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European biotech start-ups fail to win late-stage funds



1 August, 2005: Unlike their American counterparts, European biotech start-ups are more prone to fail at the earlier years as most of them fail to attract late-stage funds, a study suggests.

At the end of 3-5 year period, when the seed money runs out European biotech firms find it difficult to gain the confidence of international investors.

In the year 2003, Europe had 1,976 biotechnology companies and 132 startups, compared with a total of 1,830 in the United States, including 83 startups. However, European biotechs were much less likely to attract late-stage funds. US biotechs raised €2.9 billion in venture capital in 2004, while European biotechs raised €940 million. At the same time, the US biotech industry had access to four times as much debt finance as their European counterparts.

European investment banking sources say that efforts are underway to provide more late-stage financing for Europe's emerging high-tech companies, including biotechs.

The European Investment Fund (EIF) is the main source of early-stage financing for high-tech startup ventures in Europe. Created in 1994, the EIF has been focusing on small and medium enterprises (SMEs) since the year 2000. The EIF has committed about €2.9 billion in venture capital, of which €332 million or close to 12% is allocated for biotech funds.

The EIF is trying to help develop the professional skills of fund managers in the different specialty areas and make them available throughout the European Union. The attempt is to overcome a bottleneck in terms of scarcity of these professional skills, and risk capital to support innovation in high-tech development, reports say.

A Europe-wide seed fund, which would be backed by an international validating organization that could vouch for a company's ability to compete globally, would help solve the problem. The fund would gather several pieces of intellectual property together. The issue is currently being discussed as part of the European Union presidency, which is due to shift to the United Kingdom in July for six months.

According to Philippe Pouletty, chairman of France Biotech and vice chairman of EuropaBio, instead of a Europe-wide seed fund, he favors tax breaks for promising high-tech and biotech companies. European pension funds devote much less of their investments into high-tech, so what works are tax incentives to shift a fraction of savings and pension funds into small- and mid-sized companies.

France now has about 1,000 high-tech companies, including 150 biotechs benefiting from its year-and-a-half-old tax incentive program called Jeunes Entreprises Innovantes (Young Innovative Companies). The programme grants special tax status to small companies before their initial public offering (IPO), so they can spend at least 15% of their budget on R&D. The programme also offers tax breaks for their investors.


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