Too young to fund?

Science|Business Senior Editor Nuala Moran

The heads of Europe’s national biotechnology associations met in Brussels this week to discuss the problem and to lobby for greater public support. They were also regaled with the latest venture capital data from both sides of the Atlantic, highlighting yet again the disparity between investments in young technology companies in the US and Europe.

For most this is a familiar litany. What is more depressing is that despite Europe holding up SMEs as one of its prime economic engines, so little has been done to deal with the matter. Schemes such as France’s Young Innovative Company status may mean more start-ups are formed. But they do not solve the problem of how they are financed through to profitability.

And for many of Europe’s young technology companies – in particular those in the high-risk business of drug development – making it to a public market no longer represents an exit for the venture backers.

One company becalmed in the low liquidity of the Alternative Investment Market in London is now trying to pioneer a route out of this microcap ghetto. Phynova plc, which specialises in developing traditional Chinese medicines as Western market pharmaceuticals, announced this week that it is to become the first European biotech to join the US over-the-counter electronic market, OTCQX.

CEO Robert Miller admits the move is an experiment, but says that unlike Nasdaq or the NYSE, the cost of attaining and maintaining the listing is low enough for it to be worth the punt.

He points out also that US investors value life sciences companies more highly than European counterparts, and there is a big appetite in the US for companies, like Phynova, with access to Chinese markets.

Let’s hope the bet pays off. The latest data show US investors are putting more money into foreign companies. As of 30 September 2007, US investments in foreign equities amounted to $4.9 trillion, or 22 per cent of all US equity investments. A decade ago it was less than 9 per cent, according to the US Federal Reserve, Flow of Funds for the US Economy, published in December 2007.

If Phynova is successful in tapping into this market it will open up a new avenue for its peers, and maybe attract capital back into the venture space.

But for now, the cost of doing deals means there is no interest from venture capitalists in seed or early stage investments, and at the later stages the lack of exits is a deterrent for all but the dedicated specialists.

No wonder 3i has given up waiting around for start-ups to make it to a public market, when (the credit crunch notwithstanding) gearing up a mature, established company and flipping it offers much loftier returns.