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Foreign governments feed biotechnology venture capital firms as U.S. appetite for bailouts wanes
August 2009
by Amy Swinderman  |  Email the author
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While the suggestion that the United States government bail out venture capital firms has failed to attract support from government leaders—and would surely raise taxpayer ire—the mood is quite different overseas, according to recent media reports.

In late June, the U.K. government announced that it will invest $248 million in a new venture capital "fund of funds," according to a Venture Capital Dispatch report. Predicted by First Secretary of State Lord Mandelson to be a "real shot in the arm for the British venture capital industry", the U.K. Innovation Fund aims to attract investment from pension funds and the private sector to create a $1.6 billion fund within 10 years.

Last year, venture capital investment in U.K. start-ups fell 28 percent to nearly $2 billion, while the number of deals dropped 26 percent to 324, the lowest total on record in this decade, according to research firm Dow Jones VentureSource. In particular, the U.K's biotechnology industry has suffered badly during the last 18 months because many investors lost their appetite for high-risk investments, according to Venture Capital Dispatch. The Bioindustry Association (BIA), told the publication that a third of its small drug developer members had less than six months' worth of cash left. The BIA and other trade organizations have reportedly lobbied hard for government financial support, arguing that venture capital is essential for economic recovery and to maintain the U.K's competitiveness in the sector.

"We need the Google or Genentech of the future, and they will only be created if there is the capital to back them," Lord Drayson, minister for Science and Innovation, told the publication.

The U.K. government will appoint a manager to run the U.K. Innovation Fund and hopes to make its first investment by the end of the year.

Elsewhere overseas, Israel is also setting up a $63 million capital fund to specifically finance biotech start-ups, according to a recent Reuters report.

The government hopes the fund, expected to rise to $253 million using loans from private investors, will encourage and advance growth in Israel's biotech sector. The government will split profits from activities in the fund between itself and private investors.

"There's great importance to the fact that 250 million shekels ($63 million) of government money is allocated to the development of an industry whose workforce is of great value and whose development and prosperity are crucial to the economy," Eli Ofer, chief scientist at the Industry and Trade Ministry, told Reuters.

Back on home soil, however, our appetites for government aid of the venture capital industry aren't quite as robust. According to a recent Wired report, during the first three months of 2009, biotech firms brought in only $576 million of venture capital, the worst quarter since fall 2001, after the Sept. 11, 2001, terrorist attacks. Although some biotech leaders have lobbied Congress for a bail-out since last fall, they have yet to gain widespread approval for it.

Amidst the seemingly never-ending economic gloom and doom, there does seem to be a light at the end of this tunnel: U.S. biotech start-ups may be taking matters into their own hands. San Francisco venture capital firm Burrill & Co. recorded a significant 25 percent increase in total financings and partnering in the second quarter of this year compared to the first quarter. While financings were down quarter over quarter, the amount U.S. biotech firms raised in partnering deals was up 68 percent, Burrill said. The firm also noted that it has become increasingly difficult to attract venture capital as the amount raised by biotechs in the U.S. in the second quarter was down 43 percent down from the total raised in the first quarter.

"While it is still going to take many more months before biotech starts on the road to full recovery, it is encouraging to see companies are still raising capital despite the tough economic conditions," Burrill said. "This increase reflects the fact that in a tight fiscal environment companies are devoting their energies on finding pharmaceutical and biotech partners to help build value of their lead product programs."


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