Funding biotech start-ups in a post-VC world

Abstract

Investment in start-up biotech. companies outside the USA has essentially disappeared. VC investment in biotechnology and healthcare as a whole has nearly returned to pre-2008 levels, but almost all is in later stage opportunities. But companies continue to be founded, and continue to flourish. We examine the VC investment patterns for the past 7 years, and show that a start-up today can expect little VC support. We show from companies’
financial records that companies are adopting financial models based on angel investment, grants and revenue,
and moving away from business models that need substantial investment. There is a time lag, but government and research council policy is beginning to recognize and align with the new investment realities. We believe this trend will accelerate as internet-mediated angel investing, such as crowd-funding schemes seen in other sectors, become a developing force in the next decade.

Full text

Journal of CommerCial BioteChnology http://www.CommerCialBioteChnology.Com 10
INTRODUCTION
B   perceived historically
as driven by institutional investors who back
private companies with substantial risk capital,
commonly termed Venture Capital (VC).1,2 Aer a dip
in VC investment in 2008-2009,3 VC investment was
stated as being back to a 2005 level of $6bn-$7bn/quar-
ter (www.pwcmoneytree.com), and in biotech invest-
ment was stated as being stable at $5.3bn-$5.5bn per year
from 2008 to 2011 (compared to the annual gure of
$6.7bn in 2007).4 VC continues to be presented as an
attractive asset class for investors compared to public
stocks.5,6 is is despite fairly robust evidence to the con-
trary;7,8 and condential surveys suggest that, privately,
the industry is less optimistic.9
Venture Capital is “a professionally managed pool of
capital th at is invested in equit y-linked sec urities of private
ventures at various stages in their development”.10,11 VC
usually invests in companies with high risk and corre-
spondingly high rate of return if successful,11 especially
in early-stage companies with high capital requirements
for developing new products. Biotechnology is a major
category of such companies. VC mitigates the risk of
such investment by substantial engagement with investee
companies.12 Conventional VC theory states that the VC
management group is motivated to maximize returns
Original Article
Funding biotech start-ups in a
post-VC world
William Bains
has worked in biotech research and commercialization for 30 years, at PA Consulting Group, Merlin Ventures and as founder of four
start-up companies in therapeutics discovery and discovery technology. He has helped raise over £60M in early-stage investment
for 10 UK biotech companies, including his own, four of which subsequently floated on UK Stock exchanges. He is currently
starting a fifth company, and is on the board of two others. He is an active researcher at Cambridge University (UK) and MIT (MA,
USA) in chemical biology, and through Rufus Scientific Ltd researches, teaches and mentors new bio-company formation and
financing.
Stella Wooder
has worked in technical consulting companies for over 25 years, at EDS, Logica, Sagentia and a number of start-up product and
consulting companies. She is currently Head of Operations and Informatics at Pope Woodhead and Associates, a healthcare
consulting group and also has an interest in drug safety and benefit-risk assessment. Stella is a guest lecturer at the Institute of
Biotechnology, University of Cambridge. She holds a BSc (Hons) and PhD in Physics and an MPhil in Bioscience Enterprise.
David Ricardo Munoz Guzman
is CEO of Novellus Biopharma AG, Switzerland.
ABSTRACT
Investment in start-up biotech. companies outside the USA has essentially disappeared. VC investment in
biotechnology and healthcare as a whole has nearly returned to pre-2008 levels, but almost all is in later stage
opportunities. But companies continue to be founded, and continue to ourish. We examine the VC investment
patterns for the past 7 years, and show that a start-up today can expect lit tle VC support. We show from companies’
nancial records that companies are adopting nancial models based on angel investment, grants and revenue,
and moving away from business models that need substantial investment. There is a time lag, but government
and research council policy is beginning to recognize and align with the new investment realities. We believe this
trend will accelerate as internet-mediated angel investing, such as crowd-funding schemes seen in other sectors,
become a developing force in the next decade.
Journal of Commercial Biotechnology (2014) 20(1), 10–27. doi: 10.5912/jcb628
Keywords: nance; venture capital; business angel; start-up
Correspondence: William Bains, Rufus Scientic, UK.
Email: william@rufus-scientic.com

