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Australasian Biotechnology, Vol. 11 No. 3, 2001, pp. 22-23 BIOTECHNOLOGY FUNDING BIF - OVERCOMING ONE CRUCIAL BARRIER IN THE DEVELOPMENT OF ENTREPRENEURIAL BIOTECHNOLOGY COMPANIESJohn Ballard, Vice President AusBiotech Ltd Code Number: au01039 The Biotechnology Innovation Fund (BIF) program recently introduced by the Federal Government will enable start-up companies to secure competitive grants of up to $250,000 on a dollar-for-dollar matching basis. The provision of this proof-of-concept or seed funding may help overcome one of the key barriers to enterprise development. Barriers to Enterprise Development From the stage where a significant invention has been made until a venture capital-backed company is exploiting that invention, worldwide experience has shown that three commercial barriers must be removed or overcome. These barriers can be visualised as valves in a pipeline (see Figure) whereby all three must be opened for flow to occur. The barriers or valves are:
As recently as three years ago all three barriers were firmly in place here in Australia. For that reason, few biotechnology companies were established and those that were successful had to overcome the financial barriers through a means that was not looked on favourably elsewhere in the world - having a cash-flow business to support the development of their pharmaceutical opportunities. AMRAD, Progen, Bresagen and GroPep took this route. In 1998 the Commonwealth Government established the Innovation Investment Fund (IIF) program through which fund managers are heavily subsidised to attenuate the risk inherent in early stage investments. Six IIFs (AMWIN, Coates Myer, Rothschild, Nanyang, Start-up Australia and Newport) with approximately $250 million available for investment, have a substantial focus in the biotechnology sector. Together these venture capital funds have helped overcome barrier #3 by providing start-up capital. Indeed the situation is even more positive with at least three Pooled Development Funds (PDFs), Medica, Starpharma and Biotech Capital together having $100 million available for early-stage investments in biotechnology companies. A number of other Venture capital funds indicate their preferred business investment is at the barrier #3 stage.
How BIF will Address Barrier #2 Obtaining capital funds at the seed stage (barrier #2) is traditionally much more difficult because the commercial risk is perhaps an order of magnitude greater. Many US states address the problem by providing $250,000 - $500,000 to companies once the enterprise has attracted a modest amount of private seed capital. These payments are typically in exchange for equity rather than as grants. An important issue for the US state investment funds is that due diligence must first be carried out by the private investor, thus limiting the workload of the state groups and reducing the time between an application and receipt of an offer to just a few weeks. BIF differs from the usual US model of seed funding because cash is provided as a grant for a project rather than to develop the enterprise. Otherwise most features of BIF (see box 1) are similar to other seed funding arrangements. Moreover, any difference between a BIF project and support of an enterprise may be more illusory than real because the project may very well be proof-of-concept for the enterprise. In support of this, a stated key objective of BIF is to address the gap in the commercialisation path between research and the attraction of private investment. Because investors almost always inject funds to purchase equity, and equity in projects rather than in enterprises requires a complex financial structure, it is likely that many if not most successful applicants for BIF support will be aiming for the development of their company as a whole, rather than a project within that company. The Future: Addressing Barrier #1 The remaining barrier that faces any developing biotechnology enterprise is actually the earliest one in time sequence, viz. the lack of suitable pre-seed arrangements. Our universities and research institutions need to move forward by: introducing a 'can-do' entrepreneurial culture amongst their staff, providing pre-seed financial support to their inventions, adopting transparent policies whereby staff can be seconded as key personnel into a new company and encouraging share ownership by staff in companies that arise from their inventions. Until these are addressed, real impediments to the formation of spin-out companies will remain. The "Pre-Seed Fund", announced as part of the Australian Government's Innovation Action Plan, is being set up to specifically address the problems associated with barrier #1. While the fund is not restricted to biotechnology, experience elsewhere in the world is that most of the focus of any pre-seed fund is likely to be in the biotechnology and IT sectors. At this stage in its development, the Pre-Seed Fund is planned to be delivered by private sector fund managers. In this sense it would be like the IT-specific BITS program or the IIF. A possible scenario is that the fund managers could be agencies more akin to incubators with staff who truly understand the specific research areas being targeted. AusBiotech will continue to make representations to government so that the finalised Pre-Seed Fund will be developed to serve the needs of our members and the broad biotechnology community in the best ways possible. It is a critical $78 million initiative that we must not allow to fail.
Behind the Scenes Representations by AusBiotech Over the past two months, your Board and Executive Director have had numerous discussions with Biotechnology Australia and other Industry, Science and Resources staff to help fine-tune the draft BIF proposals. The objectives of these representations have been to modify the program so that it incorporated a broad definition of biotechnology relevant to all our members, to introduce suitable dollar-matching and equity arrangements and to adopt appropriate merit criteria for selection of successful applicants. Although not all of our proposals were adopted, ISR has at all times been receptive to constructive suggestions. We also understand that the second $20 million allocated to BIF (only the first $20 million is available under the present scheme) is likely to address any deficiencies in the program that are identified during the first two granting rounds. Relationship to Other Commonwealth Funding Programs Box 2 lists the existing Commonwealth funding programs that apply to biotechnology research and commercialisation. The programs are separated into those that support enterprise development (typically equity-based funding) and those that finance R&D. With the exception of the tax incentive and tax rebate schemes, all the R&D support is provided as grants. The industry-targeted grant schemes require matching funds. BIF is a hybrid of both types of arrangements because it is on the one hand a grant program that does not necessarily involve a substantial R&D component and on the other addresses enterprise development. A principal goal is to make a company ready for venture capital investment and in that sense it is more similar to BITS. The Pre-Seed Fund is also likely to be a hybrid involving components of both Enterprise and R&D support. While directed at public sector research institutions, it will foster new companies and may fund some R&D.
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