Rio Valdivia, cutting through Valdivia, Chile.

Or, why hatch a biotech business?

There are around 20 business incubators in Chile, and for the last couple of years they have been getting kind of a bad reputation. Their main job is to take government grants (usually seed funds) and allocate them to different projects that they scout through competitions and direct application. Many of these incubators base their business models on taking a percentage of their startups’ sales for up to 5 years, or equity up to 7% to be cashed out in 5 years, or a combination of both. Considering this timeline, it will probably come as no surprise that most business incubators here avoid biotech projects like the plague.

Which is why the case of Austral Incuba, arguably the only business incubator to focus in biotech in all of Chile, is so special. How have they managed to survive while competing with IT-based incubators with shorter timelines, lower risks and less capital-intensive projects?

Macarena Sáez, Austral Incuba’s CEO, tells me the choice to focus on bio-based projects was a conscious one, made about six years ago (the incubator has been in existence 11 years). Like every other incubator, they started working with the inevitable app and website groups, and all the projects that make you go “why are you wasting your brainpower in this,” (my words, not hers) until they realized that most of those entrepreneurs seemed much more interested in bettering the state of their personal finances than the state of their country.

But Austral Incuba was different from the start. It is located in Valdivia, a city more than 800 km away from Santiago, the country’s capital, and is housed within Universidad Austral de Chile. The university’s motto, “knowledge and nature,” reflects its environment (it is smack in the middle of forests and rivers) and their academic focus. Their most prestigious Master’s program, in human-scale development and ecological economy, is actually dictated by Manfred Max Nef, who was awarded the Right Livelihood Award in 1982. The downside is that not only is Valdivia far away from Santiago (we are talking a 12-hour bus ride at least), but also the city’s GDP is roughly 4 times smaller than that of Santiago, and still has grave illiteracy and poverty issues. So if incubating a business “from the end of the world,” as we ourselves refer to Chile, seemed hard, trying to do that from the south of said end-of-the-world sounds impossible.

The Austral Incuba team.

“It feels like our very own crusade,” says Macarena. “We know the conditions are unfavorable and yet we choose high-risk projects such as biotech-related ones, because those are the ones that actually respond to what we see in our environment. The impact you can have while developing bio-based projects is infinitely bigger than your classic app or website, and can actually take responsibility for what is happening in our local area, both socially and environmentally speaking.”

Even the entrepreneurs there are different. They bring premises from their scientific disciplines to their startup work. They don’t just want to make a sustainable product; they want to work in creating a sustainable economy, capable of regenerating their local environment and society.

It’s not all butterflies and rainbows, though. The “diva scientist syndrome,” as I like to call it, is quite real and can be a huge impediment to the development of a project. As Macarena puts it, “We understand that you rule the lab but that does not mean you rule the world!” Which is to say that these entrepreneurs might know everything about their science, but sometimes have no idea what a value proposition is. A scientist’s ego might be one of the worst obstacles when becoming entrepreneurs – they can be un-coachable and deaf to feedback. In Chile this “diva scientist” attitude can become even worse when combined with the “rockstar entrepreneur” vibe we all seem to be getting secondhand from Silicon Valley. There are so many entities here that exist solely to serve the entrepreneur, including throwing money at them, that we haven’t been able to create a proper VC structure. This also has hurt the development of the entrepreneurs. We get money all the time, but we don’t get the smarts that should come with it – which is precisely what Austral and other business incubators are trying to solve.

Luckily, Macarena says that trait is more common in an older generation of entrepreneurs and not as prevalent in the younger crops. And it’s these younger ones that have proved themselves worthy of Austral’s help, over and over. “One of our entrepreneurs relocated from Santiago and practically revived a small town that had been left down on its luck by employing tens of people that had been left unemployed after the closing of a local industry. Another is obsessed with creating added value to local industry’s waste, and is now exporting his products to the US and Europe – all while making the region cleaner and greener,” she says.

The experience Austral has had with these entrepreneurs reaffirms their belief that there’s a certain common trait to all scientific entrepreneurs: a spirit of collaboration. “During our first 5 years we witnessed the non-necessity of collaborating that traditional startups put in place through constant outsourcing and extreme secretiveness,” Macarena says. “Bioentrepreneurs are radically different. They are aware of social pain, and that pushes them towards collaboration as a tool to improve social conditions around them.”

Emilia Diaz

We’ve blogged here and here on the Australian biotech scene. In this post, we’re going to look at collaborations and finance.

Australia is strong, scientifically. The quality of its research is well above the world average and just below the average European citation rate. The country has sharp science and international academic connections. Specifically, Australia has strong links with the UK and the US, due to a common language and also because of the tie with the Commonwealth. China is also a big collaborator.

A common language is not enough, however. Australia suffers from geographical isolation and some members of Australian biotech firms travel every three months.