JANUARY 2014 I VOLUME 20 I NUMBER 1 11
from its investment through an interest in the prot on
the funds it invests (reviewed in (13)), although it is not
clear this model of VC behaviour works in the context
of the biotechnology industry, where prots in funds
are rare.7 VC investee companies are claimed to be more
successful than non-investee companies,13,14 although
whether this is an eect of VC intervention and invest-
ment, the eect of VC investment signalling to others the
quality of the company (regardless of the VC investment
or intervention itself),15 or VC’s selection of more suc-
cessful rms as targets for investment16,17 is still debated.
Depending on one view of what motivates VC to
invest and whether VC investment aects investee com-
pany outcomes, one might expect the “credit crunch”
nancial crisis of 2008-2010 to aect VC investment to
a greater or lesser extent. e conventional model of VC
suggests that a downturn in investor sentiment should
provide an opportunity for increased VC investment,
both in companies with attractive pricing and in assets
being divested as companies focus on core business.18
e aggregated gures reported above suggest that, aer
a slight downturn, VC enthusiasm for biotechnology has
returned, indicating that VCs have an active, forward-
looking view of the industry even though the market
for biotechnology IPOs at the time was still weak.19,20
However, in contrast to headline announcements of a
return of VC to the sector, surveys of companies in the
USA,21 and the anecdotal reports* of many entrepreneurs
in the UK, suggest that VC nance has not returned to
early stage biotechnology. Money is always hard to come
by, but since 2007 acquiring investment of any sort for
new, innovative companies has seemed a Sisyphean
task. Why is this so, if funds are expanding and investor
appetite for genuinely breakthrough and disruptive busi-
nesses remains as strong as ever?
In this paper we explore this conundrum by analys-
ing the actual evidence along two dimensions: what VC
investment funds are actually being used for; and how
companies actually get nanced. Specically, we explore
the hypothesis that VC capital has not actually returned
to early stage investing, that aggregate gures on VC
* We do not have objective or statistical data for this
statement. However between us we helped raise over
£60M in early-stage investment for 10 UK biotech
companies, invested personally in 3 (other than as a
founder or executive), and provided Board level guidance
to a total of 26 start-up projects, companies or investment
funds over the last 15 years. We believe that our
experience, and the experience of the many entrepreneurs
we have worked with in this time, gives us reason for
supposing the statement to be an accurate representation
of the “entrepreneurial ground-swell” in private UK
biotechnology nance.
investment overall reect a return to investing in late-
stage companies not innovators, and we examine how
biotechnology companies in one specic biotechnology
cluster have responded to this change.
We examine two aspects of the commercialization
of life science knowledge as a “biotechnology” company
(as discussed below): a narrow denition based around
healthcare biotechnology, and a broader denition based
around any commercial exploitation of life science intel-
lectual property. VC has almost exclusively supported
the former, narrow type of biotechnology.1 Overcoming
selection bias is a major problem for such studies (see for
example the discussion in the introduction to (22)), and
so we have attempted to survey all the VC investment in
biotechnology in the 2005-2011 period, and explore how
companies have adapted to changes in the investment
environment with a similarly comprehensive survey of
the Cambridge (UK) area biotechnology cluster.
Our study nds that VC has essentially ed from
supporting new companies of this type in Europe; par-
ticularly in the UK, we live in a post-VC age. But study
of both the narrow and wider type of biotechnology
companies in the Cambridge cluster shows that they
have nevertheless found a variety of creative alternative
funding sources. is, and emerging trends in internet-
mediated funding, point to a bright possible future for
biotech, providing neophyte biotechnology companies
are prepared to embrace the new models.
METHOD
What is biotechnology?
Biotechnology is the exploitation of knowledge of the life
sciences for industrial use; in a commercial context, this
means exploitation to generate wealth.23 A broad deni-
tion of a biotechnology company is therefore any com-
pany that uses knowledge of biology to provide products
or services. is we term “Broad Biotechnology”.
However public markets and institutional investors
overwhelmingly invest in biotechnology companies that
develop products for human healthcare (see, for exam-
ple, the explicit or implicit denitions of the industry in
(2, 24, 25, 26)). is narrower form of biotechnology we
term “Healthcare Biotechnology”. In principle, a scientist
or an entrepreneur with novel understanding of biology
or a novel concept for commercializing biological knowl-
edge could apply that to Healthcare Biotechnology, or
to a non-healthcare application within the wider enve-
lope of Broad Biotechnology, the relative attractions of
the two paths depending to an extent on the nature of
the biology, but also on the nancial and commercial
options available to Broad Biotechnology and Healthcare

Journal of CommerCial BioteChnology http://www.CommerCialBioteChnology.Com 12
Biotechnology. We have therefore analysed both Broad
and Healthcare Biotechnology in this paper. However,
we have focussed our conclusions about VC funding on
Healthcare Biotechnology only.
VC DEALS DATABASE ANALYSIS
Data on Venture investment deals was abstractedfrom
the MedTrack database (http://www.medtrack.com/).
All of the deals coded in the database as relating
to companies in the industry sectors biotechnology,
pharmaceuticals, healthcare, medical devices were used.
Deals coded as Venture Financing or Venture Capital,
Growth Expansion Capital with deal dates 2005-2011
were extracted. Manual inspection of these showed that
some were actually sales of VC-funded companies rather
than VC funding deals, and these were excluded.
Company names, the country of incorporation
and websites addresses were validated manually using
internet resources, primarily the Internet Wayback
Archive (http://archive.org/), Bloomberg Businessweek
(http://investing.businessweek.com), New Statesman
(http://www.newstatesman.com/company-profiles/
healthcare), and VC Experts (https://vcexperts.com/).
Company ages were compiled manually from the same
sources, primarily Bloomberg Businessweek or com-
panies’ own website histories. When neither of these
resources nor further internet searches yielded a clear
date of foundation of the company, the date for rst
registration of the company domain name was used as
a proxy for foundation date. e year of domain-name
registration was found to correlate well with the self-
reported year of company formation date with a cor-
relation coecient of 0.643 for companies founded aer
1997 (when the Internet Archive started indexing com-
pany web sites).
Company location was taken from the company web
site where it was announced (or inferred from company
telephone contact numbers). For companies with more
than one location, the location of the major activity or
corporate headquarters was used. Note that this is oen
not the same as the location of company registration,
which is a “legal ction” and not an operating reality.
Deal sizes were extracted automatically from
MedTrack text data, and converted to US dollars.
CAMBRIDGE AREA COMPANY
ANALYSIS
All the companies falling into the Broad Biotechnology
category were identied in the region of Cambridge, UK
using methods developed from those used by,27,2 8 e
Cambridge region was dened following the Library
House denition of “e Cambridge cluster”. 29 is
source denes the area as all “CB” postal districts, PE28,
PE29 and SG8, with the addition of biotech companies
based in the Norwich Research Park and surrounding
area (postal codes NR1, NR4 and NR20), as this sub-
cluster has become active aer Library House performed
their cluster analysis. e data set considered only bio-
tech companies which exist as separate entities (i.e. not
part of a subsidiary) in the period between 1st January,
2008 and 31st December, 2011.
Broad Biotechnology companies were identied in
the target geography through a multi-layered approach.
Company names were identied from
1. e membership lists of industry interest
groups (UK Bio-industry Association, London
Technology Network (LTN), Eastern Region
Bioindustry Association (ERBI)—ERBI and
LTN have since merged to form One Nucleus)
2. Past and present industry directories
3. Science and industry park directories for
Cambridge Science Park, Granta Park, Great
Chesterford Park, Cambridge Research Park at
Waterbeach, and Norwich research park
4. Social network groups relating to UK science
and technology, especially LinkedIn
5. Personal contact lists and databases compiled
for previous studies of the Cambridge
biotechnology cluster, especially ref. 28.
Most companies were identied multiple times
through these dierent sources, which gives us con-
dence that few companies were not identied by this
method.In addition, the list was spot-checked with eight
Cambridge-area entrepreneur/investors, who found no
companies of which they were aware were missing from
the list.
Companies were identied as Broad Biotechnology
companies from direct examination of their web site for
their own statement of their principal business activity.
Companies involved in any of Industrial Biotechnology,
Medical Biotechnology, Bio-manufacturing, Contract
Research, Crop Development, Medical or veterinary
Diagnostics, Drug Discovery or erapeutics develop-
ment, Laboratory Technologies development or sale were
included. Companies primarily providing professional
support to biotechnology companies, such as patent
agents, legal r ms or general busi ness consultancies, were
not included. In marginal cases, the criterion for decid-
ing whether a company tted the Broad Biotechnology
decision was whether the business product or service was
primarily derived from knowledge of biology (not neces-
sarily formalised into Intellectual Property (IP) Rights).

