Obtaining sufficient capital resources for theinitial financing of biotech startup compa-nies is essential for a nascent venture’s long-term success. For example, recruitment ofthe best researchers, an expensive proposi-tion, is critical for establishing a necessarytop-quality research program if a company isto have a shot at success. Furthermore, sig-nificant financial resources are needed toassure that researchers have sufficient fund-ing to pursue their ideas for a prolongedperiod of time. This is crucial for optimizingthe research and developmental output of abiotech startup.

In Scandinavia, where biotech is under-going a sudden spurt of support, thisrequirement for capital is magnified by thefact that European investors have a longertime horizon for success. This means theremust be an upfront commitment for largerpools of capital than if investors were merelylooking for a quick return on their invest-ment. Yet despite these caveats, venturefunding is increasingly available for the ini-tial financing of biotech ventures in theMedicon Valley of Scandinavia.

Public sources of financeSeveral sources are available for the initialfinancing of biotech startups in Scandinavia.Typically, the idea for a company comes fromresearch performed in academia, which isfunded by local grants and government pro-grams. The funding for research at this levelis on the order of $10,000 to $20,000 per year.This financing is strictly noncommercial, andoften the grantor of these funds demands aclearly defined barrier between the publiclyfunded and commercial aspects of a project.Recently, academic institutions and fundingagencies in Scandinavia have begun includ-ing provisions for “pay-back” financing or

“forced patenting,” requiring researchers totake the steps necessary to establish the intel-lectual property rights that develop frompublicly funded research. As an incentive, aninventor can receive $30,000 to $40,000 inadditional funding in exchange for patentinghis or her work. The inventor also stands toreceive approximately 30% of any futurepatent royalties.

Another initial source of capital inScandinavia are the so-called businessangels—informed capitalists who as individ-uals have the capital resources to make a pri-

vate investment in a startup venture. Often,however, the business angel’s most importantcontribution is knowledge, or intellectualcapital, because most were themselves entre-preneurs who successfully started their ownfirms. This experience and know-how isinvaluable for a startup to surmount themany hurdles to becoming self-sustainingand profitable. Table 1 lists several sources ofinformation on locating potential angels.

Another growing source of initial financ-ing in Scandinavia derives from so-calledsites of innovation, or incubators. Theseorganizations, funded by a mix of private andpublic monies, administer research anddevelopment facilities and basic researchequipment for a diverse collection of entre-preneurial projects.

They typically fund initial basic research

NATURE BIOTECHNOLOGY VOL 17 SUPPLEMENT 1999 http://biotech.nature.com BE33

and the proof of concept studies necessary toseek further financing from larger privateventure sources. At these sites, projects canquickly—over weeks to months—gatherenough evidence to prove to the prospectiveventure capitalist that the work is supportableand the developmental risk is proportionallylow. Sites of innovation provide both initialfunding, typically $40,000 to $50,000, andlaboratory space and equipment to the entre-preneur at a favorable price. In exchange, thesites often demand part ownership of thestartup, typically in the range of 5–20%.

Private venture capital: due diligenceDuring the first half of the 1990s, the world-wide financial community recognized thehigh risk involved in funding biotechnologybusiness ventures, particularly in the US andthe UK. As a result, available private venturecapital more or less evaporated. During thistime, the biotechnology venture capitalistwas educated, sometimes painfully, aboutthe specific properties an investor shoulddemand of biotech projects. It was recog-nized that a thorough and specialized processof due diligence was necessary to decreasethe risk of investing in low-potential, high-risk biotech ventures.

This process of due diligence demandedspecialist knowledge about basic scientificresearch evidence, the clinical application ofbasic scientific results, and development and

REGIONAL DEVELOPMENT

Financing biotech ventures in ScandinaviaScandinavia’s Medicon Valley is experiencing a spurt of funding, prompted by a combination of government and private capital.

Thomas Tscherning, Lone Frank, and Florian Schönharting

Florian Schönharting (fs@bankinvest.dk) is a managing director and Thomas Tscherning(tt@bankinvest.dk) is an analyst at BankInvestBiomedical Development, Toldbodgade 33,P.O. Box 9011, 1022 Copenhagen K,Denmark. Lone Frank is a science writer in Copenhagen (lonestar@isa.dknet.dk).

Table 1. European funding information on the Internet.

European Commission–DG III– http://europa.eu.int/comm/dg03/publicat/bio/index0.htmBiotechnology

Community Research and Development http://www.cordis.lu/src/s_016_en.htmInformation Service (CORDIS)

GrantsNet–AAAS http://www.grantsnet.org

Investorlink http://www.investorlinks.com/service-venture-directory.html

The Danish Growth Fund http://www.vaekstfonden.dk

Sites of Innovation (DTI Innovation) http://evu.dti.dk/forsker.htm

Medicon Valley Academy http://www.mva.dk

Copenhagen Capacity http://www.copcap.dk

© 1999 Nature America Inc. • http://biotech.nature.com©

199

9 N

atu

re A

mer

ica

Inc.

