A Comparison Between European and U.S. Venture Capital Industries

According to an article in the Independent (UK), 84 percent of participants at a recent biotech conference in Monaco cited “funding” as the biotechnology industry’s biggest challenge.

No matter which continent you’re on, the process of raising venture capital can be daunting and challenging for startup biotechnology companies, particularly in the wake of the global recession. A number of biotechs in both the United States and Europe are now looking across the pond for fresh sources of venture capital. American biotechnology companies are taking their tech to Europe, while European companies are traveling to the U.S. in search of funding. But which side offers the greater advantage to biotech companies seeking capital? Is it easier to obtain funding in Europe or the U.S.?

“The saying in the industry is, Europe is a good place for initial capital raising and possibly for the second financing round as well,” says Franck Brinkhaus, Managing Director at investment bank, Woodside Capital Partners. “But when it comes to bigger financing rounds, the U.S. funds take over the lead.”

The current popular perception that it’s easier to obtain public funding in Europe, has a strong basis in reality. Under the EU’s Seventh Framework Programme (FP7) around €6 billion (US $7.9 billion) is earmarked for life science research, of which 15% is allocated to fund SME European biotechnology companies. Separately, €2 billion (US $2.6 billion) has been invested in the Innovative Medicine Initiative (IMI), a public/private partnership specifically designed to foster pre-competitive research. This program is designed to pump up support for the EU biotech industry, as there has been great disappointment with Europe´s failure to turn its academic strength into commercial success due to a lack of finance. As a result, small biotechs in Europe may get a first and even a second helping of government funding with comparative ease.

Europe also has a large number of private/public funds, which consist of both private and public money. These hybrids pool money to fund small companies and further the EU government’s goal of growing a biotech industry. “There’s comparatively quite a lot of public money available at the moment there,” says Brinkhaus. “It is striking what the European Commission has created to foster the European biotech industry.”

However, it is a fact that ambitious European biotech companies still look to the U.S. when it comes to larger financing rounds. This was one of the driving reasons behind the creation of the FP7 Programme—namely, that top-tier European biotech companies cross the Atlantic soon after they have completed basic research. And the reasons they do so are striking.

According to Brinkhaus, the U.S. and Europe differ quite substantially when it comes to their respective biotech industries and venture capital markets. Although both markets have a similar number of companies, he says, the U.S. biotech industry generates twice as much revenue, employs twice as many people and spends three times as much on R&D than the European industry. U.S. companies raise twice as much venture capital and have access to 10 times as much debt financing. In comparison, European venture capital funds rely much more on financial institutions such as private, powerful public banks that invest in and control European venture funds. EU funds rely to a much lesser extent on private funds, such as pension funds, than their U.S. counterparts do.

The U.S. venture capital industry is at least twice the size of its European counterpart, and more interconnected. Moreover, U.S. venture capital funds tend to be more connected to the domestic biotech industry than European funds are to theirs. U.S. funds also tend to do a greater amount of syndication, working with other venture capital funds to underwrite an investment.

Generally speaking, the U.S. VC industry is a mature industry, whereas the VC industry in at least continental Europe is relatively new. However, as the EU venture capital industry has developed into a professional industry, Mr. Brinkhaus expects there will be an increase in EU-based VC funding of biotech companies, especially in combination with supportive programs such as the FP7.

Clearly, both the U.S. and European venture capital industries have their own unique differences, advantages and challenges for biotech companies. However, funding is to be found in both regions with an advantage for European start-ups at the moment. But the truth is that in the current economic situation it is very hard to get funding on both sides of the Atlantic. More than ever companies need to demonstrate a very unique technology, a solid business plan, and a good deal of pure persistence to get the funding they need.

Have you noticed a difference between the U.S. and European venture capital industries? Feel free to post your opinion in comments.

Written by Vanessa Anderson and Frank Brinckhaus, PhD

Franck Brinkhaus, PhD
Managing Director Woodside Capital Partners
Franck Brinkhaus, PhD is an experienced senior executive in the Life Sciences sector. He founded and successfully developed Biotech Alliances, a premier partnering & consulting firm engaged exclusively in the life sciences industry. Biotech Alliances focuses on developing successful alliances and collaborations, which are a critical part of the overall business strategy of today’s biotech companies, enabling them to make scientific and commercial breakthroughs, and helping them globalize their business development activities and obtain needed financing for growth and expansion. Biotech Alliances has recently moved its corporate headquarters from Germany to Palo Alto/California, which positions them in the heart of the U.S. biotech sector, giving them unprecedented access to biotech firms and global opportunities.

Additionally, Biotech Alliances has recently created a strategic alliance with Woodside Capital Partners (WCP) of Palo Alto of which Franck Brinkhaus is a Managing Director. WCP is a boutique investment bank providing M&A advisory services, capital raising and financial strategy for emerging growth companies in the major high tech areas including life sciences.

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