JANUARY 2014 I VOLUME 20 I NUMBER 1 13
us, for example, a company such as Hypoxium pro-
viding specialist contract test services in the eld of low
oxygen cell culture was included, because their busi-
ness relied on expertise in this specic area of biology,
whereas a company such as BioLauncher providing busi-
ness development support services to biotech SMEs was
not included, because, although their sta had bench
science experience in the life sciences, the company’s
own IP was in expertise and knowledge in marketing
and contracts in the bioscience space, and the life science
IP was brought to them by their client companies.
Financial and shareholder data for the Cambridge
area companies was extracted from the FAME database,
accessed through the Judge Business School (University
of Cambridge).
A full list of the global VC investee companies and
the Cambridge area Broad Biotechnology companies is
available on request.
RESULTS
the global Vc funding landscape
Reports of VC nancing of biotechnology start-ups usu-
ally draw aggregate gures from generalist VC databases
(i.e. covering a range of industry sectors), or rely on
self-reporting from VC groups on their activity. Neither
can be used reliably to nd out how new biotech compa-
nies can be funded. We therefore analysed every VC deal
in the healthcare/biotech industrial area in the 2005-2011
period in the MedTrack database (http://v1.medtrack.
com/ —access and data kindly provided by Biotosacana
Farma S.A.). Additional data was gathered from internet
sources on the companies (See Supplementary Material).
Anecdotal data suggests that many companies have been
funded “under the radar” in the last few years with mini-
mum public announcement, but we found that websites,
location and age data could be successfully gathered
from 96.5% of the VC investee companies analysed, even
when no press release had been given for the investment.
e aggregate number and value of VC investments
in biotechnology dipped signicantly in 2007-2009, and
the exuberance of 2007 had only been partially recov-
ered by 2011 (Figure 1). However investment is clearly
returning to pre-credit-crunch levels. Around 63% of
the investee companies, 67% of the deals and 73% of
the invested sums were in the USA, with a heavy con-
centration in the known clusters in New England and
California. Average amounts invested per deal are sig-
nicantly higher in these clusters and lower in some
European territories (Figure 2). Some territories, such
as Germany and the BRIC countries, show a signicant
0
2000
4000
6000
8000
10000
12000
14000
16000
2005 2006 2007 2008 2009 2010 2011
Year of inve stment
$ invested
RoW
BRIC
Is rael
Scandinavia
Other Europe
Switzerland
Germany
Franc e
UK
Canada
Other USA
East Coast
West Coast
Figure 1: VC investment in biotech, 2005-2011
Aggregate value of investments in biotechnology companies, 2005-2011.

Journal of CommerCial BioteChnology http://www.CommerCialBioteChnology.Com 14
decline in average deal value between the 2005-2007
period and the 2008-2009 period.
So is the entrepreneur-reported fall-o in invest-
ment a myth? Closer examination of the data suggests
otherwise. VC investments are typically described
in Series—A, B, C etc—which reect the seniority of
the shares created at each round. Pre-A rounds are
also common; they are referred to as “Seed” rounds in
MedTrack (and this paper adopts the same terminology).
e usual assumption is that Seed rounds occur around
company formation; Series A rounds as soon as the com-
pany beginsserious operations, Series B rounds when the
funds from Series A have allowed the company to achieve
a signicant milestone and consequent value upli, and
so on. In other words, the share structures reected in
the A, B, C nomenclature oen assumed to be a reection
of the age and maturity of the company.
However, while B rounds almost never come before
A rounds, the “alphabetical terminology” does not
match well with actual company age. Drug discovery
company Karus erapeutics (Southampton, UK) raised
their rstmajor VC round (labelled Series B for technical
reasons) in September 2012, seven years and £3.2M of
non-VC investment aer the company was founded.30
Drug discovery company Mission erapeutics received
their rst major VC investment in August 2011,31 three
months aer incorporation. Clearly the two are not
comparable—Karus’ investors, innovators and manage-
ment have had to sustain the business (including sub-
stantial patent costs†) for nearly thirty times longer than
† Karus erapeutics has 11 patent families listed in the
European Patent Register, all with priority documents
led in the UK. We assume that Karus follows standard
practice of ling a priority document in the UK, then
proceeding through the PCT mechanism to US, EU,
China and Japan. We can estimate ling and prosecution
(not post-grant) costs in these territories. Filing, EU
translation and prosecution costs were estimated from,32
China and Japan translation costs from ~£5000/ling
for China and Japan (from http://patentcost.co.uk/
sand32) and professional fees of £1000 for draing
and £1000/patent/year for each of UK, EU, US and
all other territories together (a low number, but not
Average deal size, 2005 thru 2011
0
2
4
6
8
10
12
14
16
18
West Coast
East Coast
Other USA
Canada
UK
France
Germany
Switzerland
Other Europe
Scandinavia
Israel
BRI C
RoW
Global average
M$
2005-2007
2008-2009
2010-2011
Figure 2: Investment by size
Average deal size in VC investments in biotechnology 2005-2011 . Error bars are 1.98 times standard error of
themean.