• h

ttp

://b

iote

ch.n

atu

re.c

om

BE34 NATURE BIOTECHNOLOGY VOL 17 SUPPLEMENT 1999 http://biotech.nature.com

REGIONAL DEVELOPMENT

marketing of biomedical products in a largerpharmaceutical company setting. As veryfew venture capitalists had this background,they kept their investments away from thebiotech market for several years. Manybiotech project entrepreneurs, therefore,still find the step of going from the incuba-tor environment to the venture capitalistinvestment the largest hurdle to becoming abiotech company.

The amount of initial investment from asingle biotech venture capitalist typicallydoes not exceed $6 million. The issue ofquickly resolving patent applications andproof of concepts demands a swift initialinvestment followed by a larger investment.This implies that a lead investor injects asmall amount of capital to assure the syner-gy of the patent portfolio, the scientificresults, and the research and managementteams.

Thereafter, both to diversify risk but alsoto increase the long-term relationships

between investment houses, venture capital-ists often syndicate in biotech investmentsover a longer range of time. Short-term refi-nancing of biotech projects is not an opti-mal approach, as the entrepreneur has toattract funds on a competitive basis in eachperiod.

An efficient solution can only beachieved through a long-term contract thatallows for inter-temporal risk sharing.Another word for this is staged financing,whereby specific milestones have to be satis-fied before a refinancing of the projects bythe same group of investors is to occur. Inthis way, the funds will be allocated by theentrepreneur as intended, regardless of howthe funds are provided over time.

Scandinavian countries have recognizedthe need for government-supplied capitalresources for startup companies. InDenmark, the government sponsored fundis named VækstFonden, and in Sweden thename is Industrifonden. They typicallyoperate as adjuncts to the venture capitalist,in that they supply approximately 30–50%of the total initial investment. This capital issupplied as a loan to the entrepreneur at afavorable rate (5–10%) and does notdemand equity. In addition, loan payback isdeferred or forgiven if the project does notmeet its stated goals. Other countries havesimilar same organizations (see Table 1).

To diversify the risks inherent to these

Pharmaceutical alliancesare often seen as the HolyGrail for a startup venture.

projects, the entrepreneur can commit toalliances with either academic research lab-oratories or with pharmaceutical compa-nies. In the academic alliance, the goal is tohave a research problem guided by an expertin the basic scientific area, with the actualresearch done by a PhD in the laboratory ofthe expert. An added benefit is that theoften-expensive equipment needed for suchresearch is already at the site. Thus, expensesare kept low while many possible ways forreaching the goal are studied, tried, andeither adopted or abandoned by the biotechcompany. This method is widely used inEurope, where even small biotech compa-nies fund an academic research program,thereby typically acquiring ownership of thepatents from the research. One such exam-ple is Bavarian Nordic, a Danish-Germanbiotech company upholding extensive col-laborative alliances with research institu-tions in Munich.

Pharmaceutical alliances are often seenas the Holy Grail for a startup venture, inthat they validate the young company anddemand strict adherence to a certain strate-gy demanded by the pharmaceutical compa-ny. Though often seen as a panacea, biotechcompanies should be careful not to wedtheir personnel and intellectual property toa strategy of research difficult to abandon ifthe strategy seems unprofitable. It is oftenwise for the biotech company to keep asmuch research in-house, or at least out-license specific tasks to other smallerbiotech companies, thus increasing thevalue of the company. This is more true inEurope than in the US, where many biotechcompanies may give away shares of the com-pany (long-run upside potential) for a larg-er capital resource alliance with a largerpharmaceutical company (short-run upsidepotential).

Eventually, the prospect of taking a com-pany public faces every entrepreneur. Theentrepreneur sees this as another way toacquire the financing needed to grow anddevelop the company, while the venturecapitalist sees the initial public offering asthe endpoint of their venture participation,allowing them to cash out of their initialinvestments, i.e., the exit strategy. This is ofcourse the same case in Europe.

ConclusionsThe European financial setting might betough to penetrate for a startup biotech can-didate, and as situation that is detrimentalto the many possible early projects needingventure capital financing in the short run.But this hardship in the race for capitalresources will probably select for the bestbiotech projects in the long run, with thelowest risk of failure joined together withthe best profile of yields. ///

© 1999 Nature America Inc. • http://biotech.nature.com©

199

9 N

atu

re A

mer

ica

Inc.

• h

ttp

://b

iote

ch.n

atu

re.c

om