Foreign governments feed biotechnology venture capital firms as U.S. appetite for bailouts wanes

While the suggestion that the United States government bail out venture capital firms has failed to attract support from government leaders—and would surely raise taxpayer ire—the mood is quite different overseas, according to recent media reports.

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While the suggestion that the United States government bailout venture capital firms has failed to attract support from governmentleaders—and would surely raise taxpayer ire—the mood is quite differentoverseas, according to recent media reports.

In late June, the U.K. government announced that it willinvest $248 million in a new venture capital "fund of funds," according to a VentureCapital Dispatch report. Predicted by FirstSecretary of State Lord Mandelson to be a "real shot in the arm for the Britishventure capital industry", the U.K. Innovation Fund aims to attract investmentfrom pension funds and the private sector to create a $1.6 billion fund within10 years.

Last year, venture capital investment in U.K. start-ups fell28 percent to nearly $2 billion, while the number of deals dropped 26 percentto 324, the lowest total on record in this decade, according to research firmDow Jones VentureSource. In particular, the U.K's biotechnology industry hassuffered badly during the last 18 months because many investors lost theirappetite for high-risk investments, according to Venture Capital Dispatch. The Bioindustry Association (BIA), told thepublication that a third of its small drug developer members had less than sixmonths' worth of cash left. The BIA and other trade organizations havereportedly lobbied hard for government financial support, arguing that venturecapital is essential for economic recovery and to maintain the U.K'scompetitiveness in the sector.

"We need the Google or Genentech of the future, and theywill only be created if there is the capital to back them," Lord Drayson,minister for Science and Innovation, told the publication.

The U.K. government will appoint a manager to run the U.K.Innovation Fund and hopes to make its first investment by the end of the year.

Elsewhere overseas, Israel is also setting up a $63 millioncapital fund to specifically finance biotech start-ups, according to a recentReuters report.

The government hopes the fund, expected to rise to $253million using loans from private investors, will encourage and advance growthin Israel's biotech sector. The government will split profits from activitiesin the fund between itself and private investors.

"There's great importance to the fact that 250 millionshekels ($63 million) of government money is allocated to the development of anindustry whose workforce is of great value and whose development and prosperityare crucial to the economy," Eli Ofer, chief scientist at the Industry andTrade Ministry, told Reuters.

Back on home soil, however, our appetites for government aidof the venture capital industry aren't quite as robust. According to a recent Wired report, during the first three months of 2009,biotech firms brought in only $576 million of venture capital, the worstquarter since fall 2001, after the Sept. 11, 2001, terrorist attacks. Althoughsome biotech leaders have lobbied Congress for a bail-out since last fall, theyhave yet to gain widespread approval for it.

Amidst the seemingly never-ending economic gloom and doom,there does seem to be a light at the end of this tunnel: U.S. biotech start-upsmay be taking matters into their own hands. San Francisco venture capital firmBurrill & Co. recorded a significant 25 percent increase in totalfinancings and partnering in the second quarter of this year compared to thefirst quarter. While financings were down quarter over quarter, the amount U.S.biotech firms raised in partnering deals was up 68 percent, Burrill said. Thefirm also noted that it has become increasingly difficult to attract venturecapital as the amount raised by biotechs in the U.S. in the second quarter wasdown 43 percent down from the total raised in the first quarter.

"While it is still going to take many more months beforebiotech starts on the road to full recovery, it is encouraging to see companiesare still raising capital despite the tough economic conditions," Burrill said."This increase reflects the fact that in a tight fiscal environment companiesare devoting their energies on finding pharmaceutical and biotech partners tohelp build value of their lead product programs."

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