JANUARY 2014 I VOLUME 20 I NUMBER 1 15
implausible—see for example the discussions in http://
www.ipwatchdog.com/2011/01/28/the-cost-of-obtaining-
patent/id=14668/, http://www.aboypatentlaw.com/
newsite/wp-content/uploads/2011/05/Services.pdf ), this
suggests a minimum patent protection budget for Karus
of ~£340,000 since its inception to mid 2013.
Mission erapeutics before they were allowed signi-
cant investment. e Karus example is not unique, and
companies that receive investment several years aer
start-up are clearly not “start-up investments” in the
sense of a new business. Seven years is rather less than
the average time between rst VC investment and the
average successful “trade sale” exit.33
I
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011
Late Stage
Mid Stage
Early stage
II
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2005 2006 2007 2008 2009 2010 2011
Late Stage
Mid Stage
Early stage
Figure 3: Number of deals by stage, 2005-2011
A fraction of all deals done in a year, divided into “early” (seed or Series A), “mid-stage” (Series B-E) and “late”
(laterdeals). I: deal numbers and II: deals by total declared value, are shown.

Journal of CommerCial BioteChnology http://www.CommerCialBioteChnology.Com 16
To gain a statistical measure of the delay between
foundation and investment, we estimated company age
by using web resources to gather evidence of when com-
panies had been founded. is may be some months or
even years aer the entrepreneur has had the “light-bulb
moment” of realizing that there is an opportunity to
exploit; company formation is when the corporate struc-
ture is put in place to exploit that opportunity. In the few
I
USA median age at round vs investment year
0
2
4
6
8
10
12
2005 2006 2007 2008 2009 2010 2011
Seed
A
B
C
D onw ards
II
Non-USA median age at round vs investment year
0
2
4
6
8
10
2005 2006 2007 2008 2009 2010 2011
Seed
A
B
C
D onw ards
Figure 4: Age of investee companies
Median age of investee biotech companies in the VC investment dataset at the time of investment, by
investment stage and year. X axis—year of investment. Y axis—age of company at time of investment. Errorbars
are 3 times the standard error of the mean (~99% condence limits).

JANUARY 2014 I VOLUME 20 I NUMBER 1 17
cases directories, corporate histories and the company
web site itself gave no indication of when a company was
founded. In these cases, the date of the company’s rst
web site with some signicant content, as determined
from archived copies at www.archive.org, was used as
a proxy. Comparison of the web site origination with
foundation dates for companies where both are known
showed that, for this set of companies, a content with sig-
nicant content was created 6-12 months aer company
foundation.
Figure 4 summarises the data for this dataset, and
shows that a “seed stage” investment is usually made 2 to
3 years aer the company has been founded, and Series
A (the rst formal or signicant investment) is made in
companies of 3.5-4 years old. Both these ages have risen
slightly over the last 6 years, notably in the USA where
“seed stage” used to mean funding at the inception of
the company, and now means (on average) funding some
30 months aer inception. ere is a substantial spread
of ages (Figure 5) with many companies receiving VC
investment up to half a decade aer they started. Note
that this view only covers companies that successfully
raised VC funds.
If start-up funds for actual start-ups are absent,
does this imply that VCs are directing their attention to
later stage opportunities? Figure 6 conrms this is the
case—the large majority of the deals and the funds are
directed to older companies. But the pattern of when
deals are done has changed signicantly globally and
in the UK, and the pattern of the aggregate amount
invested in companies of dierent ages has changed as
well. Both the number and value of deals has declined
in the USA (suggesting that the amount invested per
deal has remained relatively constant). In Europe, how-
ever, while the number of early stage deals (investments
in companies less than 4 years old) may have increased
in 2011, the aggregate value has remained low. In both
territories, the number of investments and their value
in older companies has increased consistently over the
2005-2011 period. Notably also, again in both territo-
ries, the amount invested in companies 2-4 years old
has declined dramatically. We would expect this to have
a particularly severe impact on companies in the UK
which, it is clear from Figure 2, receive substantially less
investment per round than the USA, or than some other
European countries. In the UK funding has essentially
vanished for young companies since 2007.
To summarise, the feeling “on the ground”21 that
we are living in a post-VC era is justied outside North
America for start-up biotech companies. While the aggre-
gate gures are good, investment in early-stage compa-
nies has dried up. In the USA there is an early-stage VC
drought, but “the species is not yet extinct” (Figure 6).
is pattern of investment is supported by analy-
sis of the activities of individual investment houses. We
examined the portfolio of three major VC groups‡ who
stated on their web sites and in promotional presenta-
tions that they invested in all stages of company, from
seed to late stage growth capital. While in 2005-2006 this
spread of investment was clear in their portfolio, invest-
ments from 2008 onwards were exclusively in: late stage,
near-revenue companies; projects with Phase II clini-
cal trials under way; or in companies that were already
in their portfolio before 2007. ey were not, in reality,
investing in early-stage companies.
financing sources in cambridge (uK)
healthcare biotechnology
e overriding view is that early-stage investment has
almost dried up outside the USA. To receive VC invest-
ment, a British company has to be fou nded, grow, develop,
make products, le IP etc, all without any external VC
investment. is is clearly implausible, and the lack of
VC funding consequently has led many entrepreneurs to
announce that the era of biotech start-ups is over outside
the USA. But a visit to a UK science park or innovation
centre does not support this conclusion either: several
in the Cambridge area have announced major expan-
sion plans and near complete occupancy of new build-
ings (for example, see news stories in (34-37)). So if there
is no money, how are these companies surviving? In an
eort to nd out, we examined the nancial records of
all the biotech companies in the Cambridge cluster in the
UK. UK companies are almost uniquely well suited to
such study, as the British Companies act 2006 requires
extensive public disclosure of the names of shareholders,
their shareholdings, and the class, attached rights and
purchase price of the company shares. Private company
accounts are also public documents in the UK, although
Companies ling accounts under the Small Company
Exemption (companies with turnover not more than
£6.5m, or a balance sheet total not more than £3.26m,
or no more than 5 employees—see https://www.gov.uk/
audit-exemptions-for-private-limited-companies) can le
much abbreviated accounts that contain little data rel-
evant to this analysis.
Biotechnology companies were identied from
trade associations, science park occupancy, a range
‡ e analyzed VC management groups were selected as
being major players in biotech, one primarily operating in
Continental Europe, one in the UK and one on the East
Coast USA, but as we have not done a statistical survey to
prove that they are representative it would be invidious to
name them.

