The Edge Daily, June 11, 2007

My Bit: Financing biotech, the Indian experience

Financing plays a critical role in the development and promotion of the biotechnology industry. Biotechnology businesses go through various life cycles and each one is confronted with its own financing issues and concerns. Labelled as a knowledge-based industry, this sunrise sector requires a modern and innovative financing business model for it to work. Consequently, alternative financing structures and options are required. Building a biotechnology business requires a foundation supported by research and development (R&D), prototype and product development and the commercialisation of the R&D, followed by the licensing of the intellectual property rights (IPR) or the formation of a start-up to grow the business. Additional business models include the purchasing of an IPR and manufacturing of the products, while others involve merger and acquisitions (M&A). As such, a financing structure that supports funding throughout this spectrum of activities is paramount for the success of the industry. With this brief overview, I wish to highlight to readers strategic initiatives introduced and promoted by the Indian government independently, as well as in partnership with the state governments, private sector and international partners aimed at fast-tracking the growth of the biotechnology segment through innovative financing solutions encompassing angel investing and seed capital, venture capital funding and debt financing by selected banks, including Rabo India Finance Private Ltd and Yes Bank.

I wish to draw the readers' attention to angel investments and seed funds offered in India. Subsequent articles will focus on venture capital financing and also feature selected banks in India which have identifed biotechnology as a priority lending sector and their corresponding programmes and funds. Starting in 2001, the venture capital financing scene in India witnessed a drastic dip in investments for early stage or startups. From a high investment of approximately 30% of total venture capital investments channeled to the early stage in 2000 during the IT and Internet boom, this changed considerably as the dotcom burst created fear among venture capitalists. This caused concern to the Indian government and businesses which recognised the need for adequate funding at this critical stage of business development. In response to the new business model and needs of the industry, innovative financing structures and mechanisms were introduced to offer help at this early stage of development.

These new financial structures were introduced to fund start-ups, in addition to the traditional 3F's — Founders, Family and Friends — and business angels and seedcorn/seed capital or seed funding.

Business angel financing

Angel investments and seed funds only took root in India in 2006, after much debate and concern has been raised about the acute shortage of this type of funds to support seed and early stage businesses.

Band of Angels (BoA)

A group of highly successful entrepreneurs and CEOs from India and outside the country gathered to establish a Band of Angels in April 2006 to serve as a unique platform to fund entrepreneurs at the early stage of their business development.

Comprising high net-worth individuals and institutional investors, this New-Delhi angel investment group offers more than just money. They provide entrepreneurs access to mentoring, vast networks and inputs and advice on strategy as well as execution. Saurabh Srivastava, co-founder of Nasscom and the Band of Angels as well as the President of Indian Venture Capital Association (IVCA); Barings Private Equity Partners' Alok Mittal; Silicon Valley entrepreneur Sanjay Bhargava; Vertex India's CEO and head of offshoring Dan Sandhu, and Scicom Infotech director Mohit Goyal are some of the BoA's investors while institutional investors include SIDBI Venture, Punjab Venture Capital Ltd and Lightspeed Venture.

An interesting article published by GigaOmniMedia Inc highlighted the background to the establishment of the BoA. It reported that after the dotcom meltdown and IT slowdown had nearly crushed the startup he co-founded, Mittal realised that India's business environment had a major shortcoming. There was no money for early stage companies. He survived — selling the startup he co-founded, www.jobsahead.com , to www.Monster.com for US$9 million in 2004 — but his five-year roller-coaster ride gave him another idea.

With venture capitalists looking to invest around US$1 million to US$3 million, Indian entrepreneurs badly needed angel investors willing to commit smaller amounts, and more importantly, provide guidance to very early stage companies.

Thus Mittal informally started BoA, modelled on the Band of Angels and Angel Capital Association in the US, to provide not just money but also high-quality mentoring to budding entrepreneurs. The group that was formally launched in April 2006 has 30 investors from a variety of industries. Investment sectors considered for funding by the BoA include IT products and services, high-end BPO, internet, media and entertainment, biotech and pharma as well as leading-edge technology in telecom and embedded domains.
Although their investment ranges from US$100,000 to US$1 million, the band may also consider investments of over a million dollars via co-investment and syndication. Generally, these angel investors offer financing to entrepreneurs just prior to investments by the venture capitalists.

