Long gestation periods of biotech ventures, near absence of public-listed companies, and lack of regulatory framework, have been cited as major impediments for getting venture funding in the sector. The tepid demand for venture capital from the start-up firms could be another reason.
Biotechnology industry
The biotechnology industry is a knowledge driven capital-intensive one. The two most important applications are in life-sciences industry, where the focus is on treatment of diseases, and in the farm business, where the aim is to produce foods with enhanced nutrition and flavour, longer tenability and a natural resistance to insects, viruses and herbicides. This is evident from the share of agro-products and pharmaceuticals in the global biotechnology market, at 35 per cent and 25 per cent respectively in 1999.
India has been practising conventional biotechnology for decades, but modern biotechnology is rather new to India and is growing rapidly. In 1997, the total biotech market in India was valued at $500 million. This grew to $1 billion and $2.5 billion in 1999 and 2001 respectively and is expected to grow to $4.5 billion by 2010.
India is a large market and opportunities exist for biotech products and businesses in the areas of biogenerics, biopharmaceuticals, agricultural, food and nutrition sectors, not only domestically but also internationally. India's clinical capability and research access to a diverse patient profile, makes the industry competent.
In addition, there are significantly lower operational costs and a higher profit margin. Bio-diversity of human gene pools and unique plant, animal and microbial diversity also offer exciting opportunities for genomic research.
Venture capital in biotechnology firms
Biotechnology firms have access to capital through two avenues: Private venture capital and government funding. Venture capital funding in India is severely limited. There are six or seven prominent venture capital firms, including ICICI, and Morgan Stanley, which have been fairly active. But most venture capitalists are unwilling to invest in biotech R&D. Rather, they want to fund companies whose products and markets are clearly identified. Their focus is on funding the commercialisation of techniques already developed.
Given the growth potential, biotechnology is an ideal area for venture capital investment. A high level of drug discovery is expected in small start-up companies. The potential for emerging biotechnology can be fully realised only if venture capital funds (VCFs) come forward more proactively.
Role of venture capitalists
Venture capitalists finance innovation and ideas with a potential for high growth but with inherent uncertainties. This makes it a high-risk, -return investment. According to a recent report, of 100 proposals received by venture capitalists, only one reached the final stage of discussion and evaluation.
Apart from finance, venture capitalists provide networking, management and marketing support as well. The venture capitalist is a business partner, sharing the risks and rewards and provides strategic, operational and financial advice to the company based on experience with other companies in similar situations.
Factors affecting choice of partners by venture capital
Venture capital target companies with superior products or services focussed at fast-growing or untapped markets. Venture capitalists must be confident that the firm has the quality and depth in the management team to achieve its aspirations. They will want to ensure that the investee company has the willingness to adopt modern corporate governance standards.
Firms strong in factors relating to patents, management, idea, and potential are more likely to obtain VC financing and willing partners to support commercialisation activities.
Last, venture capitalists look for clear exit routes for their investment such as public listing or a third-party acquisition of the investee company.
Though the biotechnology segment is gaining prominence and has the potential to address some of the socio-economic deficiencies, venture capitalists need to develop a sense of confidence to invest more into the sector. One of the ways to do this is to compare the relative performance of venture capital funds-backed and non-venture capital funds-backed firms.
The Table shows how venture capital-backed firms have performed vis-a-vis non-venture capital-backed firms for both expansion and start-ups firms.
Comparing the expansion stage investment of the venture capitalists in Biocon with that of Nicholas Piramal, it can be seen that in 2003, immediately after Biocon received venture capital funding, its profits rose 76 per cent, followed by a quantum jump of 247 per cent in 2004, whereas for 2004, Nicholas Piramal's profit rose merely 60 per cent. Both these firms are in the expansion stage and were started at the same time.
Panacea Ltd was also started around the same time. Its profit fell both in 2003 and 2004, whereas Biocon is experiencing a high growth in profit partly due to the support of the venture capitalists.
Another established firm, Monsanto India, which got venture capital support in 2002, has shown fair results compared to its contemporary, Shasun Chemicals and Drugs. In 2001, Monsanto's profits rose 10 per cent while the latter reported a 40 per cent fall in profits. With venture capital support, the profit of former jumped to 60 per cent, leaving Shasun's profit growth at only 17 per cent.
A comparison of Genomic and Haffkine Bio-Pharmaceuticals, both started in 1999, shows that the latter had not experienced any growth in profits from 2002 onwards. Whereas, venture capital-backed Genomic's profits rose 671 per cent in 2003 followed by 32 per cent growth in 2004 compared to Haffkine, whose profits fell 4 per cent and 111 per cent in the same periods.
Krebs Biochemical is also a startup, but has been performing badly compared to companies backed by venture capital. Its profits fell from 2001 onwards. In comparison, venture capital-backed Bharat Serum and Vaccines, set up in 2003, showed a positive profit growth of 18 per cent in 2003.
Venture capital is a nascent industry in India. With a sea-change in the mindset of people towards risk and investment, expatriates are returning to invest more than just money in start-ups. Also, the Government is promoting the establishment of biotechnology centres within industrial parks. Some are already established, such as the Marine Biotech Park in Chennai; others are in the pipeline.
According to a recent Nasscom study, venture capital funding in India is focussed primarily on expansion. Funding on startups fell from 36 per cent in 2001 to less than 10 per cent in 2003.
The same is true of the biotech sector, where seed funding accounted for only 15 per cent of the total disbursement, while late-stage funding constituted 41 per cent.
If India is to become one of the top five global locations in the creation of technology ventures, leading to the annual investment of over $10 billion by 2008 as envisaged by Nasscom, this trend needs to be reversed. Perhaps, a look at the performance of venture capital-backed start-up firms vis-à-vis non-venture capital-backed firms can surely induce more funding.
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