Journal of CommerCial BioteChnology http://www.CommerCialBioteChnology.Com 18
I
0-1
1-2
2-3
3-4
4-5
5-6
6-7
7-8
8-9
9-10
10-12
12-14
>14
Seed + A
B
C
D onwards
0
10
20
30
40
50
US Stage vs age
Seed + A
B
C
D onwards
II
0-1
1-2
2-3
3-4
4-5
5-6
6-7
7-8
8-9
9-10
10-12
12-14
>14
Seed + A
B
C
D onwards
0
20
40
60
80
100
120
RoW Stage vs age
Seed + A
B
C
D onwards
Figure 5: Distribution of company ages at investment 2009-2011
Number of VC investment deals, by stage and age of investee company. X axis—age of company at time
of investment. Y axis—number of deals. Z axis—stage of deal. Deals 2008-2011. Panel I: USA companies,
PanelII:Companies from rest of the world.

JANUARY 2014 I VOLUME 20 I NUMBER 1 19
I
USA - total deal number
0
50
100
150
200
250
0-2 2-4 4-6 6-8 8-10 >10
2005
2006
2007
2008
2009
2010
2011
II
Europe - total deal number
0
10
20
30
40
50
60
70
0-2 2-4 4-6 6-8 8-10 >10
2005
2006
2007
2008
2009
2010
2011
Figure 6: VC investment by company age, year
VC investment in biotechnology companies in the USA and Europe, by year and age of company. Data from
two-year time periods (shown on X axis) was aggregate to provide a total number of investments (Panels I andII)
or an aggregate declared value of the invetsments (panels III and IV) for the USA (Panels I and III) and Europe
(panels II and IV). All deal values in millions of US dollars. Errors bars were computed as follows. Because the
value and number of deals is not normally distributed and has very dierent variance year-on-year and age-on-
age, an estimate of the eect of omitting deals from the data set was estimated by simulation, as follows. 4000
sets of data were generated in which 25% of the deals were randomly omitted (Excel RAND() function). The
standard deviations of the total number of deals (Panels I and II) or the aggregate value of deals (panels III and IV)
were calculated for each year+age combination. Error bars are plotted as 1.98 x that standard deviation. These
are an estimate of 95% condence limits on the numbers shown.

Journal of CommerCial BioteChnology http://www.CommerCialBioteChnology.Com 20
of directories, and conrmed by personal discussions
with 9 entrepreneurs and angel investors active in the
Cambridge cluster biotechnology community. 38 192
companies were identied in and around Cambridge,
UK, whose business is (or was) based primarily on the
exploitation of technical knowledge or IP in the life sci-
ences, and which were active in that business in 2008 or
aer regardless of when they were funded.
We rst examine the nances of the Healthcare
Biotechnology companies in the UK. ese are the com-
panies with similar business models to those analysed
in the sections above: they were founded to gain sub-
stantial investment to enable them to develop products
for the human healthcare market, usually based on new
scientic or technical insights into how to treat human
disease, and usually with an expectation that their
products would be licensed to another company before
III
USA - aggregate deal value
0
500
1000
1500
2000
2500
3000
0-2 2-4 4-6 6-8 8-10 >10
2005
2006
2007
2008
2009
2010
2011
IV
Europe - aggregate deal value
0
100
200
300
400
500
600
700
0-2 2-4 4-6 6-8 8-10 >10
2005
2006
2007
2008
2009
2010
2011
Figure 6: Continued

