Venture Capital: Bridging the gulf

By Iain Scott
Thursday, 20 June, 2002

Of all the developments in Australian biotechnology in the last five years, one of the most accelerated has been the industry's burgeoning relationship with venture capital.

A new report, Venture Capital and the Healthcare/Bioscience Sector in Australia and New Zealand 1996-2001, shows that from almost no investment five years ago, now seven percent of Australia's roughly 250 biotech companies receive some sort of venture funding.

Venture capital invested in the healthcare and biotech sectors has risen from $26.54 million in 1996-97 to $116.14 million in 2000-01, more than half in biotechnology.

But the relationship isn't always cosy. Science and finance don't often speak the same language. What's more, the number of start-ups in the biotech sector has grown dramatically, and its impatience for funding has outstripped venture capital supply.

In a nutshell, the biotechs want money and blame the VCs for holding it back. The VCs want the scientists to realise that it's not that simple.

Lyndal Thorburn, principal of Advance Consulting and Evaluation and one of the report's authors, was herself a scientist, at CSIRO in Canberra.

"My approach to the world was 'gather facts, prepare a hypothesis'," she says. "It took me seven years to work out that not everyone thinks that way. Scientists don't understand that there are a thousand other things and any one of them can be a make or break."

On the other hand, she says, people in the financial sector need to be sensitive to the fact that they may be speaking with a scientist about his or her life's work.

The gulf may be narrowing, however, for a number of reasons - "both institutional and individual", according to Thorburn.

In the past, she says, biotech start-ups were often headed by people who were forced into that position by redundancy or frustration.

Funding cuts to the major Australian research institutions have had the unexpected side-effect of making researchers look outwards and become more creative about commercialisation. Careers are not as stable as they once were - tenure is fast becoming a distant memory - and younger researchers have had experience in commercially-focussed labs in the US or Europe.

Other changes have occurred on the VC side. Seven years ago, Thorburn interviewed venture capitalists in both Australia and the UK and noticed a stark difference - whereas all the Australian VCs had a financial background, their UK equivalents came from pharma and the life sciences.

Importantly, in Australia there are now "a handful of VCs who are becoming specialist in the area," Thorburn says. "Obviously they will attract the people who have themselves gone through the process of setting up a business and getting venture capital.

"It's an important stage to move to."

One of those specialist VCs, Harry Karelis, managing director of Biotech Capital, trained as a mircrobiologist but chose an MBA over a PhD.

There was a "cultural mismatch", he says, "although the groups are becoming a little more aware of the other's nuances.

"The business sense in academe has increased from a low base. The younger academics see that you can make money from biotechnology.

"It's a generational thing. But I think the climate is certainly changing."

It's the scientists who have been the prime movers, Karelis says. "Not many of us [VCs] understand the lingo, and I'd say there's more scientists getting up to speed.

"If you're an entrepreneurial scientist you've got to get off your bum. PhDs used to be considered pretty nerdy and narrow-minded... that's still true, but it's changing."

Karelis says that Biotech Capital, which counts Proteome Systems, Alchemia, Biocomm and Xenome among its investee companies, sees two or three would-be investees a week. "We kick a lot of tyres," he says.

What's needed, he says, is some understanding by start-ups that venture capital is not the be all and end all.

"We see you-beaut technology every day," he says. "We say, 'Yes, we can get you access to capital. But what's more important is access to the network and expertise.' "Sometimes they're way too early for us. We say, 'This is really interesting, but we invest from $2 million and what you need is $200,000'."

Five years ago, when there was little or no biotech venture capital available, companies listed on the ASX as a quick money-spinner - "too early," says Karelis, with the result that only a few of them are now attractive to institutional investors.

Nowadays, VC should not be considered a quick fix either. "There's lots of money around," he says. "People who say there's not enough are lying - there's almost too much."

Stuart Wardman-Browne, COO at Amwin Management, says many of the people who walk through his door are "convinced that they have the next great breakthrough... We have to explain that we have a portfolio approach and couldn't necessarily invest even if we wanted to," he says.

But it's important that scientists continue to focus on the science of their business, as well as implement and effective strategy, he says.

Thorburn says biotechs inexperienced with the venture capital sector should not take their ideas straight to the top.

"I worry about people burning their bridges," she says. "If you've been in the door and been kicked out once, it's harder to get back in again. Find a couple of people who have had VC, and do a practice pitch. You need to be ready for lots of curly questions."

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