Tracking Venture Capital Around the World

Image: Anne MacNamara Sophisticated European and UK investors seek potentially profitable deals with US biotechnology startups, which opens opportunities for American scientists at a time of caution in US capital markets. Between January 2001 and the end of March 2002, venture capitalists (VCs) based outside the United States raised 36 new funds to invest wholly or significantly in the life sciences. In the aggregate, those new funds represent $12 billion (US) for the life sciences and other t

Jul 22, 2002
Peg Brickley
Image: Anne MacNamara

Sophisticated European and UK investors seek potentially profitable deals with US biotechnology startups, which opens opportunities for American scientists at a time of caution in US capital markets. Between January 2001 and the end of March 2002, venture capitalists (VCs) based outside the United States raised 36 new funds to invest wholly or significantly in the life sciences. In the aggregate, those new funds represent $12 billion (US) for the life sciences and other technology companies, according to VentureWire, which tracks the private investment industry.

Much of that money is headed to the United States, thanks to the strength of the NASDAQ stock market, where VCs sell their private equities to the public. The success of biotechnology companies in the NASDAQ spurs many overseas VCs to put their money in American companies, says Ramesh Ratan, chief financial officer of Enanta Pharmaceuticals, a Massachusetts-based drug-discovery technology firm that has a history of successful overseas fundraising, including $18 million raised in June 2002. "The international VC crowd feels it has been easier in the past for companies with a presence in the United States to go public, and that's when they make their money," Ratan adds.

STARS AND STRIPES FOR EQUITY American scientists who want to get their ideas out of the university laboratory and onto the market have an unscientific but very real advantage: US roots. US stock market debuts by overseas biotechs, like the stellar one of Iceland-based deCode Genetics two years ago, are the exception rather than the rule.

The rest of the world is catching up with the United States in building machinery for pushing biotechs out of laboratories and onto the public market, says William Mills, an executive with Advent International, which manages $16 billion in venture and other investments. "The US market has the broadest and deepest venture capital infrastructure of any country in the world," Mills says. "Venture capital originated here in the United States as far back as the '40s, and I think it's fair to say it is most highly developed in the United States. Certainly other areas, notably Western Europe, have become quite well-developed over the last decade or so."

Over the past year, however, times have tightened for biotechs on the NASDAQ, causing American VCs to delay making investments. European VCs seem to have adjusted better to the slower, more cautious investing climate of today. Figures from an Ernst & Young study indicate that investment in US biotechs fell by 76% in 2001, while European biotechs saw only a 68% slowdown during the same period.1

When things look bad for biotech investing in the United States, they often look good in Europe. During the 1994 drought in US venture investment, Sequenom, a San Diego, Calif.-based genetic technology firm, turned to the international venture capital markets. The company raised its startup cash from Munich- and Boston-based Techno Venture Management (TVM). "European VCs are more patient than they are in the United States," says Charles R. Cantor, one of Sequenom's founders, who left the chairmanship of Boston University's Department of Biomedical Engineering and Biophysics to become the company's chief scientific officer. "If you have to develop a fairly complicated technology platform before launching products, as we did, it was nice to have that patience."

This spring, London-based MVM closed a £100 million pool of cash, called International Life Sciences Fund II. The money will be invested in seed and startup companies in the United Kingdom, United States, Europe, and Scandinavia. "The United States is the great land of opportunity for biotech," says Stephen Reeders, chief executive of MVM, a life science venture fund with rights to technology developed by the UK's Medical Research Council. "Or it used to be. Right now, the funding environment in the UK is as good as it is in the US."

UK researchers can compete with their American counterparts on the basis of science, he says, but the financial principle of diversification--many eggs, many baskets--means firms like his need to find good opportunities in different countries. "The market cycles are not synchronized between Europe and the United States, so that's one of the reasons why people should look outside the US for funds," Reeders continues. "You can have a situation where the [capital] market is terrible in the US and good here, and the lack of synchronization creates windows of opportunity."

