For four years, the High-Tech Gründerfonds (high-tech company establishment fund) has been supporting technology-oriented company founders. The project, which is backed by the Federal German government and major businesses, has 272 million euros of largely federal funds at its disposal, and its objective is the accelerated marketability of ideas. We spoke with Marco Winzer, representative and Investment Director at High-Tech Gründerfonds, responsible for acquisition, assessment and negotiation of investments as well as the supervision of investment management companies.
No. Founders in the high-tech area, especially those in the life sciences, have enough seed capital available. Public and semi-public investors as well as private investors are currently investing against the trend.
We have observed increased financing activity by family offices and business angels. This is shown by follow-on financing in the companies in our portfolio: In 2008 and over the first half of 2009, around 80 million euros were invested in our portfolio companies by third parties. In contrast, over the same period of time, High-Tech Gründerfonds spent 36 million euros on first round financing.
I am assuming that this trend will continue despite the crisis. I would advise any founders to go ahead despite the crisis and to make full use of High-Tech Gründerfonds capital along with other funding for the first two years of business.
Not all biotech start-ups are high risk and need huge amounts of capital. It is important to differentiate between drug development companies and service providers with a platform technology. Of 48 High-Tech Gründerfonds life science companies, seven are involved in drug development, two of which negotiated follow-on investments of 3.5 and 5 million euros in 2008. High-Tech Gründerfonds was an ideal seed-financing partner for these companies with a first round investment of 500,000 euros.The prerequisite for investment is that a company has a technology that has basically proven to be feasible and that during the seed phase additional investors besides us are involved, thus extending the financing range. Ideally, the initial founding team includes an experienced coach with experience in industry and/or clinical development.
Business plans drawn up by biotech founders are usually very well thought-out and planned. It is clear that the founders have thought about the project and the possibility of establishing a start-up for a very long time.In the biotech industry, the step towards self-employment is rarely taken due to lack of other alternatives or as an emergency response (e.g., to unemployment); it is often a conscious, long-term decision. The founders have weighed the possibility of founding a company against a career in teaching and research, for example.Furthermore, we have discovered in our portfolio that for life science start-ups – as compared with other industries e.g., the Internet or software industries – the costs calculated in the business plans are usually precisely adhered to. Unfortunately, this is not the case for planned sales: These are rarely adhered to across all industries.
As a result of the relatively high capital needs, long development phases to the final product and the incredibly high risk in biotechnology, I always advise founders to start thinking about follow-on financing in the High-Tech Gründerfonds seed-financing phase. Through our wide and resilient network in the private equity market (VC’s, family offices, strategic investors, etc.) we can offer valuable aid and provide companies with pitches to present to investors. This basically echoes a saying from football: “The end of the seed financing phase comes before the follow-on financing phase”.
Entrepreneurial spirit and thinking! Even if a product’s market launch is very far off, biotech founders should know who their customers are, what solutions they can offer to future customers at what price, and what distribution channel with what marketing mix will be necessary to reach customers. This is also true for drug development companies who are interested in a pharmaceutical deal at a certain clinical phase. Very important: Founders must have the courage to take on the risks themselves. When High-Tech Gründerfonds invests, we expect the founders to keep their IP in the company and support their own share of the financing. This makes up at least ten percent of our funding or at least five percent in the newly formed German states.
Our organisation anticipates two to four months from initial contact to final investment decision. Time-wise, our assessment process (due diligence) is targeted to be carried out at our external investment committee meeting, which is held about six times a year. This committee consists of external experts from industry, research, banking, VC industry and an experienced entrepreneur. The founders present their plan personally and immediately receive the vote on investment (see graph).At best, the founders can then start their business two to three months after initial contact with us using the first financing sum.
Compared to other industries such as multimedia, soft- and hardware, we receive considerably fewer applications for funding from biotech founders. However, as the business plans are better prepared, biotech founders definitely have a higher chance of receiving our support.Only 15.4 percent of applications we receive are from the life science sector (biotech plus medtech, white and green biotech), but these make up nearly 30 percent of our portfolio (see graph). We would be happy to finance more biotech and cleantech companies.
Our life science portfolio consists of seven companies that are involved in drug development, nine biotech companies with platform technologies, eight diagnostics companies and three white or green biotech companies. 20 other companies operate in medical technology, which completes the life science portfolio.
We are extremely happy with the development of our biotech investments. Over a funding period of nearly four years, we can only report one failure: Contrary to our expectations, the results of the pre-clinical study were negative. The project was therefore aborted and the company liquidated. All other biotech investments appear to maintain stable value development of our investment.
During the first round of financing, we invest 500,000 euros in the company. At the same time, we hold on to 500,000 euros in order to protect our shares from dilution, which we can invest as follow-on funding. The company finds a so-called lead investor on the free equity market, and High-Tech Gründerfonds then acts as co-investor. The interview was conducted by Walter Pytlik, BioRegionUlm.