Should we bail out biotech? UK biotechnology companies are coming to the government with begging bowls in hand. It is better to let these weaker companies, and their investors, fall than prop up discredited investment models

Chemistry and Industry, Feb 23, 2009 by William Bains

Every industry in the Western economy has been begging for a bailout this last month. Envious eyes see the trillions given by governments to the banking sector since October 2008, and, not unreasonably, say 'I want some too'. Biotech is no exception, with luminaries calling for 500m [pounds sterling], 1bn [pounds sterling], 2bn [pounds sterling] funds to be set up to 'pump money into the sector'. Their arguments are filled with special pleading disguised as analysis, so I should state from the start that I am also wildly biased. I run a biotech company, am on the board of three others, teach biotech entrepreneurship, and yes I would love the government to help me and mine through the dark times ahead. But should they do it?

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The argument for a bailout says that translating academic research into new startup companies that can be funded by venture capital (VC) is essential if the UK is to keep its competitive place in the world, but funding for such enterprises has dried up. Despite claims that 'there is always money for a good idea' many companies with ground-breaking technology and programmes are going to the wall in the UK. The level of funding for start-ups in the UK is at its lowest level for 15 years, at the same time as there is less state and charity funding for genuine, blue-skies research than at any time in a generation. Luminaries such as Lord Drayson and Sir Chris Evans have said that we risk not merely falling behind, but falling out of the race entirely, and only 500m [pounds sterling] of state money can save us.

Such is the wisdom of the crowd. The reality is very different. Innovative start-ups have been suffering in the UK for at least a decade, not primarily from lack of investment but from the wrong sort of investment, and the wrong sort of management and direction that comes with it. While companies in the US, Canada, Scandinavia, Israel, and more recently India, have grown and matured, new UK companies have, in general, been under-funded. Shareholders that control these businesses have pushed them towards over-expensive and unsustainable business and operational models and failed to develop the longer term business opportunities that their founders had in mind.

This is driven by the VC's own business model. Traditionally, 'venture capital' means private investment that gains big profits for their investors and managers by finding potentially great companies and making them great. VCs invest other people's money and make money for themselves by charging a percentage of what they invest as a 'management fee', as well as taking a fraction of the profit. In the US, VCs make most of their money from their share of the profit, and so they are motivated to make companies as successful as possible,

In Europe the model is different, with VCs gaining most of their reward, not from profit from investment, but from the management fees. Their motivation, therefore, is not to invest well but to fundraise well. My recent analysis of their business model shows why this leads them to starve companies of funds, mis-direct their businesses and ultimately doom them to failure.

To an extent this is a result of support policy in Europe. Governments want biotech to flourish. In the US the government achieves this by supporting specific projects. They want a genome sequenced--they just pay someone to do it. The fastest and most innovative companies get the contract and grow as a result. Who they are, how they finance it and where they employ their staff is irrelevant. In Europe, states support investment in new companies. This rewards the investment process, and so drives investors to make the companies that they invest in support the investor's business model, which is to raise more funds. Looking good for a slide in a VC presentation and developing a growing, valuable business are, unfortunately, quite different and often opposed things.

Real biotech businesses are surviving, some even flourishing. Investment is flowing into them, just not from VC. Their stock prices have fallen modestly, not catastrophically. Indeed, in the UK, as in the US, biotech stock indices have actually risen in 2008, compared with a 30% fall in the overall market. These companies continue to close deals and sell products.

Yes, taking a great idea from the mind of an academic and turning it into money in the bank is extremely hard. But it was possible last year, it is possible now, as these companies choose to pursue money through business, not VC investment. Putting funds into the formal investment community will do as much for these companies as putting money into the high street banks has helped UK business borrowers--not at all.

So should the government bail out the biotech industry? If you mean should it help scientists with great projects turn them into businesses, then maybe it should. But personally I think it would be better advised to say what it wants and leave the ingenuity of the scientists and entrepreneurs to work out how to do it.