Portfolio Strategies of Life Science Venture Capital Firms in North America and Europe
Patzelt, Holger, Knyphausen-Aufsess, Dodo zu, Habib, Yasmin, Journal of Small Business and Entrepreneurship
Most young life science ventures essentially depend on the infusion of venture capital (VC) (Traore, 2005), because their product development processes are risky and capital-intensive. Biopharmaceuticals, for example, demand on average more than 800 million $US R&D expenditure and a 12-year development process (DiMasi, Hansen and Grabowski, 2003) with only one out of 5000 initial drug candidates reaching market launch (Evans and Varaiya, 2003). Financing these expensive development processes is only possible if VCs are willing to take the risk and invest large amounts of money in the young ventures (Powell et al., 2002; Prevezer, 2001). Despite the high risk for investors, however, the life science industry is a major area of activity for VCs because the ventures have an enormous revenue potential. The most successful life science firms such as Amgen and Genentech earn billions of $US every year and their founders and investors have become very rich. In 2006, VCs invested 3.5 billion $ US in North America (US and Canada) and 1.9 billion $US in European life science ventures (Ernst & Young, 2007).
The emergence of the life science sector, however, has not been homogeneous across countries. Already in 1986, the North American industry counted more than 800 companies and employed more than 40,000 people, and in 2006 these numbers amounted to more than 1,900 firms and 188,000 employees (Ernst & Young, 2003c, 2007). In contrast, in European countries the development of the sector is about 10 to 20 years behind the North American industry. In the 1990s governmental programmes such as the BioRegio competition in Germany (Dohse, 2000) were major drivers of the rapid growth of the European life science industry, and the number of firms grew from 450 in 1992 to more than 1,600 in 2006 (Ernst & Young, 2003a, 2007). However, relatively few of these companies are established corporations yet, and total employment in the sector equalled only about 75,000 people, corresponding to less than 40% of the US sector. Whereas in North America 418 life science firms were quoted at the stock markets in 2006, this was the case for only 156 European firms. In that year, North American companies generated 62 billion $US in revenues, as compared to 19 billion $US of European firms (Ernst & Young, 2007). Table 1 provides an overview of the life science industries in North America and Europe.
Several differences between North America and European countries may explain the different development paths of the life science industries in both continents. First, with the exception of the UK, European countries were lacking an established VC industry that is essential for stimulating the foundation and growth of life science ventures (Cooke, 2001; Giesecke, 2000). For example, in large European countries like Germany and France the legal system offers low protection for shareholders, which counteracted the establishment of independent VC firms (La Porta et al., 1997). Moreover, the stock markets in European countries outside the UK are under-developed and left little opportunities for VC firms to exit their investments (Black and Gilson, 1998). In the historically bank-based financial environments of Europan countries like France and Germany, VC firms are often owned by banks (Wright et al., 2004), and the VC managers of these firms usually have a finance background (Ooghe, Manigart and Fassin, 1991), which leads to them to be averse to non-controllable financial risks of young technology ventures (Dimov, Shepherd and Sutcliffe, 2007). Second, many European countries had unfavourable legal and regulatory frameworks that blocked the emergence of the life science sector. For instance, in Germany restrictive laws on the usage of genetic material and methodologies, and the genetic manipulation of organisms made it difficult for young firms to engage in life sciences (Engel and Heneric, 2008). Finally, many European countries are known to lack a culture supportive of entrepreneurship. …