Mumbai Angels

Seven months after the establishment of BoA India in New Delhi, another group of entrepreneurs, many with prior Silicon Valley experience, set up Mumbai Angels in November 2006. Its investments range from US$200,000 to US$500,000 and higher investment ranges may be considered via co-investment and syndication.

Interestingly, a large number of The Indus Entrepreneurs (TiE) members are angel investors. TiE, also known as Talent Ideas and Enterprise, a global, non-profit network founded in 1992 in Silicon Valley by a group of successful entrepreneurs, corporate executives, and senior professionals with roots in the Indus region, is committed to the advancement of entrepreneurship. TiE had three main objectives: mentor, network and educate. TiE was active in building an ecosystem for entrepreneurship in India. It launched the AAA campaign, which stood for advocacy, awareness and assistance. The advocacy initiative sought to work with the Indian government to remove impediments to the development of an entrepreneurial culture.

In this context, TiE was working closely with the National Entrepreneur's Network to study the factors causing a paucity of seed capital in India. In the area of awareness, TiE was developing a showcase of successful local entrepreneurs in India to publicise their achievements and inspire the next generation.

Finally, TiE was developing programmes to assist entrepreneurs. An example was the launch of the Entrepreneurship Nurturing programme in TiE's New Delhi chapter. Through this programme, a select group of entrepreneurs were given the opportunity to attend weeklong entrepreneurial boot camps where they were closely coached by TiE charter members who helped them validate their ideas, define their market and refine their strategy. Since its early days, TiE had been a breeding ground for angel investors. Serial entrepreneurs and wealthy private investors actively sought aspiring entrepreneurs looking to start new ventures through the TiE network.

Seed fund

Based on the founders' experience, in which they estimated that the right amount of funding for an Indian startup wasn't in the millions or in tens of millions of dollars but closer to about US$500,000, Pravin Gandhi and Bharati Jacob, who came from Infinity Venture, Mahesh Murthy, who came from Passionfund, and Paula Mariwala started India's smallest venture capital fund, Seed Fund, providing between US$10 to US$13 million. Seed Fund, incorporated in December 2006, is committed to investing in very early-stage startups in India, especially innovative companies that primarily serve the Indian market. The founders, guided by the principle and practice that at the seed stage, teams with big ideas need less money and more mentoring from people who have an entrepreneurial background, are anticipating to work closely with about 15 to 20 companies over the next five years.

From their exposure to previous investments and local as well as international investors, the founders had succeeded in soliciting contributions for the Seed Fund from high net-worth individuals as well as local and international venture capital companies.

A most recent investor to the Seed Fund is Google Inc, which surprised many investors and entrepreneurs. This is a different approach to its traditional way of direct investments into companies rather than into funds. Meanwhile, the Feb 22, 2007, issue of Business Line reported that the ICICI Knowledge Park will be launching a seed fund for R&D in life sciences and IT on September 2007. This 100-crore rupees IT-Biotech seed fund will earmark 50 crore rupees for biotechnology and another 50 crore rupees for IT.

Recommendations for Malaysia

I think it is clear that Malaysia needs to establish a Business Angel Network in selected regions promoted as bioclusters. Malaysia is fortunate to have a large number of wealthy individuals who have successfully built businesses in many sectors of the industry. These individuals have immense potential to offer to budding entrepreneuers seeking to establish start–ups. In addition to funds, these individuals (more popularly referred to as business angels) are able to mentor the entrepreneurs as well as connect them with their corporate contacts and networks which are very critical in the early stage of business development.

Hence, it is highly recommended that Malaysia strive to identify these business angels and set up business angel networks as a strategic means for offering funding, mentoring and networking for start-ups. Malaysia also needs to establish seed funding. While the nation's first dedicated venture capital fund for the life science sector, the Malaysia Life Sciences Venture Fund, has just been launched last week, there is a critical gap to offer new funding for early and seed stage companies.

Sheriffah Noor Khamseah al-idid is a biotech advocate with a Master's in Physics from the Imperial College, London