JANUARY 2014 I VOLUME 20 I NUMBER 1 21
commercial launch. However, unlike those in the global
analysis of VC investment above, they have not been
selected because they are the recipient of VC investment,
but only because they have a Healthcare Biotechnology
business model.
We identied 42 such companies in our Cambridge
(UK) dataset, most of which have received some invest-
ment, even if only from their founders. Figure 10 shows
thatthe large majority of these companies have received
investment, although a minority (8 companies) was built
essentially without external investment beyond their
founders and executives investment. Most however did not
rely solely on investment for their nancial resources, but
also got funds from sales, collaborative revenues or grants.
Shareholder data was obtained from company
records led with Companies House, the UK central
depository of company nancial, shareholding and
accounting information. e large majority of share-
holders in the 42 companies analysed were individuals—
only 6% of the shareholders were Venture Capital groups
(Figure 7). Surprisingly, VCs held only slightly more than
half the shares in this group of companies (Figure 8). is
includes companies that are over a decade old, and had
followed the “classic” biotech business model of reliance
on VC investment, and thus have had time to accumu-
late a substantial VC investor base. is illustrates that
VC investment is not a dominant nancial mode for UK
Healthcare Biotechnology companies.
Few shareholders hold shares in more than one
company. Only Cambridge University and Cambridge
Enterprise hold shares in more than 5 Cambridge area
biotech companies (Figure 9). is implies companies
are exploring a wide range of sources of funds, rather
than simply approaching a small number of well-known
sources of investment.
broad biotechnology companies in
cambridge, uK
e lack of concentration of shareholding in the
Healthcare Biotechnology companies leads us to examine
the wider biotechnology cluster economy in Cambridge.
As noted in the Methods section, new knowledge and IP
in the life sciences does not have to be applied in health-
care product development—depending on the knowl-
edge, it can be applied in a range of commercial modes.
We therefore sought to see if the Broad Biotechnology
industry in Cambridge could give us further insight into
how the geographic cluster was ourishing despite the
observed limitations of VC investment.
e most immediately obvious result was that many
of the Broad Biotechnology companies have revenue
sources to support their business. Only 13% were sup-
ported exclusively by investment (Figure 10), around 42%
had no investment at all, the rest having a combination of
investment and revenue. Companies currently i n business
are more likely to be partly or entirely revenue- supported.
Companies that have been acquired, liquidated or gone
dormant in the last 5 years are more likelyto be supported
Individual
Finance House
VC
General Investor
Corporate
Seed Co
Academic
Figure 7: Average number of shareholders in
Cambridge Healthcare Biotechnology companies, by
shareholder category
Average number of shareholders in each category.
For each company the fraction of the shareholders
in each shareholder category was calculated: shown
is the average of these fractions. For example,
on average 67% of the shareholders listed in the
Company Register were individuals.
Individual
Finance House
VC
General Investor
Corporate
Seed Co
Academic
Figure 8: Average fractional shareholding in
Cambridge (UK) Healthcare Biotechnology companies,
by investor category
Average fraction of shareholding held by shareholders
in each category. For each company, the fraction of the
total shares in each company that were held by each
shareholder was calculated: shown is the average of those
values. For example, on average 61% of the shares in this
set of companies was held by Venture Capital groups.

Journal of CommerCial BioteChnology http://www.CommerCialBioteChnology.Com 22
entirely by external investment. However this probably
reects the dierent business goals of the stakeholders in
the deceased companies rather than a malign inuence of
investors on business survival.
Analysis of company age versus size, nanc-
ing source and business model shows no clear pattern
(Figure 11), companies of varying proles can get funds
from all sources. is is in part a reection of the breadth
of business models involved. Although the business
model described as standard by the investment indus-
try39 and its government supporters (see e.g. (24, 40, 41))
is a high-growth, investment-driven therapeutics discov-
ery company, in reality a wide range of other businesses
can create value from life science IP.
limitations
While this survey sought to be a systematic, bias-free
review of a specic geography, we apply two caveats:
• It is very hard to prove any survey is complete.
While we are condent that the large majority
of companies operating in biotechnology in
the Cambridge area were identied, based
on “triangulation” of data from a number of
sources, we cannot claim 100% coverage
• Similarly, we relied on Medtrack for VC
deals, and this database is not universal.
CONCLUSIONS
We have analysed how start-up biotechnology compa-
nies are nancing their business in the post-VC era in the
UK. We have documented the decline of conventional
Venture Capital, and that a diverse range of other sources
of funds have been tapped to ll the gap le by the tra-
ditional VC funding of early stage start-ups exploiting
the Broad Biotechnology business model. Even within
Healthcare Biotechnology, companies are clearly seek-
ing investment from a wide range of sources, are no
0.1
1
10
100
1000
Individual
Finan ce House
VC
General Inve stor
Corpor ate
Seed Co
Academic
1
2
3
4 - 5
>5
Figure 9: Shareholder dispersion in Cambridge Biotechnology companies
Number of shareholders in dierent classes, by number of Cambridge area companies in which they are
shareholders. X axis—category of shareholder. Y axis—number of shareholders. Each bar represents the number
of shareholders in that category that hold shares in 1 (red), 2 (yellow), 3 (orange), 4-5 (green) or more than
5(blue) investee companies in the Cambridge cluster.

JANUARY 2014 I VOLUME 20 I NUMBER 1 23
Revenue / Internal
Inves tment / External
Combined
I
Revenue / Internal
Investment / External
Combined
II
0
10
20
30
40
50
60
70
Acquired Acti ve Dissolved Dormant In
Liquidation
External
Combined
Internal
III
Figure 10: Overview of nancial resources of Cambridge area companies
Financial resources for Cambridge area biotechnology companies. Financing resources for companies are
classied from their accounts and shareholder information as “External” (investment), “Internal” (revenue,
including grants), or “Combined” (both investment and revenue). Panel I: breakdown of nancial resources of
healthcare Biotechnology companies. Panel II: nancial resources for all of the Broad Biotechnology companies
in the Cambridge cluster. Panel III: analysis of all of the Broad Biotechnology companies by status of companies.

