(FORTUNE Small Business) – Biotech is booming again, and the scramble among states and cities to lure life-sciences firms and their young, affluent workforces has intensified. But attracting biotech can be an expensive and risky business, and that is where E. Jonathan Soderstrom steps in. As managing director of Yale University's Office of Cooperative Research, he has the job of creating companies around lab discoveries. At Yale his work not only brings in $25 million in annual royalties from some 36 biotech firms he has helped hatch but has also sparked an urban revival in some of New Haven's toughest neighborhoods. He discusses the bounty with FSB's Patricia Gray.

TEN YEARS AGO NEW HAVEN WAS A POSTCARD FOR URBAN DECAY. TODAY IT IS ENJOYING A BIOTECH BOOMLET. HOW DID YOU DO IT? In the early 1990s, Yale started to realize it had an untapped resource: its life-science laboratories. Some faculty were beginning to ask whether their innovations would find a path to market. That's when tech transfer--that is, building companies around innovations--became a priority at Yale. We had challenges, but we also had some significant assets.

SUCH AS? Yale is preeminent in the life sciences; it is among the top five universities in terms of research grants from the NIH, the National Institutes of Health. We are strategically located between Boston and New York City, and there are a lot of venture capitalists in those cities looking for good investment opportunities. Ten percent of the venture capital community are alumni of Yale, and they are a strong, loyal force. Also, this part of the state is home to several large research labs for the big pharmaceutical companies. We knew we could recruit top management talent for our startups from those companies.

HOW DO YOU JUDGE YOUR SUCCESS? We set a goal of three to four new companies a year. We actually average close to five. To make the cut, a company has to be adequately funded by real, independent investors. Getting blue-chip investors is a key factor for success in this business.

Many states and communities believe that they can create a biotech industry by building office parks and research centers. In fact, some of them are pouring millions into such developments, hoping that if they build, biotech will come.

WHAT DO YOU THINK OF THIS STRATEGY? It's risky. For a biotech company, real estate costs are a tiny asterisk at the bottom of the balance sheet. The big money is in equipment and talent. Biotech companies aren't going to relocate simply because they can save a few bucks on office space. So here's the correct equation: Get the companies up and funded, and the builders will come.