Photo by Alan Kim | The Roanoke Times

Randal J. Kirk, Third Security founder, stands in front of the company headquarters.

About Third Security

• Third Security is an independent, private equity and venture capital firm that manages investments in public and private companies.
• Formed in 1999.
• Employs about 50 people in two offices, one in Radford and the other in San Francisco.
• The firm has launched six funds, including New River Management I through V and NewVa Capital Partners.
• Key employees include Randal J. Kirk, senior managing director and chief executive officer; Krish Krishnan, senior managing director and chief operating officer; Rob Patzig, senior managing director and chief investment officer; and Marcus Smith, senior managing director and general counsel.

Some of Third Security's investments

• Cyntellect

Third Security led a $15.1 million round of venture investing in the San Diego-based life sciences company in late July. Cyntellect uses living cells in life science research and cellular therapy.

• Intrexon

The Blacksburg-headquartered life sciences company announced in May that it had received $25 million in financing from New River Management V, a private investment fund managed by Third Security. Intrexon develops new ways to fight complex, intractable diseases. At the center of the company’s efforts is the combined use of engineered, multifunction genes and special gene activation compounds.

• Halozymes Therapeutics

The San Diego-based biopharmaceutical company announced in April that Third Security’s New River Management V had agreed to purchase $32.1 million of Halozymes common stock.

• Clinical Data

In mid-July, Third Security’s Randal Kirk purchased 2.25 million shares in the Newton, Mass.-based biotechnology company for a total of $49.5 million.

Definitions

What is private equity?

Private equity refers to equity securities of unlisted companies. Private equities are generally not liquid and thought of as a long-term investment. Private equity investments are not subject to the same high level of government regulation as stock offerings to the general public. Private equity is also far less liquid than publicly traded stock.

What is venture capital?

Venture capital is the money and resources made available to startup firms and small businesses with exceptional growth potential. Most venture capital money comes from an organized group of wealthy investors.

SOURCE: www.FundingPost.com

RADFORD -- A few months after Randal J. Kirk became Southwest Virginia's first billionaire, the businessman sits in his sleek, modern office in Third Security's hillside headquarters. He is discussing failures. His company's.

From Third Security's plush digs and the 10-figure fortune it manages, it is hard to believe the asset-management firm has failed, at least in any substantial manner.

But Kirk insists.

"We talk about our failures all the time," he said, blue eyes twinkling. "We hate them. ... we wouldn't have a successful track record if the failures didn't really bother us."

Take Harvest Pharmaceuticals. Third Security began investing in the prescription drug company in early 2003, thinking its plan to sell niche pharmaceutical products at low cost would make a good business. A year after Harvest opened in Independence, Va., however, operations there closed.

After realizing their investment was a mistake, Third Security executives eventually sold off the products and began searching for new opportunities, Kirk said.

The decision was a blow to Independence. Local officials had viewed Third Security's investment as a boon to the struggling community, and U.S. Rep. Rick Boucher, D-Abingdon, had heralded it as "a tremendous victory for the economy of our region."

For Kirk, however, shutting down Harvest just made business sense.

"We like companies that can be market leaders," he said. "This one clearly was, by definition, a market follower."

To find such high-flying companies, Third Security executives often travel the world, stopping in Germany, Australia, even Iceland, before returning to their swanky, art-filled headquarters. In Radford.

Largely unknown

Founded by Kirk in the late 1990s, Third Security manages private equity and venture capital investments in public and private companies, particularly those in technology and life sciences.

In its early days, the company had six employees and managed "a few tens of millions in assets" -- almost all of it his money, Kirk said.

Since then, Third Security has grown to employ about 50 people in two offices and control "over a billion" dollars, according to senior directors.

In July, the firm announced its most recent investment fund at $250 million. And in the next year or two, executives say they plan to double the company's Radford operations in terms of both space and staff.

Yet despite Third Security's significant resources, the firm is largely unknown in the region and does relatively little community outreach.

Housed in a former hotel, its offices are somewhat removed from other big business, and its successes often go unannounced and unheralded.

"They were known in investment circles, but seemed to have a low profile in the public eye," Ray Smoot, chief operating officer and secretary-treasurer of the Virginia Tech Foundation, said of his early interactions with the firm. "It seemed to me that they were focused on developing the investment business rather than gaining a lot of publicity."