Journal of CommerCial BioteChnology http://www.CommerCialBioteChnology.Com 24
0
2
4
6
8
10
12
Combined External Internal
Funding Source
Company Duration (Years)
I: Funding source versus company duration
0% 20% 40% 60% 80% 100%
Dissolved
Dormant
In Liquidation
External
Combined
Internal
II: Funding source versus company status (where inactive includes companies
which were dissolved, became dormant or liquidated between 2008–2011)
Figure 11: company business models and nancing

JANUARY 2014 I VOLUME 20 I NUMBER 1 25
longer relying on Venture Capital, and are seeking non-
investment sources of nance.
A wide range of nancial resources have been
tappedinto by the Companies discussed in this paper.
We have not systematically surveyed the non-investment
sources of income, but we note that the following have
been used successfully in UK Broad Biotechnology
Business Angel investment: Loose aliations of
generally specialist investors (i.e. investors with
some sector-specic knowledge or interest).
Non-VC institutional investment: Some companies
have successfully acquired substantial investment
from institutional investors other than Venture
Capital. Oxford Nanopore Technologies§ has raised
over £130M in investment from non-VC investors.
Grants and non-dilutative support: Companies have
become adept at seeking non-commercial support
for their businesses, such as specic technology, new
business or sector funds
Revenue: Many of the Cambridge area companies
support themselves on revenue. is gives them a
fundamentally dierent business model to that of
VC-backed companies; they can then apply to VC
§ https://www.nanoporetech.com/ . Note that Oxford
Nanopore Technologies is not a Cambridge Company, but
is included in the larger global investment dataset.
for growth capital (as did Horizon Discovery in
Cambridge in July 2010).
None of these are exclusive, and oen form a con-
tinuum of nancing from investment seed through
non-dilutative grant and revenue funding to angel
investment for growth, as illustrated by Figure 7, Figure
8 and Figure10 above.
Other sources of nance are more speculative. One
European biotech has acquired initial nance from a
combination of Angel and Crowdfunding sources.42
Crowdfunding early, applied, non-prot research proj-
ects outside conventional academia is becoming more
widespread in the USA,43 and Crowdfunding appeals
for funding for treatment44 is echoing early predictions
that Crowdsourced drug development was possible in
principle.45 Although the scale of almost all Crowd fun-
draisings are much smaller than even Angel rounds
in biotech, let alone VC investment,46 some bio tech-
focussed crowdfunding platforms are being launched in
the USA,47, 48 suggesting this may be a future addition to
the nancing mix.
In summary, our analysis of investment trends in
the biotechnology sector indicates that:
• Funding for early stage biotechnology
companies has declined very substantially
since 2006, and in Europe, and especially
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Acquired Ac ti ve Dissolved Dormant In Liquida tion
III: Company status versus ratio of institutional shareholders
Figure 11: continued

Journal of CommerCial BioteChnology http://www.CommerCialBioteChnology.Com 26
the UK, nancing round numbers and
investment value
• ere is consequently a move away from
business models that need substantial
investment
• Companies are adapting by adopting
nancial modes based on angel
investment, grants and revenue
• Internet-mediated angel investing, such
as crowd-funding schemes seen in other
sectors, may be the developing force in the
next decade.
e future remains bright for start-ups, providing
they embrace new business models, and consider VC
investment as a “nice to have” source of growth capi-
tal for the future, not a mandatory part of the start-up
model. Whereas once the default position for biotech-
nology entrepreneurs was to access VC investment, the
funding picture is becoming more diverse, with scope
for internet-mediated investment (crowd-funding) to
become a new capital source for neophyte biotechnology
companies in the next decade.
ACKNOWLEDGEMENTS
e authors are very grateful to Biotosacana Farma S.A.
for access to the MedTrack database, and to the Judge
Business School (e University of Cambridge) for access
to business databases. Elements of the work presented
in this paper were carried out as part of the Masters in
Bioscience Enterprise degree at Cambridge University,
and the Masters in Biotechnology, Bioprocessing and
Business Management degree at the University of
Warwick. e authors are grateful to both courses for
their support. We are also very grateful to Ken Malone
for his extensive and helpful comments on an early ver-
sion of this paper.
REFERENCES
1. Lee D.P., Dibner M.D. (2005) e rise of venture capital
and biotechnology in the US and Europe. Nature
Biotechnology. 23(6): 672-676.
2. Bradford T.C. (2003) Evolving symbiosis—venture capital
and biotechnology. Nature Biotechnology. 21(9): 983-984.
3. Browning J. (2009) e incredible shrinking venture
capital. Nature. 460: 459.
4. Huggett B., Lähteenmaki R. (2012) Public biotech 2011—
by the numbers. Nature Biotechnology. 30: 751-757.
5. Cambridge Associates LLC. (2011) Cambridge Associates
LLC U. S. Venture Capital Index and selected benchmark
statistics. Boston, MA: National Venture Capital
Association.
6. Booth B.I., Salehizadeh B. (2011) In defence of life science
venture investing. Nature Biotechnology. 29(7): 579-583.
7. Bains W. (2008) Venture capital and the european
biotechnology industry. Basingstoke, UK: Palgrave
Macmillan.
8. Mulcahy D., Weeks B., Bradley H.S. (2012) We have
met the enemy ... and he is us. Lessons from twenty
years of the Kauman Foundation’s investments in
Venture Capital Funds and the triumph of hope over
experience. Kansas City, MO: Ewing Marion Kaumann
Foundation.
9. Lash A., Salemi T. Venture capital survey paints bleak
portrait. e Pink Sheet. 2012: 17-19.
10. Sahlman W.A. (1997) e structure and governance of
venture-capital organizations. In: Wright M, Robbie K,
editors. Venture Capital. Aldershot, UK: Dartmouth.
pp.3-51.
11. Gompers P., Lerner J. (2001) e venture capital
revolution. Journal of Economic Perspectives. 15(2):
145-168.
12. Gorman M., Sahlman W.A. (1989) What do venture
capitalists do? Journal of Business Venturing. 4: 231-248.
13. Gompers P.A., Lerner J. (2004) e Venture Capital
Cycle: 2nd edition. Cambridge, MA: MIT Press.
14. Brown J. (2005) Venture capital and rm performance
over the long-run: Evidence from high-tech IPOs in the
United States. Journal of Entrepreneurial Finance. 10(3):
1-33.
15. Davila A., Foster G., Gupta M. (2003) Venture capital
nancing and the growth of startup rms. Journal of
Business Venturing. 18(6): 689-708.
16. Croce A., Martí J., Murtinu S. (2013) e impact of
venture capital on the productivity growth of European
entrepreneurial rms: ‘Screening’ or ‘value added’ eect?
Journal of Business Venturing. 28(4): 489-510.
17. Baum J.A.C., Silverman B.S. (2004) Picking winners
or building them? Alliance, intellectual, and human
capital as selection criteria in venture nancing and
performance of biotechnology startups. Journal of
Business Venturing. 19(3): 411-436.
18. Chesbrough H.W., Garman A.R. (2009) Use Open
Innovation to Cope in a Downturn. Harvard Business
Review.
19. Booth B. (2009) Beyond the biotech IPO: a brave new
world. Nature Biotechnology. 27(8): 705-709.

