Fifteen years ago, during the halcyon days ofthe American biotech industry, one of themajor differences between Europe and theUnited States was the availability of venturecapital for biotech startups. While it seemedat the time that US startups were awash inmoney, European companies were finding itdifficult to scrape together even the smallestamounts of venture capital funding.

Today, the situation is far different, per-haps even reversed. European investors havediscovered biotechnology, and in the wake ofseveral successful initial public offerings,venture capital has greatly expanded. Thereare, however, some significant differencesbetween the two sides of the Atlantic when itcomes to the criteria for successful venturecapital behavior. These differences are rootedin both material and cultural differences, andpossibly in the kind of companies that willreceive funding in the future.

Fast return on investmentsLooking back over the years, it seems that USventure capitalists have shown a general ten-dency to follow fads and trends in the bio-medical sciences. At any given time, the cropof new companies has typically been domi-nated by a certain new technology¾the fla-vor of the day, so to speak. This was evident atthe industry’s birth, when recombinant pro-teins were all the rage and companies such asGenzyme (Cambridge, MA), Genentech (S.San Francisco, CA), Amgen (Thousand Oaks,CA) and the now-defunct Synergen (Boulder,CO) sprang up and acquired substantial earlyfunding.

Later, combinatorial chemistry becamehot, giving rise to NeXagen (Boulder, CO),Pharmacopeia (Princeton, NJ) and ArQule(Medford, MA), for example. Today, we havethe genomics push, and companies such as

Tularik (S. San Francisco, CA) are receivingventure capital on the basis of their particulargenomics approach to drug discovery.

Thus, venture capitalists in North Americahave been inclined to take chances on newtechnologies and themes, and the backgroundfor this investment strategy rests in the way thatUS venture capitalists measure success—ensuring a relatively fast return on any individ-ual investment. In other words, the successfulventure capitalist is the one who makes moneyfor the investors in the venture fund. As a con-sequence, the focus in biotech funding has beenon making it to the IPO. One might say that thequestion posed by the venture capitalist when

faced with an investment opportunity is morelikely to be “What can I sell on the stock marketin two years?”, rather than “How is this compa-ny going to make money in the long run?”Indeed, for US venture capitalists, the long-term fate of the funded companies clearly takessecond place to the welfare of the investors.

The behavior of any venture capitalist is,of course, partly determined by the demandsof the institutional investors who are fuelingthe funds. Thus, part of the reason that USventure capitalists must operate with such atight focus on short-term return probablyresides with the corporate culture of institu-tional investors. Viewed from the outside,such institutions are characterized by a highdegree of mobility within these organiza-tions, producing a situation in which portfo-lio managers rarely stay in a position for verylong. Such an ever-changing managementenvironment will naturally favor a short-term over a long-term focus.

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Mobility also comes into play with regardto those who manage US biotech companies.In the US, heading one or even several failedcompanies does not, in the eyes of venturecapitalists, make a manager unfit for theposition of chief executive officer. In fact,quite the opposite is true: a failed CEO islikely to be regarded as a person with valu-able experience. At the root of these charac-teristics lies a strong tradition for entrepre-neurship that pervades the personal as wellas the corporate spheres. In this cultural tra-dition, trying is viewed as a positive in and ofitself, regardless of the actual results.

When it comes to biotech funding, thereare both pros and cons to this approach. Onthe plus side, many new companies areformed and many possible routes to discov-ery are tried. On the negative side, the focusof venture capitalists—fast investmentreturn—produces a relatively high failurerate among funded companies. This becamepainfully evident in the US in the early 1990s,when a host of biotech companies failed.Typically, the companies that succumbed inthis period had concentrated their efforts ondeveloping one compound or one technolo-gy, pushed to that approach by the short-term focus of their venture backers.

Less room for failureIn Europe, the successful venture capitalist isnot so much characterized by his or her abilityto secure investment return, but by whetherhe or she is able to show a record of fundedcompanies that survive and thrive. At theheart of this lies the fact that there is much lessroom for failure in the European biotechindustry, partly because the local venture cap-italist communities are much smaller than thecompounded American market. Today, thesecommunities are mainly situated in Germany,the UK, and Scandinavia, and they eachdepend heavily on their reputation amonglocal institutional investors.

When it comes to raising money inEurope, it is important to have a good trackrecord with these investors, and that means ahistory of funding companies that have beensuccessful long past the IPO. Because themarket is more driven by local reputation,

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Venture capital with a European twistCultural factors suggest that European venture capitalists will follow a different model than their US counterparts in selecting companies to fund.

