VC surprise: Spruce Capital, Xeraya Capital announce first close of new $150M Biogreentech Venture Fund 

January 8, 2015 |

2000px-Location_Malaysia_ASEAN.svgAs a newly-closed venture fund opens for business with a distinctly Malaysian flavor, we look at the state of venture capital and the new role of integrated sovereign investment.

From California and Malaysia comes the news that Spruce Capital Partners and Xeraya Capital have announced the first close of MLS Capital Fund II, L.P. at $150 million.

MLS Capital Fund II, the successor to the $162 million Malaysian Life Sciences Capital Fund, is co-managed by Spruce Capital Partners and Xeraya Capital, which will invest the funds in a diversified portfolio of biogreentech companies at all stages of development. During 2015, the managers intend to focus on expanding the available capital pool and investing in a select group of entrepreneurial entities that meet their investment criteria. The Fund will have offices in San Francisco and Kuala Lumpur, Malaysia, and will target food and energy security, aging population, and sustainability.

Spicy news with a strong hint of Malaysia

Spicy news with a strong hint of Malaysia

Industry veterans will recognize MLSCF for investments in Akermin, Chromatin, Cobalt, Codexis, Gevo, Glori Energy, LanzaTech, Mascoma, and Segetis, among others. Also as a primary catalyst in connecting ventures to the red-hot Malaysian market — where others such as Verdezyne and, earlier, GlycosBio, have found green pastures for development and deployment.

Biogreentech, in MLSCF’s parlance, spans plant and animal agriculture; food, feed and nutrition; bio-renewable chemicals and materials; and adjacent opportunities along the value chain, including “big data analytics,” robotics, production, harvesting and use of natural resources, and synthetic biology.

Looking at the Malaysian investment success story

Observers have taken note of the heavy activity in recent years in Malaysia — which, like many countries in Southeast Asia, has taken a strong interest in biotechnology, but with more success. It starts, really, with the National Biotechnology Policy.

NBP’s purpose is to create an integrated platform for participation by the scientific, business and funding groups to ensure an eco-system that is capable of sustaining Malaysia’s growth and progress in biotechnology.

The policy was launched in 2005, and includes nine “thrusts”, as defined by the Prime Minister at the time, Abdullah Bin Haji Ahmad Badawi (“Pak Lah”):

1. To transform and enhance the value creation of the agricultural sector through biotechnology.

2. To capitalise on the strengths of biodiversity to commercialise discoveries in health-related natural products and bio-generic drugs.

3. To leverage the manufacturing sector by increasing opportunities in bio-processing and bio- manufacturing.

4. To establish biotechnology centres of excellence in the country, where we bring together multi-disciplinary research teams in coordinated initiatives.

5. To build the nation’s human capital in biotechnology via education and training. There is no doubt biotechnology is built from the power of research and human intellect. My Government therefore aims to enhance Malaysia’s knowledge generation capabilities by nurturing research activities and by building a strong human capital base.

6. To apply competitive ‘lab to market’ funding and incentives to encourage committed participation from academia and the private sector, including Government-linked Companies.

7. To improve the country’s innovation system by reviewing the country’s legal and regulatory framework.

8. To build international recognition for Malaysian biotechnology. Biotechnology has become a globalised activity.

9. To establish a dedicated and professional agency to spearhead the development of Malaysia’s biotechnology sector.

It was Thrust Nine that led to the formation of the Malaysian Biotechnology Corporation, entrusted with identifying good value propositions in both R&D and commerce, and to assist these ventures via financial support and developmental services.

Importantly, the Malaysian government decided to “employ an approach that moves away from an infrastructure focus to one that builds on the capabilities of existing institutions. In line with this, the Government will be developing a network or nexus of centres of excellence from existing institutions around the country, to be known as BioNexus Malaysia.”

But let’s also introduce Khazanah.

Parallel to the national biotech policy, there’s the national sovereign development activity, and Khazanah Nasional Berhad is the Government of Malaysia’s strategic investment fund. Khazanah is also tasked to nurture the development of selected strategic industries in Malaysia with the aim of pursuing the nation’s long-term economic interests.

Accordingly, Khazanah has investments in over 50 major companies, both in Malaysia and abroad, and its companies are involved in a broad spectrum of industries. It’s especially active in driving value creation in

in companies controlled by the government, commonly known as Government-Linked Companies, or GLCs. (A recent example, Khazanah recently acquired the outstanding assets of Malaysian Airlines, which has run into headwinds after two crashes in the past year).

Under Khazanah, there’s MTDC, “the complete equation”

This is the Malaysian Technology Development Corporation, the Malaysian Government’s integrated VC company, wholly-owned by Khazanah Nasional Malaysia, with the focus on commercializing research results of universities and research institutions, identifying and transferring emerging and strategic technologies for adoption by industries, and encouraging the growth of technology-based enterprises in Malaysia. To facilitate its operation, MTDC functions as an integrated venture capital company, whose role is to identify, finance and develop potential companies and strategic technology areas.

MDTC has several investment arms, among them:

1. The Commercialisation of Research & Development Fund, for the funding of commercialisation activities of locally developed technologies undertaken by Malaysian owned company.  The technologies can be those developed by the public sector or they can also be the output of in-house research and development  activities by the companies.

