Biotechnology: Shortage of Venture Capital Endangers Entrepreneurship

Biotechnology is key in the 21st century. The fact that it is now harder for new biotechnology firms to establish themselves in Germany than it was several years ago, is therefore quite justifiably a cause for concern. It is now more difficult to find providers of venture capital to finance biotechnological business ideas.

15 per cent of biotechnology firms founded between 1995 and 1999 received venture capital. Many of them would certainly not have been able to establish themselves had they not found an investor. If venture capital providers continue to show such reserved investment behaviour over a longer period, this sector may experience economic decline. Further development of the biotechnology industry in Germany may be endangered. This is the finding of a current analysis carried out by the Centre for European Economic Research (ZEW) in Mannheim.

There are several reasons for the current difficulties facing those hoping to secure venture capital for the establishment of a new firm in the biotechnology sector. Firstly, an ever decreasing degree of acceptance for biotechnology products in the market, as well as continued management deficiencies in biotechnology firms, are resulting in providers of venture capital putting higher requirements on biotechnology investments. Furthermore, any venture capital invested in the biotechnology sector cannot be expected to yield particularly high returns. Since the end of the euphoria surrounding the "New Economy" and the extreme fall in the exchange rate, young biotechnology firms have had poor prospects in the stock market. Buying shares in biotechnology firms is therefore not particularly attractive for venture capital firms. In addition, biotechnology firms must compete with other businesses who already receive funding from a venture capital provider, and which must therefore continue to be financed.

Looking at the actual allocation of venture capital, it seems that particular branches of the biotechnology industry have received significantly more investment than other. Such branches are likely to suffer to a greater extent from the reduction in the amount of venture capital now available. Receiving 31 per cent of all venture capital invested in the biotechnology sector; developers of new biotechnology products receive the most investment. Such developers rarely become producers. Particularly where medical products are developed, an alliance or partnership with an established pharmaceutical firm is necessary. This facilitates the long and expensive process involved in transforming an active ingredient into a medication and having it cleared for introduction to the market.

Providers of both technical and non-technical services for product developers receive the second largest proportion of funding. They receive 26 per cent of all venture capital provided. These businesses include in particular, numerous providers of platform technologies. Such technologies can be widely used and ensure that innovation processes in product development are as efficient as possible. These include bio-information, combined chemistry and functional geometrics. The high proportion of service providers funded by venture capital is a result of a significant interest on the part of providers of venture capital in financing platform technologies. This interest is largely based on hopes that platform technologies will find greater acceptance in the market, and that products will have shorter development times than bio-pharmaceutical products.

The third group of businesses include providers of laboratory equipment or systems. These businesses receive only six per cent of all venture capital.

It is also apparent that the various branches within the biotechnology sector attract the interest of providers of VC to different extents. Businesses developing medical products for example ("red" biotechnology) have particularly good chances of receiving venture capital. 31 per cent of all product developers and service providers of "red" biotechnologies are recipients of venture capital. Together, however, "green" (agriculture and food) and "grey" (environmental) biotechnologies receive only 8 per cent of all investment. This significant difference can be explained by the attractiveness of the medicines market, which is, and will continues to exhibit great potential. Furthermore, unlike the "green" biotechnology market, this market enjoys wide market acceptance.

Contact

Claire Champenois, E-mail: champenois@zew.de

Dr. Oliver Heneric, E-mail: heneric@zew.de