Philanthropist Bill Gates, who has invested in a biotech firm, pledged $1 billion to vaccine programs in June. Credit: AFP PHOTO/BEN STANSALL

In March, the Bill & Melinda Gates Foundation, of Seattle, made a $10 million program-related investment in Liquidia Technologies, a nanotech platform delivery company, based in Research Triangle Park, North Carolina. The equity investment, unlike a grant, gave the Gates Foundation ownership company just like any other investor. This influx of capital can only be good news for biotech startups, says Michael Nowak, a former venture capitalist and now managing director of Yorkville Advisors, in Jersey City, New Jersey. “There never is enough innovative capital,” he says. Venture capitalists, who traditionally operate in the same space, however, may be less sanguine.

Equity investments by foundations come with complications that venture capital funds don't have. “There were certain issues that had to be worked out because they [Gates] are a charitable organization,” says Stephen Bloch, general partner at Canaan Partners, of Westport, Connecticut, and a member of Liquidia's board of directors. An equity investment endows the foundation with added control over the company that it wouldn't have with a standard grant. Having a seat on the board “allows them to have a bigger say in core issues,” Bloch adds. “It's different when you're an investor than when you write a check for a grant, which tends to be a passive activity.”

The added influence should work in Liquidia's favor. The Gates Foundation has experience, expertise and contacts in disease, global markets and potential nongovernment organization (NGO) payers and product delivery that typical startups lack. “They're bringing resources to the table,” Bloch says of the Gates Foundation.

An equity investment does not exclude grant money, however. There's an expectation that future collaborations could be established after Liquidia develops its vaccine technology further. More funding from the Gates Foundation could be in the form of nondilutive grants for projects that Liquidia wouldn't develop otherwise.

The Wellcome Trust, a biomedical charity based in London, has similarly been making investments into independent biotech companies since 2003. As of December 2010, the charity had made 59 investments in companies in the UK, US, Europe, India and Australia, totaling £110 ($158) million. With early-stage startups, The Wellcome Trust often uses convertible loan agreements, which the foundation converts into equity only after it is “reassured the company is sustainable, has good leadership and has credible backers,” says Richard Seabrook, head of business development in the technology transfer office at The Wellcome Trust.

The Wellcome Trust uses a committee of scientists and entrepreneurs to help guide its investments. Seabrook says it's very important that “their decisions are not based on investment return criteria but unmet need and the chances of making a difference.”

Melding the goals of for-profit venture capital with nonprofit foundations isn't straightforward, but John Schaetzl, a consultant who has been working for years to bring foundations and biotechs together, says the key is to focus on aligned goals. “For a vaccine to be a viable alternative in the third world, the company making it has to be a commercial success,” Schaetzl says.

Although foundations are investing in the same types of companies as venture capital funds, at this point, venture capitalists don't view foundations' investments as competition. In fact, it's a case of mutual admiration. “It's not competitive with venture capital. At the very least it's additive, and possibly synergistic, in that in addition to injecting much needed capital, they also bring their unique networks, experiences and organizational footprint to bear in support of their investments. It's a win-win as far as I can tell,” says Bruce Booth, a partner at Atlas Venture, of Cambridge, Massachusetts.

Schaetzl concurs, pointing out that foundations can leverage venture capitalists' financial capital, intellectual capital and investment recognition skills. “The more experts you can get at the table, the better off you are,” he says.