GLOBAL-LOCAL SYNTHESIS Scientists starting companies could make critical mistakes by ignoring local venture capitalists, however. Enanta had strong backing in the United States and Europe to start, and still does, says chief financial officer Ratan. "One of the ways to minimize risk is to make sure other members of the syndicate [group of investors backing a particular company] are equally strong," he adds. "Syndicates put together internationally have the depth and commitment to support the company long-term."

Photo: Courtesy of Abingworth Management Ltd.
 Stephen Bunting

An absence of local support raises questions among potential foreign investors. "The first question we would always ask [of an American biotech] is, 'Why have you not tried to get money locally?'" says Stephen Bunting, a principal at Abingworth Management, a London-based life sciences investing firm that closed a new $225 million (US) fund at the end of 2001.

Abingworth invests in American biotechs, but the UK firm usually seeks a coinvestor in the United States who can keep a close eye on the company receiving the money. Early-stage companies need advice and introductions as well as capital, and early-stage investors are accustomed to giving it, he added. That's not easy to do when the biotech is 3,000 miles away. "Early-stage or seed-stage venture capital is a very labor-intensive activity on the part of the venture capitalist," says Mills of Advent.

If regular contact with investors sounds like mere interference, consider this: A foothold in overseas markets can be an important by-product of collaborating with a venture firm outside the United States. TVM maintains full bases in Boston and Munich, to help portfolio companies expand internationally, says Chris Gilligan, a TVM executive. "It has helped in that we have European contacts and some of our customers are European," reports Sequenom's Cantor. "One of our early investors was from Singapore, and now we have customers in Asia, too."

Peg Brickley (pegbrickley@hotmail.com) is a freelance writer in Philadelphia

1. Ernst & Young, "Beyond Borders: Global Biotechnology Report 2002," 83-87.


Image: Erica Johnson
 
THE GLOBAL MONEY HUNT

What you know can be worth money
Academic investigators who research for publication may already be taking the first step toward getting cash from overseas investors. "Venture capitalists want to see breakthrough science published in all the best journals with an incredibly broad patent behind it," says Robert S. Langer, Germeshausen Professor of chemical and biomedical engineering at Massachusetts Institute of Technology. Langer's labs have created startups, some run by former students and postdoctoral trainees. "We read Science and Nature. We attend a lot of scientific conferences," says Chris Gilligan, a senior associate with TVM, a Munich- and Boston-based investment firm. That reading list helps investors find what they seek: innovation. "What VCs want to see is really cutting-edge science, some real breakthrough that isn't going to be 50 years away to realize," Langer says.

Who you know counts, too
VCs scout biotech talent at international conferences, through university technology transfer offices, and through their considerable network of contacts, including one another. "The VCs are a close-knit community," says Ramesh Ratan, chief financial officer of Enanta. "They live on the phone and on their Rolodexes." Get your closest friend to introduce you to a VC. "It's best if you can get a personal introduction to a venture capitalist through whatever means," says Mills. More is better. "Basically, you want to spread your arms as wide as you can to get the largest number of contacts," says Charles R. Cantor, who left an academic career to cofound Sequenom, a San Diego, Calif.-based biotech.

Hook up with experienced business people, but don't spend a fortune on consultants
"No one person can be all things to a new company," advises Langer. "It's very important to realize that business people can play an important role and good business people are not that easy to find." Experienced entrepreneurs are especially hard to find in Europe. "What is different in the United States and gives companies there an edge is the strength of management and the entrepreneurial risk-taking culture," says Stephen Reeders, chief executive officer of the British investor MVM. Enlisting experienced management can mean immediate entrée for a new biotech. But stay away from people who offer to groom a company for a fee. "Typically, consultants are not helpful in the process of getting venture capital," Mills says. "A consultant is generally viewed as, at best, a neutral and typically a negative by venture capitalists. VCs like to see principals involved in writing their own business plan and finding their own path to the introduction."