Since 2004, Third Security has joined with the foundation and Carilion Clinic to co-invest in, and manage, NewVa Capital Partners, a fund designed to support entrepreneurs who are either already operating in Southwest Virginia or willing to relocate here.

In contrast to its NewVa partners, both local heavy hitters, Third Security carries little name recognition among residents. Most of what is known about the firm is about its founder, a man with a reputation for confident, high-stakes business deals.

In April, Kirk, who Virginia Business Magazine ranked as the state's sixth-richest resident with a net worth of $1.2 billion, gained particular notoriety when he sold New River Pharmaceuticals to a British drugmaker.

As part of the $2.6 billion deal, the New River Pharmaceuticals founder sold his shares in the company, reportedly netting between $1.2 billion and $1.46 billion.

Some of that money likely went into Third Security's investment pool, although Kirk, 54, would not disclose how much of the company's capital is his own.

Fueled by investments from Kirk, his employees and an undisclosed number of outside investors, the firm has launched six investment funds.

According to a Thomson Financial Venture Economics report, four of Third Security's funds ranged in size from $7 million to $21.8 million and represent a total of $52.3 million. Company executives would not confirm these numbers, saying Third Security does not comment on figures it has not publicly disclosed.

The firm's latest fund, New River Management V, closed at $250 million.

'We usually require control'

With so much money up for grabs, Third Security receives a steady flow of investment applications from companies looking to grow.

"Globally, we probably see 20 things a month easily, and we're out looking for things," said Rob Patzig, senior managing director and chief investment officer.

Of the eight portfolio companies the firm names publicly, four are in life sciences/biotechnology/biopharmaceuticals; two are in communication technology; one is a media solutions company and another develops and manufactures magnetic bearing and starter-generator technologies.

In reviewing potential additions to its portfolio, Third Security is selective.

"We don't do a lot of deals," Patzig explained. "Generally, in a portfolio with a value ... about like ours, you'd probably find 40 or 50 companies in it, maybe as many as 200 or 300. We have maybe a dozen."

As a result, Third Security is able to invest a significant amount of employee time and resources in each portfolio business.

We're "very heavily involved," Kirk said. "We usually require control or control-like features in our portfolio companies.

"The companies we invest in tend to be smaller companies, at least initially, and we think we can provide quite a lot of assistance to those companies," Kirk explained. "We're not entirely a financial organization. We, in fact, are not interested with ... simply investing passively."

Just ask executives with Intrexon.

Since relocating to Blacksburg from Cincinnati in 2004, the life sciences company has received $31.5 million in funding from Third Security investment funds, including close to $1 million from NewVa Capital Partners.

Intrexon President and Chief Executive Officer Robert Beech said the money has allowed the company to expand rapidly and, as a result, "we can do a higher volume of genetic materials, as well as the testing of those genetic materials."

Yet with capital has also come significant involvement from Third Security employees.

Patzig, and Vice President Matt Crisp sit on Intrexon's board of directors, and Beech said Crisp spends roughly 50 percent of his time working at Intrexon's offices in the Virginia Tech Corporate Research Center.

"Third makes it very clear up front that they bring to bear the full capabilities of their sophistication and support for portfolio companies to help increase significantly the probabilities of success," Beech said. "Most entrepreneurs underestimate all the risks, all the challenges, that are facing them as they start out their ventures. Those of us that have been around for a while appreciate that it never hurts to have sophisticated, smart help when it's offered."

Greg Feldmann, president and chief executive officer of First National Bank and co-founder of Gryphon Capital Partners in Roanoke, said such heavy involvement is more common among investors in early-stage companies than it is among investors in later, or expansion, stage businesses.

For Third Security, he noted, it has proved to be "a real strength."

"They are very hands-on with their companies and provide a lot of ancillary services to the company, beyond just giving them money and getting reports on their progress," Feldmann said. "I think that's one of their hallmarks."

But it isn't for everyone.

"Some companies don't want that," Patzig admitted, and choose to seek financing elsewhere.

For those companies that do, however, the rewards can be substantial.

"Right now, I am in an entrepreneur's dream situation," said Victor Iannello, founder and president of Synchrony, a Roanoke County technology company. "We have these very exciting commercial opportunities, and we have the resources behind us to make it happen."