JANUARY 2014 I VOLUME 20 I NUMBER 1 27
20. Huggett B., Hodgson J., Lähteenmäki R. (2011) Public
biotech 2010—the numbers. Nature Biotechnology. 29:
585-591.
21. Lawrence S. (2007) Upward Trend in nancing
continues, but fewer feel ush. Nature Biotechnology.
25(1): 3.
22. Cochrane J.H. (2005) e risk and return of venture
capital. Journal of Financial Economics. 75(1): 3-52.
23. Bains W. (2004) Biotechnology from A to Z. 3rd ed.
Oxford, UK: Oxford University Press.
24. Bioscience Innovation and Growth Team. (2003)
Bioscience 2015. London: Bioindustry Association
Contract No.: DTI/Pub 6988/1k/11/03/NP. URN 03/1321.
25. Booth B. (2006) Early-stage returns? Nature
Biotechnology. 24(11): 1337-2340.
26. De Robertis F., Fleck R., Lanthaler. (2009) Six secrets to
success—how to build a sustainable biotech business.
Nature Biotechnology / Bioentrepreneur.doi:10.1038/
bioe.2009.5.
27. Akram M.S. (2007) Investment trends in the Cambridge
Biotechnology Cluster. Cambridge: University of
Cambridge.
28. Smith G., Akram M.S., Redpath K., Bains W. (2008)
Wasting cash: causes of the decline of the British
biotechnology industry. Nature Biotechnology.
submitted.
29. Hugo E., Franklin R., Coman C., Lawton J., Holi M.,
van Leeuwen M., White R., Harper D. (2007) Looking
Inwards, Reaching Outwards e Cambridge Cluster
Report—2007. Cambridge, UK: Library House.
30. Karus. (2012) Karus erapeutics Secures Series B
Financing from a Syndicate of Leading VC Investors.
2012 [19th October 2012]; Available from: http://www.
karustherapeutics.com/press.asp.
31. Mission. (2011) £6M Secured in series-a-funding. 2011;
Available from: http://www.missiontherapeutics.com/
index.php/blog.
32. de la Potterie B.v.P., Francois D. (2009) e cost factor in
patent systems. J Industrial Competitiveness and Trade.
9: 329-355.
33. Buch H.K., Gustafsson A., Drvota V., Sundberg C.J.
(2011) Divining the path to a successful European exit.
Nature Biotechnology. 29(3): 205-207.
34. Armitstead L. Cambridge: home of Britain’s biotech
boom oers relief to UK economic ills. e Telegraph.
2013 02 Apr 2013;Sect. http://www.telegraph.co.uk/
nance/newsbysector/industry/9966414/Cambridge-
home-of-Britains-biotech-boom-oers-relief-to-UK-
economic-ills.html.
35. Davies L. Hi-tech cluster keeps business booming in
Cambridge. e Guardian. 2012 30 May 2012; Sect.
http://www.theguardian.com/world/2012/may/30/
hi-tech-cluster-cambridge-business.
36. BBC. (2011) Bioscience jobs boom predicted for East.
London: BBC; 2011 [17th Oct 2013]; Available from:
http://www.bbc.co.uk/news/uk-england-13068799.
37. Cambridge Research Park. (2012) Cambridge
Research Park pushes back boundaries. Cambridge,
UK: CRP; 2012; Available from: http://www.
cambridgeresearchpark.com/news/2012_august.html.
38. Wooder S. (2012) Funding Sources & Outcomes for
Cambridge Area Biotechnology Companies. Cambridge.
39. British Venture Capital Association. (2008) Venture
Capital Manifesto. London, UK: BVCA.
40. Bioscience Innovation and Growth Team. (2009)
e Review and Refresh of Bioscience 2015. London:
Bioindustry Association Contract No.: BERR/Pub
8811/0.4k/01/09/NP. URN 09/517.
41. Bains W. (2009) e VC manifesto: special pleading for
a damaged cause. Journal of Commercial Biotechnology.
15: 290-292.
42. Oreli B. (2012) Biotech crowdfunding paves way for
angels. Nature Biotechnology. 30: 1020.
43. Gewin V. (2013) Independent streak. Nature. 499:
509-511.
44. Park A. Crowdfunding a cure: the sick are getting
strangers to pay their medical bills. Time. 2012: 22.
45. Bains W. (2007) e Biomedical Mutual Organization:
a new approach to developing new edical treatments.
Medical Hypotheses. 70(4): 719-723.
46. Philippidis A. (2012) Biopharma Will Need More
than New Law to Embrace Crowdfunding. Genetic
engineering news.
47. Philippidis A. (2013) Crowdfunding Touches Down in
Biotech : Poliwogg and Microryza Represent Two Very
Dierent Approaches for Biopharma Startups to Raise
Money. Genetic engineering news. 33(10): 6-8.
48. Philippidis A. (2013) Two Roads to Wowing the Crowd.
Genetic engineering news.