GGV annual review

Governments reap rewards for their venturing efforts.

To say governments are increasingly important to the innovation capital ecosystem is an understatement.

The more than 150 new funds either directly run or backed by governments was a nearly threefold increase over 2014’s total, according to Global Government Venturing (GGV).

There was also a threefold increase in direct dealmaking by these government venturing funds, with 533 in 2015 compared with 173 the year before, according to GGV’s proprietary database.

The goals from all the new funds and deals remains broadly the same – to develop, hopefully high-paying, productive jobs for their populations, attract the fast-growing scaleable entrepreneurial businesses to the country from around the world and deliver positive financial returns.

Innovation is the mantra for this era, whether by individuals, institutional investors, universities, non-profits, governments and corporations.

But while some win, most incumbents seem to be struggling in what Paul Graham, co-founder of accelerator Y Combinator, called the “refragmentation” of society.

More than 75% of the S&P500 index of the biggest US public companies are expected to be replaced by 2027 as the average lifespan on the index falls from 60 years in the 1950s to less than 20 in the 2000s, according to data from Innosight and Richard Foster.

This is at least in part due to corporate underinvestment. Analysis by Reuters of 3,297 publicly-traded non-financial companies found they were spending more than they had on giving money back to shareholders.

Buybacks and dividends as percentage of net income

*2015 data for 613 companies that have reported
Sources: Thomson Reuters data, regulatory filings

This type of focus is encouraging governments and others to look at private and fast-growing companies for future jobs and returns, whether economic or social.

Sanaria, a US-based company working on a vaccination for malaria, last year raised $48.5m from a consortium including the government of Equatorial Guinea.

The government announced its agreement with US-based energy companies Marathon Oil Corporation, Noble Energy and US-based Atlantic Methanol Production Company (AMPCO) to support the clinical development of the vaccine from 2015 to 2018.

Equatorial Guinea invested through its Ministries of Health and Social Welfare and Mines, Industry and Energy alongside its industrial partners. The government invested $36.75m with the industry partners making up the remaining $11.75m.

Salim Abdulla, director of Tanzania-based Ifakara Health Institute, which is participating in the development of the vaccine, said: “We are honoured to contribute towards this initiative driven by our African leaders and are excited about the possibility of elimination of malaria in Equatorial Guinea and other parts of Africa.”

This form of research-driven investment by governments and corporations – the so-called triple helix – has been increasingly seen in fundraising.

For example, V-Bio Ventures, a Belgium-based venture capital firm, last year raised €63m ($68.7m) for its V-Bio Ventures Fund 1 with a cornerstone investment from the European Investment Fund (EIF), the continent’s largest limited partner in VC funds.

The EIF was joined as a V-Bio investor by Arkimedes, a program run by investment firm ParticipatieMaatschappij Vlaanderen, the region of Flanders, investment firm Korys and Leuven University.

Vlaams Instituut voor Biotechnologie (VIB), a Belgium-based life sciences institute, is also a co-founder of the fund.

The fund will invest in early-stage life sciences companies, particularly in the pharmaceuticals, biopharmaceuticals, diagnostics and agricultural improvement sectors.

Piyush Unalkat, head of technology transfer investments at the EIF, said: “This investment recognises the strong scientific base and potential of VIB, which ranks among the top in Europe in terms of scientific output and is complemented with a world-class technology transfer office.

“The European Investment Fund's investment is in line with its objective to support the commercialisation of EU innovation.”

The Benelux region – Belgium, Netherlands and Luxembourg – has had a strong life sciences focus, with Acerta the largest exit among a number of government venturing-backed deals (see below). Other Benelux government-backed health exits last year include Celyad's and Biocartis’s flotations and the sale of ActoGeniX to Intrexon.

And continental Europe has developed a strong focus on triple helix funds with multiple corporate, university and government ties. The €18m ($20m) Mainport Innovation Fund II raised money from airline operator KLM, airport company Schiphol Group and rail network manager NS Dutch Railways, Delft University of Technology and Port of Amsterdam and the Netherlands Ministry of Economic Affairs’ Seed Capital initiative.

