT Enterprise Forum in Pasadena, Calif. Sponsored by the Massachusetts Institute of Technology, the forum enables entrepreneurs to have their products reviewed by a panel of experts. "Those were the days when you could say, |Give me a couple million and I'll come back in 18 months to tell you if this idea works,'" he says.

Bootstrap Financing. The December 1989 Science and Technology grant saved the owners of the fledgling enterprise, recollects Pursley. "We were about to sell the idea to the Richards Medical Co. in Memphis, because we were nearly out of cash."

Up to that point, Autogenesis had survived on investments from family members, friends, and other Alaskan investors, or "angels," who believed enough in the company to put in $25,000 apiece. "This is what I call |the character-building phase of the company,'" quips Pursley. "It got to the point where my friends and family hated to see me coming, because they knew I was going to ask for more money."

According to venture capital experts, this kind of early-stage financing isn't unusual. Says Nichols, "We have no idea how much capital is in the hands of private investors -- but it's an enormous number: more than the estimated $2 billion raised last year by the professional firms. And it's going to get more important as fewer and fewer young companies get financed by the professional venture people."

To get the Alaska Science and Technology Foundation grant, Autogenesis had to come up with some matching dollars. "A whole continum of funding has to be in place for an invention to go to commercialization," says John Sibert, executive director of the foundation. "We want the grantee to come up with their own resources to match the ones we provide. If they can't, we don't fund them."

Science and Technology's rationale is no different from that of other financiers. "When a company gets critiqued by the forum, we always ask them what sacrifices they're prepared to make," says Nichols. According to Draper, the Polaris Fund, too, encourages the companies it invests in to put up their own capital.

By the end of the 10-month grant period, Autogenesis had put in more than $276,000 of its own resources. "Our grantees always wind up putting in more than they anticipate," says Ann Kampfer, grants officer for the Science and Technology Foundation. "Just about everything short of their firstborn."

With foundation money in hand, Autogenesis started talking to doctors to find out how to build the best prototype the market would respond to and to do market research. It also went to work on patents, on approval from the federal Food and Drug Administration, and on a tangle of legal and regulatory problems. FDA approval came in April of this year.

The partners also put together a revised business plan, which they and potential investors agree is key to getting investor commitment. "I don't know how many of these we've written, but I must have a whole shelf full of them," says Pursley.

Looking ahead to September 1990 when the foundation grant money would run out, the three founders also started talking to venture capital firms in the Lower 48 for second-stage money. "It's a quest that never ends," notes a resolute Pursley.

Autogenesis looked outside the state for major infusions of capital because Alaska has no venture capital infrastructure, though the Polaris Fund is meant to change that. Furthermore, there are restrictions placed by the state of Alaska on the dollar amount a company can take from small non-professional investors.

Though Autogenesis tried to persuade Lower 48 firms to invest more than a year ago, Pursley says now he's glad the quest failed. "Institutional investors have their own agenda, and we would have sold too much ownership at that point. Also, having few resources forced us to conserve them."

Pursley is right about a major investor's agenda. When a company gets venture capital, it usually gets a new partner, who wants to tend its high-risk enterprise directly. Starting this summer, the Polaris Fund will be represented on the Autogenesis board of directors. In return, Autogenesis will get Polaris' money, expertise and links to other sources of capital.

Battling Bias. Rejected by the professional venture capital firms a year ago, Autogenesis sought more private investors "at home." Pursley now sees advantages to that solution: "With local money, we were able to keep control of the company. And it reduced the pressure on us to relocate out of Alaska, which is what the Lower 48 firms wanted us to do. They didn't think anything solid could come out of Alaska."

A related stumbling block was cultural bias against the Soviet technique. "Frankly, some investors wondered, |What could the Russians possibly have to offer?' We had to deal with that, too," Perrigo adds.

Autogenesis' founders believe they overcame both kinds of bias by spending time with potential investors. "That was the key -- spending time with the partners who were to make the business decisions, answering their questions, showing them the technology was solid and so were our business practices. That's what put us |over the top,'" says Perrigo.

Draper offers his own reasons for putting Polaris Fund money into the company. "During the startup phase of a company, the only yardstick the potential investor has for measuring the company is the people. Of course, the investor studies the concept they're selling and its potential market. But in the beginning, all there is, really, are the people," says the California investor.

Draper says he's no different from any other venture capitalist when measuring the people part of a company. "I look at whether they're really focused and determined to make it. Or are they scattered in their goals and their energy? Do they have a track record, and, if not, are they what I would call |chargers' -- people with drive?"

Perrigo and her partners have both a track record and drive. Pursley has 15 years of experience in technology-based businesses, including two start-up firms.

Perrigo has a master's degree in mechanical engineering from Stanford and has managed a wide range of engineering projects with budgets of $10 million plus. She manages Autogenesis' strategic planning and finance.

The third partner, J. Michael Holloway, has more than 20 years of experience in orthopedic surgery, and is one of the first U.S. surgeons trained in the Ilizarov technique.

Perrigo believes a keystone to Autogenesis' success has been the management team. "It's a common thing for technology-based companies to focus on the technology and to neglect finance, marketing and the organization of the company itself," she explains. "That's a mistake. To succeed, you have to first put together a team of people with varied expertise in all aspects of the business."

Nichols agrees: "Technology-based companies tend to focus on the technology to the detriment of other aspects of the business. In the forum, we try to enlarge their vision of the company."

Now that Autogenesis has matured, the partners are confident about finding the $3 million the company needs to see it through the next phase of its growth. Pursley expects the dollars to come from both Alaska and Lower 48 sources: venture capital firms, joint ventures with medical companies, the sale of stock, commercial loans, and an economic development loan from Anchorage Neighborhood Housing Services.

Growth Agenda. Most of the new investment dollars will go toward setting up an assembly operation in Alaska this summer. Autogenesis expects to start producing in September, to start selling in November, and to start making a profit next March. Marketing will be done through existing orthopedic hardware sales outlets.

Perrigo admits it took perseverance to keep going through the long struggle. She says, "I stayed optimistic and never gave up, especially in the beginning when everyone told us, |You'll never make it.'"

Pursley offers a more philosophical reason for the company's survival: "I think Autogenesis was meant to be. This isn't a widget we're building. It's a miracle."

PHOTO : Juliann Perrigo demonstrates how computer components can be used to replace manual adjustments of stretching devices. The smaller increments permitted by computer manipulation reduce patient discomfort.
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Title Annotation:includes related article; developer of orthopedic hardware has secured startup investment funds
Author:Murray, Marjorie
Publication:Alaska Business Monthly
Article Type:company profile
Date:Jul 1, 1991
Previous Article:Northrim's launch.
Next Article:Polaris Fund aims to tap Alaska's investment potential.

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