Lone Frank, Thomas Tscherning, 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).

The European CEO whosecompany ultimately fails does not easily get a second chance.Figuratively speaking, no points are given just for trying.

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there is much less tolerance for disaster inEurope than in the US, and the backgroundfor this makes sense when you consider thesheer difference in the number of public com-panies. In the US today, there are over 300public biotech companies, compared withjust two in Denmark and one in Germany.

The aversion to failure is also found in amore personal incarnation at the level ofmanagement. The European, and particular-ly the Scandinavian, chief executive officerwhose company ultimately fails does not eas-ily get a second chance. Figuratively speaking,no points are given just for trying. The per-sonal risk involved in leaving the relativesecurity of the pharmaceutical industry forlife in the more volatile biotech is perceived aslarger in Europe than in the US.

As a consequence, both management andresearchers are more reluctant to joinbiotech startups. This has a clear impact onfinancing: when forming a new biotech com-pany, Europeans ask for more capital up-front than their US colleagues. Typically, acompany’s projections include having 30–50employees within 12–18 months, and aEuropean venture capitalist will have tocome up with enough funding to last at leasttwo years at a substantial burn rate thatreflects the higher short-term inducementsneeded to attract high-caliber talent to astartup in Europe.

Given all these circumstances, a Europeanventure fund evaluating potential biotechinvestments is inclined to look for projectsthat will be sustainable and can make moneyafter going public. Such an emphasis on sus-tainability would be reflected in the configu-ration of new European biotech companies aswell as in their business strategies. In contrastto many American companies¾particularlythose of the 1980s biotech boom¾Europeancounterparts should be integrated drug dis-covery companies with several products indevelopment.

A tale of two companiesOne way to compare the European and USbusiness models is to look at the central char-acteristics of an example of each system.Amgen is the paragon of a successful USbiotech endeavor, while NeuroSearch(Glostrup, Denmark) is a young companywhose overall success to date, despite recentsetbacks, has inspired the current optimismin Danish biotechnology. The differencesbetween these two companies are pro-nounced, from business strategy to financingto management.

Amgen was founded in 1980. Eventhough George Rathmann, Amgen’s firstchairman and CEO, came from AbbottLaboratories, a large part of the early teamcame directly from academia without anykind of track record in management or the

pharmaceutical industry. What the fledglingcompany did have were several hot targets.From the beginning, Amgen was a productcompany focused on developing the two pro-teins: EPO and G-CSF. As it turned out, bothproteins became major products¾Epogenand Neupogen, respectively¾forming a firmfoundation for further development andhealthy growth. If those two projects hadfailed, Amgen would not have survived.

In contrast, NeuroSearch, founded in1989 and listed on the Copenhagen StockExchange in 1996 as the first biotech-likecompany in Denmark, never relied on oneor a few products to succeed. The company,which targets the large and diverse centralnervous system market, has always been rel-atively technology-independent, as it isbased on an integrated approach to drugdiscovery. Even if its most advanced andmuch awaited compound Brasofensin, forthe treatment of Parkinson’s disease, fails,NeuroSearch will still possess a considerableand promising pipeline and valuable tech-nological expertise. The company’s survivalwill not be threatened.

NeuroSearch originally grew out of theDanish pharmaceutical industry, and itsmanagement team, as well as many of its earlykey employees, is characterized by considerableexperience in drug development. Notably,when chief executive officer Jürgen Buus Lassenwas at Ferrosan (Soeborg, Denmark), he was incharge of developing Paxil¾marketed bySmithKline Beecham (London) as one of thebest-selling drugs in the world.

The future of venture capitalWhen it comes to funding biotech startups inthe future, the key to success for Europeanventure capitalists is not to adopt the fastinvestment return strategy—there are toomany factors endemic to the European mar-ket that will not go well with such anapproach. Rather, they should think alongthe lines of long-term profitability and seekout companies with key parameters compa-rable to those of NeuroSearch. This alsomeans that the key to securing venture fund-ing as a European biotech entrepreneur willbe to focus on platform technologies andintegrated discovery approaches rather thanon one target or one product.

Whether the hard times experienced inthe US biotech industry recently will lead toa rethinking of the local investment strate-gies is not clear. There is some evidence thatUS venture capital is beginning to lean towardthe European model, as platform productcompanies are now performing better.However, the willingness to take significantrisks at the chance of large profits is deeplyingrained in the American business ethos.One would not expect the US venture capitalindustry to abandon its ways quickly. ///

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