2. The Technology Acquisition Fund  was established to facilitate eligible Malaysian companies in the acquisition of foreign technologies for immediate incorporation into the company’s manufacturing activity. TAF’s partial grant enables companies to avoid expensive and often risky technology development stages.

3. The Business Growth Fund focuses specifically on supporting and providing follow-on funding to successful grant recipient companies. The fund provides hybrid grant-equity funding which acts as a transition and a bridge from grant to venture capital  financing. The financial assistant is a mix of two components – a grant portion and an equity portion that is similarly structured but more flexible than a VC financing.

4. The Business Start-up Fund was established to fund new start-up technology-based companies. The Fund incorporates elements of loan and equity, offering companies flexible funding via Convertible Notes (CN) and/or Preference Shares. The objectives of BSF are to support and encourage entrepreneurship; creation of new strategic businesses that are important and potentially scalable; and funding of supporting companies within a technology eco-system.

5. MTDC’s Graduate Entrepreneurship Programme or Symbiosis as appropriately dubbed, is aimed to train selected graduates to become technopreneurs. Symbiosis is a comprehensive programme that covers aspects of commercialisation as well as entrepreneurship. At the end of the programme, selected candidates will lead start-up companies to commercialise technologies from the Universities/Research Institutes (Uni/RI) that have been carefully chosen by MTDC.

Where does venture capital fit in all this?

The national policy recognizes the value in a) creating an entity to source investments and to nurture them towards success and b) tapping other international institutional and strategic corporate funds. Hence, an entity like MLSCF.

Accordingly, MDTC made a strategic investment several years ago and served as co-manager of MLSCF I, which was established in 2006 with $162 million — and was co-managed at the time with Burrill & Co. More recently, Xeraya has assumed the role played by MTDC and Spruce Capital Partners has assumed the role played by Burrill.

In Xeraya, you see how embedded the venture fund is into the overall biotechnology framework, beginning with CEO Fares Zahir, who from 2005 headed the Life Sciences Unit within Khazanah, served as co-manager of MLSCF I, and a board member of MTDC and also Biotechn Corp, not to mention Spring Hill Bioventures, another venture investment entity. Several others of the Zeraya team joined from Khazanah when Zeraya was formed in 2012 — and there are ties also to Sime Darby which recently led the massive investment in Verdezyne, which attrcated both the Malaysian PM Najib Razak and US President Barack Obama to the signing. www.xeraya.com

The US connection

The connection in the US and biotechnology venturing is Spruce Capital, which is essentially the former Burrill Greebiotech team — Ganesh Kishore, Roger Wyse and Greg Young, who are co-managers of Spruce and overseeing the investments made in MLSCF I as well as the new fund. The three made more investments that led to Hot 50 companies than any ivestment team in the world — including the current #1 Hottest Company in the sector, LanzaTech.  www.sprucecp.com

Reaction from the venture principals

“The use of biological process to improve health, agricultural, and industrial processes is giving rise to a new bioeconomy,” said Wyse,. “We believe there are significant opportunities with potential to generate superior returns in these areas to improve productivity, sustainability, quality, and affordability.”

“We will focus on unmet and underserved market needs in the biogreentech space,” said  Kishore. “We will seek out globally competitive technologies with large market potential, and hungry entrepreneurial teams embracing business models that capture a fair share of the value, while addressing global societal needs in food and energy security, an aging population, and sustainability.”

“MLS Capital Fund II builds upon the accomplishments of Malaysian Life Sciences Capital Fund, and enables us to continue propagating global innovation and participate in a unique way within the Bio Green Sector”, said Zahir. “The partnership of leading financial and industrial houses in MLS Capital Fund II is a testament to our commitment to sponsor and grow innovation led businesses”.

The Bottom Line

If you have noticed the momentum out of Malaysia, you haven’t been looking, and the most important driver for that has been the National Biotechnology Policy and the investment and development activity that sovereign funds are creating, which ultimately are attracting institutional and strategic investors to leverage the Malaysian government’s commitments.

And the key word is commitment. Rather than fostering value destruction through policy instability, as in the case of the US, the Malaysian government has been using policy certainty to drive innovation and also leverage direct foreign investment. Further, the Malaysian government in its sovereign activity has been focused on driving science through into stand-up commercial ventures, rather than focusing on basis science and applied independent research which often struggles to connect directly to a national investment return.

result? Worth noting that four of the 12 investments made by the old MLSCF are public entities today — and of course include among the private entities white-hot companies such as Chromatin and LanzaTech

In short, the Malaysian model is a model to the world — it’s really a notable miracle that the 28th largest economy in the world — a player in the G30 but not even close to the G8 — has done so much, and achieved such a high profile globally. Small wonder that Malaysia, which has just 28 million in population, is on target to be the world;s 21st largest economy by 2050 —passing Saudi Arabia, the Netherlands along the way. We note tht that 2012 HSBC report also projected that the top 4 economies in the world would include China, India and Japan.

One of the reasons we have been pointing to “Asia, Asia, Asia” this year.

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