There is also greater collaboration among European development institutions, particularly the EIF and its parent, the European Investment Bank, the European Commission and the European Bank for Reconstruction and Development, including the primarily project finance-orientated European Fund for Strategic Investments with multibiillion-euro commitments already made.

However, other regions, particularly in Asia, have already been making these leaps.

China announced at the start of last year a $6.5bn programme to support venture capital and entrepreneurs, while the Zhejiang provincial government in the country set up a $3.2bn programme and its sovereign wealth funds and top universities have been looking more at innovation investments (see Tsinghua box in GUV).

The US, however, remains an outlier in terms of its innovation capital industry. While state funds, such as Alaska’s which invested in Juno Therapeutics ahead of its flotation, can take large stakes, most of the big deals – many involved in the taxi wars of Uber, Lyft, Ola and Didi Kuaidi – have involved foreign sovereign wealth funds, such as Singapore’s Temasek and GIC.

State support has tended to focus on research through the Small Business Innovation Research programme, leveraging VCs through Small Business Investment Company (SBIC) and State Small Business Credit Initiative loans, and tax breaks to entrepreneurs and investors.

However, through the successes of government venturing unit In-Q-Tel and an unexpectedly large boost in last year’s budget, to $225m from $75m, for the Rapid Innovation Fund (RIF), which is designed to “transition innovative technologies, primarily from small businesses, that resolve Department of Defence operational challenges”, the government under President Barack Obama had looked at ways to support innovation.

Around the world, therefore, there were few signs that innovation capital was becoming less important.

Europe’s ‘resilient’ entrepreneurs

It is a sign of how far European entrepreneurs and its innovation capital economy have come that the biggest venture-backed exits of the past few years in WhatsApp and now Acerta Pharma involve the “old continent”.

That the majority of the returns have been reaped by US venture capital firms in both these cases is a sign of the progress that still needs to be made, at least in the eyes of European policymakers.

Jan Koum was born in Ukraine before moving to the US and co-founding messaging company WhatsApp with Brian Acton and then exiting to Facebook in a $19bn deal. VC firm Sequoia Capital reaped the bulk of this return. A US company sold to US firms and backed by US VCs is fairly standard for Silicon Valley, which prides itself on attracting talented entrepreneurs from around the world.

Acerta Pharma, however, looks on paper to be more of a European deal and the largest exit at about $7bn since 2014’s WhatsApp.

Anglo-Swedish-listed drugs company AstraZeneca has agreed to acquire a 55% stake in Netherlands-based anti-cancer drug developer Acerta Pharma, backed by the regional government venturing unit BOM Capital and an interesting triple helix venturing organisation, BioGeneration.

AstraZeneca has agreed to pay $2.5bn initially for 55%, and another $1.5bn will be paid either on receipt of the first regulatory approval for its main drug, Acalabrutinib, for any indication in the US, or the end of 2018, depending on which is first. AstraZeneca also has a $3bn option to buy the remaining shares.

Even taking the first tranche of cash, this is a great return for BOM, which had invested €749,222 ($812,442) in Acerta, according to an answer to political questions, and BioGeneration Ventures, which helped Acerta raise $13m to $14m in a first tranche of its $130m to $175m series A round in 2013, according to news provider Fortune.

But as one local industry expert said, BioGeneration, which was started in 2007 as an initiative involving the government’s Netherlands Genomics Initiative, Leiden University, bank ABN Amro and its former VC unit Forbion Capital Partners, and BOM were diluted, as US investors, including venture capital firms Frazier Healthcare Ventures and OrbiMed Advisors, came in.

Acerta also reportedly raised up to $375m in a B round that closed in May, according to news provider Fortune. BioGeneration went to a "low single digit" percentage, according to one industry expert. Biogeneration declined to comment on its returns.

Given even 1% of a $7bn deal is $70m, even a holding of a few percentage points will be a fantastic return. But for the VCs and others, reportedly including mutual fund manager T Rowe Price, that own more, the value can quickly run into hundreds of millions of dollars.

