CLEVELAND - Over the past several years, VCs have become increasingly discriminating, often shying away from firms with early stage and untested technologies. For young firms, that has raised the importance of seed investments and grant support.

That might be especially true in the Midwest, away from the biotech hubs on either coast. The fourth annual BIO MidAmerica Venture Forum, held in here last week, aimed at bringing together private companies and VCs, and featured several presentations by companies getting ready for their first substantial venture capital-backed round.

But to get that VC interest, companies have to demonstrate progress with their technologies and pipelines, and that's where the seed funds and grant programs, such as those from the National Institutes of Health, come into play. A number of states now help emerging companies while promoting business development in their regions.

Ohio has the Third Frontier program. Introduced by Ohio Gov. Bob Taft in 2002, Third Frontier is designed to provide $1.6 billion in grants over a 10-year period. The fund incorporates the state's tobacco settlement, as well as additional state money and requires a 2-to-1 in kind or cash match.

"Really, only the California stem cell initiative compares to this," said Baiju Shah, president and CEO of BioEnterprise, a developer of bioscience firms in the Cleveland area, "except that [the Third Frontier is] not stuck in the stem cell debate."

Between 2002 and 2005, $337.7 million has been awarded from Third Frontier, with more than half of that - 55 percent - going to bioscience-related research and development efforts, which span the biotech, pharma and medical device space, as well as research institutions.

A total of 17 biomedical partnerships were formed due to Third Frontier by the end of 2005.

Shah called the program a "long-term strategic investment" to "create pipelines and get companies ready for venture funding."

A $600,000 grant from the Biomedical Research Commercialization unit of the Third Frontier project in 2006 helped Cleveland-based Arteriocyte Inc. prepare for its first financing round, a Series A expected to begin shortly.

Arteriocyte, a 2004 spinout of Case Western Reserve University, is developing stem cell-based angiogenic-inducing products for ischemia.

The support from Ohio "really enabled us to move forward," Donald Brown, CEO of Arteriocyte, told BioWorld Today following his presentation to investors attending last week's forum at the Intercontinental Hotel and Conference Center.

In addition to the state grant, Arteriocyte received in 2005 a $1.4 million Small Business Technology Transfer (STTR) fast-track award to support the Phase I trial of its lead product, ACY001, an angiogenic-inducing autologous-derived marrow stem cell product for ischemia. The company completed the 10-patient safety trial in no-option coronary artery disease patients in July and expects to meet with the FDA in anticipation of filing an investigational new drug application for a Phase II efficacy study in the fourth quarter.

"Since 2005, we've received $2 million in non-dilutive funding," Brown said in his presentation. That, along with a $250,000 seed investment from Case Technology Ventures, has taken the company to the point where it's ready for its first venture round, an expected $14 million. That would be used to support the Phase II efficacy trial of ACY001, as well as preclinical and Phase I studies of its allogeneic stem cells.

"That $14 million should fund us for the next two years," Brown said, adding that the company has submitted more than a dozen additional grant applications, even to the Michael J. Fox Foundation, on the basis that Arteriocyte's cell therapy approach might be successful in neuronal cell survival in Parkinson's disease.

Ohio's Third Frontier money also played a part for Cleveland-based Copernicus Therapeutics Inc., which received $1 million from the program. Incorporated in 1997, Copernicus conducted a $3 million Series A-1 round in 2000, followed by a $2.5 million bridge financing. The rest of its funding has come from grants, including another $1.1 million from the state of Ohio through the Technology Action Fund.

Copernicus expects to close a Series B round in the next six months, and formed an alliance with the Cystic Fibrosis Foundation, which agreed to pay for all development through Phase II of the company's lead product, CFx. That product uses a nucleic acid nanoparticle nasal delivery technology and is aimed at cystic fibrosis.

OncoImmune Inc., of Columbus, Ohio, recently received $4.2 million from the Third Frontier program, together with Ohio State University and the Cleveland Clinic, to partially fund manufacturing and clinical work on its multiple sclerosis drug, CD24. That company, founded in 2004, also has submitted a grant application to NIH to assist with product development.

The Cleveland Clinic also has been a recipient of Third Frontier funding, which it has used, in part, to spin out more than a dozen new companies, such as Cleveland BioLabs, a company founded in 2003 to discover and develop radioprotective drugs. That company, which also has received numerous federal grants from the National Institutes of Health and NASA, went public in July, raising $10.2 million through the sale of 1.7 million shares at $6 each. (See BioWorld Today, July 24, 2006.)

It's not just about companies, though, as Third Frontier is meant to produce economic benefits for Ohio itself, which is seeing a decline in its traditional manufacturing and industrial markets. So far, the move to a more science and technology-based industry seems to be enjoying success.

In 2005 figures collected by BioEnterprise, Ohio had 775 bioscience entities. That figure includes emerging companies, such as Arteriocyte; established pharma and health care businesses, for example, Cardinal Health, of Dublin, Ohio; research and development organizations; and existing companies that have expanded into the state.

Last year 50 companies were either launched or recruited to Ohio, including San Diego-based Amylin Pharmaceuticals Inc., which announced plans to build a $70 million manufacturing facility for its Exenatide LAR product for diabetes in West Chester.