VC: virtuous or vampire capital?

It is a universally acknowledged truth that a biotech start-up in possession of little fortune must be in want of venture capital (VC). Perhaps less well acknowledged, however, is that VC investors operate in a way consistent with being rational economic entities — creating VC shareholder value at the expense of investee company value and maximizing management fees by raising new funds at the expense of effectively managing existing investments. This is the controversial message of a new book by William Bains that purports to uncover the real VC business model and, for the first time, to link it to the withered European biotechnology industry that, in comparison with the US, has singularly failed to thrive.

Gerhard Symons

Dr Bains' contrarian conclusions are the fruit of a career spanning two decades as an academic and a life sciences entrepreneur, in which he has founded four companies and helped in the creation of several others in a variety of roles, including as an investor. It is his intimate familiarity with the seminal events of company development through the biotech growth, boom and bust eras, with the liberal sprinkling of real-life examples on almost every page that lends credibility to the book.

Speaking to Pharmaceutical Technology Europe, Dr Bains said: "I had a hypothesis that something was wrong with the VC business model and that it was a major contributory factor to why biotech companies fail, along with the other business school reasons: cyclical public markets, institutional investor and public non-acceptance of biotech, and tension between management and entrepreneurs. The result is a book that doesn't conform to what people think about VC."

The first six chapters whet the reader's appetite with a highly readable history of the biotech industry, VC origins, and the weaknesses of European biotechnology before moving on to the main course, which has considerably more bite. What follows is a text-book style dissection of the effects of VC management on investee board-level issues: veto powers, directors' responsibilities, company strategy, preference shares and even the performance of senior pharma executives parachuted in as biotech CEOs.

On this latter point, I asked Dr Bains for advice to pharma executives considering a move into biotech: "Biotechs are generally a level playing field — there is no hierarchy in a start-up. You also have to be personally excited by the opportunity, not just with having the CEO title or a big salary — kudos will run out when the VC fires you. Usually, pharma executives fall down on how fragile a biotech start-up is: one day you might have to help buy some laboratory kit, the next day discussing financial strategy with the Board."

Part-exposé, part-manifesto, the threads previously discussed throughout the book are finally woven into a narrative exposing the VC business model in the lengthiest and most revelatory chapter of the book — the vampiric emasculation of biotech investee companies — before making an appeal to government and business in the final two chapters to encourage VC to do better.

I challenged Dr Bains to predict reactions to the book. He says: "A minority of VCs will get very annoyed; however, most entrepreneurs and business angels I spoke to about their experiences with VC didn't know it happened to anyone else too and that was a big motivation to write the book."

Indeed, the British Private Equity and Venture Capital Association (BVCA), which is undergoing major organizational changes, commented on the findings: "VC plays a significant role in the UK economy and we know, from politicians and commentators alike, that there is a pressing need to allow the free enterprise economy to flourish over the long term. We are focused on building a compelling argument to demonstrate that VC does make good returns. We are beyond the problems of the dot-com period and, as such, believe that we can create the necessary shift in attitude to turn around the received wisdom of US doing venture and the UK doing buy-outs."

As with any book with a 5-year gestational period and which straddles an academic pot pourri of topics, it could, in places, have benefited from tighter editing to ensure that all references cited were the most up-to-date and that the copy more closely matched chapter headings. Despite the ostensible 'European' remit there is a strong bias throughout the book towards the use of UK data, particularly from the Cambridge biotech cluster, to which Dr Bains replied: "The UK has been a leader in European biotech from the beginning and the concentration of VC and the wealth of data on biotech VC investing, particularly in Cambridge, Oxford, and to some extent London, reflects the historical development of biotech in Europe."

With this well-referenced book, Dr Bains has filled an important lacuna within the literature on European biotech VC financing with an accessible primer for MBA students — particularly those researching biopharma and VC business cases — and for students undertaking specialist, industry-focused, post-graduate courses, such as bioscience enterprise at the Institute of Biotechnology, University of Cambridge, where Dr Bains lectures in entrepreneurship. Moreover, business angels, institutional investors, high-net worth individuals, not to mention entrepreneurs, may wish to compare their own VC experiences against Dr Bains' model. Indeed, Dr Bains considers that pharmaceutical corporate venturing may also be interested: "It is now a good opportunity for them to come into the market and set new modi operandi for investing."

With this book William Bains convincingly demonstrates the importance of investment-ready biotechs and their scientist–entrepreneur founders to choose their bed-fellows with caution. VC may well be virtuous, but judging by this book, inviting VC into one's domain may render one powerless.

Gerhard Symons is a Doctoral Researcher at Imperial College Business School, London. Dr Bains's Venture Capitalism and the European Biotechnology Industry is published by Palgrave MacMillan (www.palgrave.com).