However, as a close peer of Acerta, Pharmacyclics, was sold in March to AbbVie for $21bn, it could be argued that European investors might have been quicker to spot the hidden value in the Dutch startup, given public market analysis by EP Vantage among others.

Neelie Kroes, former vice-president and digital agenda commissioner for the European Commission and now special envoy for StartupDelta in the Netherlands, certainly hopes things will change.

She said: “In Europe it remains difficult to believe that even with success stories like Acerta Pharma, startups have to rely on US money in the later-stage funding rounds. We have to change that.”

She described Acerta Pharma as a “new success story for the Dutch/StartupDelta ecosystem” and an example of “the resilience of the people and the local ecosystem” in the Netherlands and its Oss region.

The origins of Acerta show this.

In 2011, US-based pharma company Merck closed its Oss-based research department taken on when local pharma group Organon was acquired by a business that was then folded into Merck in 2009. Outside the US, the company is known as Merck Sharp and Dohme (MSD).

A year after the centre’s closure, in 2012, some of these research buildings and equipment were reconstituted by a consortium of business, universities and government into Pivot Park, which housed Acerta, set up by two ex-employees of MSD/Organon – Allard Kaptein and Tjeerd Barf.

Kroes said: “The Pivot Park in Oss is a classic example of an inspiring campus for open innovation in the life sciences. Startups and SMEs [small and medium-sized enterprises] have access to the same facilities as big pharma. You can compare the story to a certain extent with [mobile phone maker] Nokia, where Nokia’s fall means the rise of startups in Finland.

“The early-stage funding of Acerta Pharma demonstrates that startups in the Netherland have sufficient access to funding in the early stages. The local ecosystem was also very successful in connecting to international VCs for the later-stage funding rounds. But this is not always the case and there is room for improvement and StartupDelta wants to play a role.”

As Kroes said, initially, Kaptein and Barf had been meeting local investors.

Mariette van der Velden-Roesink, senior investment manager for life sciences and health at BOM Capital, which invests to support the Brabant region in the southern Netherlands, of which Oss is a municipality and a city, declined to comment on returns but said: “The Brabant (Oss) region was very much a factor in this startup, which deserved our support but also soon attracted many American investors and has management and clinical operations in California [under CEO Dave Johnson].”

Edward van Wezel, managing partner of BioGeneration Ventures, which is planning to raise a third fund of €50m in the first half of 2016, said he had started to work with Acerta Pharma in 2012 and helped bring in these Americans.

He said: “Through our own network, we came into contact with Allard Kaptein and Tjeerd Barf [who] were looking to raise funds for a startup company based on a small-molecule-based technology platform. 

“We employed our experience with early-stage opportunities to get the company started. BioGeneration helped to direct the focus of the new company and enabled the company to get the required assets in place. BioGeneration also early on identified a team of experienced professionals based in the US with complementary skills [including Ahmed Hamdy, the ex-chief medical officer of Pharmacyclics] that joined Acerta Pharma. This, together with a number investors, mainly from the US, ultimately resulted in a series A funding in 2013.

“It must be noted that we do not believe that Acerta would have found sufficient funding at this early stage in Europe alone, nor the expertise and experience required to make it into a success. We know there is great scientific innovative strength in Europe. However, the expertise to translate innovative new scientific findings into successful new therapeutic products lags behind compared to the US.”

AstraZeneca certainly has high hopes for Acerta’s main drug, Acalabrutinib, a so-called BTK inhibitor designed to interrupt the signalling process that B-cell cancers use to proliferate. The drug, currently in phase 3 trials, so with an assumed 60% probability of success, could bring in $5bn a year at its peak if clinical trials work out, according to AstraZeneca in its press release. 

The good news, therefore, is the Netherlands has an entrepreneurial success story and its Startup Delta ecosystem has developed the tools to help support their earliest stages.

The other positive is the global ecosystem has proved successful in funding its potential and finding a trade buyer to crystallise its value.

The challenge remains for Europe’s deep-pocketed investors to reap fuller rewards from their earlier-stage support.

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