"If we don't make it happen," he added, "it'll be our fault -- it's not because we don't have the money to do it, because we certainly do have the financial backing."

Synchrony has received $1.2 million to $1.3 million from NewVa Capital Partners and $3.7 million to $3.8 million from Third Security, Iannello said.

Iannello said the money allows his firm to develop and manufacture magnetic and electronic systems for high-speed rotating machinery.

Without it, he noted, "Synchrony would have been a nice technology development consulting company that probably could have run until the day that I retired, but it would've never really fully achieved its full potential."

Regional benefits

Before Iannello knew about Third Security, he sought capital from a handful of other companies in Northern Virginia, Baltimore, Atlanta and New Jersey.

Local options, however, were severely limited.

Asked whether he was aware of other private equity/venture capital firms in the Roanoke or New River valleys, Iannello said, "certainly none with the resources that they [Third Security] have."

"I think you would have to go at least to Richmond or Northern Virginia to find something even close to it," Smoot agreed.

As a result, regional business leaders say Third Security's continued presence and success in Radford are exceedingly important to area startups and their ability to access the funding needed to grow.

"Venture capital investment is usually considered to be fairly high risk, and VCs usually want to be able to keep an eye on their investments," said John Williamson, chief executive officer of Roanoke Gas' parent company RGC Resources in Roanoke, and a Synchrony board member. "The further away you are, I think the less likely they are to invest in you."

Historically, venture capital firms have concentrated in areas such as Silicon Valley in California and in New England, pockets known for their highly successful technology companies.

According to the National Venture Capital Association's 2005-2006 Year In Review, 147 members were in Northern California and 71 were in New England. Not surprisingly, a first-quarter 2007 MoneyTree report from the association and PricewaterhouseCoopers, found Silicon Valley captured $2.17 billion, or nearly 31 percent of the $7.1 billion distributed to U.S.-based companies, throughout the quarter. Companies in New England received $976 million.

By comparison, Southwest Virginia has long been overlooked -- a fact that has proved problematic as business and community leaders attempt to maneuver the region's economy away from manufacturing and toward technology and knowledge-based industries.

"If we want to help the community develop ... with more technology-related companies, more entrepreneurship and the like, then private equity and venture capital is the mother's milk of that type of development," explained Dr. Ed Murphy, chief executive officer of Carilion Clinic. "It's of singular importance to have those funds available here."

And, because Third Security is in Radford, the hope is that some of its funds will funnel down to businesses in its back yard.

"I think there's certainly a desire or hope that Third Security is here for the long term and will continue to plow capital back into local firms," Williamson said. "We expect they will make smart capital investments and we hope that they will be here."

They might not be.

'Geographic agnostics'

"We did not start with the intention of focusing investment on the region," said Kirk, a Radford University graduate who has family ties to Southwest Virginia. "We just happened to be based in Radford."

And although the company has made big-dollar investments in Blacksburg, Radford and Roanoke, its interest runs far beyond the Roanoke and New River valleys.

In addition to Intrexon and Synchrony, Third Security's portfolio includes Clinical Data of Newton, Mass., Halozyme Therapeutics and Cyntellect in San Diego and unnamed companies in San Francisco and Australia.

Some area businessmen say that's exactly the way it should be.

"They have a reputation for being very pragmatic and tough investors; in other words, they do good deals," said Jim Flowers, director of VT KnowledgeWorks, a business incubator and accelerator based in the Corporate Research Center.

"I think a lot of people wish they would throw more money around in a more loose fashion, but that's a wish [and] personally, I think that's an unfair expectation.

"People are in the investment business in order to make money," he added, "not to do economic development."

Sychrony's Iannello agreed.

"At the end of the day, they're not going to make investments that are what I call 'charitable investments,' " Iannello said.

"They're not going to invest in a company -- nor do I think they should invest in a company -- that makes everybody feel good, and then the company ends up going belly up in a year or two."

Instead, Kirk and his employees simply go wherever the opportunities exist.

"We're actually geographic agnostics," Kirk said. "We're interested in making the most attractive investments -- the ones in which we can contribute the greatest amount of value -- and we don't really care where they are."