Large multinational companies as partners (or investors) help bring validation to Australian biotechs, just as they do elsewhere in the world, but Australian companies often accept unfavorable terms because they need a global brand and wide distribution. While CEOs often realize they need to reach global markets, they sometimes do not appreciate which product is likely to succeed globally (though this has been somewhat alleviated in recent years by an influx of senior executives from the US or the UK, or from Australians returning from abroad). Collaborations are helpful for Australian biotechs to get drugs through the FDA, and many companies decide to open an office in the US to generate US-derived data for the FDA, as well as for access to the US capital markets.

Financing

Finance is, of course, of critical importance to young companies, and there are interesting facets of the Australian financial ecosystem.

Angel investors. In Australia, biotech angels tend to be people with backgrounds in the biosciences, and they guide and help the firms they invest in. The association of individual angels, BioAngels, tends not to invest in drug development due to the high cost, but to focus on devices and diagnostics. They invest around A$60,000-A$250,000 per company. In general, they select opportunities that can scale up 7–30 times in 5–7 years so that the few that succeed will provide good returns overall. As elsewhere, angels do not look kindly on VCs, who tend to bring in shareholding agreements that override the angels’ earlier agreements with the company, not to mention dilute initial investors down to small percentages of ownership.

Venture capital. Table 1 has a list of active Australian VCs. Australia also had the Pooled Development Fund, a venture capital fund that invested in enterprises valued at less than $50 million. Although new registrations under this program are no longer possible, income obtained by holding, or disposing of, shares in this fund is tax-exempt. Also, in recent years, Australian VCs have syndicated with US VCs to increase the size of their funds.

Earlier in the Australian industry’s history, a company might conduct an IPO, raise $10 million and have a valuation of $20-$30 million. Things have improved somewhat. In 2013, for example, stem cell company Regeneus raised A$10.5 million in its IPO, giving it a market cap of around A$46 million. It’s a sign of maturity that there are much fewer listings on the ASX today.

Table 1. Major VCs that have invested in the bio-medical sector in Australia.

Up next: clinical trials and Australia’s unique skillset

Szymon Jarosławski and Gayatri Saberwal

Acknowledgments

This article is based on interviews with 14 senior people in, or associated with, companies in Australia, whose comments have been edited for clarity and brevity. We are extremely grateful to the interviewees, who gave freely of their time and their insights.  This work was supported by a grant to GS from the Institut Merieux, France. SJ was supported by France Volontaires, France. Neither organization played any specific role in this study.

In our last blog post, we laid out the Australian biotech foundation and a few of its shortcomings. Here we focus on what it has done well.

Certainly biotechs can be built successfully in Australia. One company (Acrux) grew from a $20 million market cap to $500 million over 15 years, and another (Mesoblast) grew to be worth $2 billion. Australia is doing many things right.

Partially this is because the government has played its role well. Initially Australia’s government looked at biotech as a lucrative export opportunity, and it put in place a grant system and tax benefits for anyone investing in high-risk start-ups. For instance, companies with less than $20 million in turnover yearly can get a 45% tax refund on eligible R&D expenditures (more information here).

Some of the other government initiatives have been the Innovation Investment Fund (IIF), since closed; the Innovation Investment Fund-Follow-on (IIFF), also closed, and the Early Stage Venture Capital Limited Partnerships, which offer tax breaks for limited partners. Pre-Seed plans helped create the first batch of biotech entrepreneurs, and today the government still strives to make things easy – it can take just minutes and less than $1,000 to do the paperwork to set up a firm.

The government has also invested large sums in infrastructure made available to the public on a fee-for-service basis. The National Collaborative Research Infrastructure Strategy (NCRIS) program provided $542 million from 2004 to 2011 for subsidizing infrastructure in private drug discovery firms and contract research organizations (CROs). NCRIS has in some cases subsidized the cost of installing/purchasing advanced biotech infrastructure in private CROs or R&D biotechs with a CRO wing.

State governments have also helped to create a few clusters. In Melbourne, for instance, the government of Victoria has supported the development of The Walter and Eliza Hall Institute of Medical Research, Burnet Institute, The University of Melbourne, Monash University, Royal Melbourne Hospital and the Royal Children’s Hospital – many of which are in close proximity to each other. Clusters allow companies to share facilities and draw a better hiring pool. Clusters also help promote collaborations, and sometimes consortia formed in a cluster may earn state government funding.

Australia has a unique system of about 60–70 public collaborative research centres. Called the Cooperative Research Centres (CRC) program, it supports end-user-driven research collaborations to address major challenges facing Australia. The CRC Program links researchers with industry to focus R&D efforts on progress towards utilisation and commercialization. In 2014–15, there were 35 CRCs in a range of areas such as healthcare, natural hazards management and the aerospace industry.

Most biotech start-ups originate from these centres, meaning the spin offs have essentially been financed by public universities. There is no regulation on who owns an invention – the scientist, their department or their organization – and thus the company founder and inventor have been able to own IP rights rather cheaply. This has changed, with most universities adopting the equal splitting of IP rights among 3 parties: the research organization, the relevant department and the inventor scientist.

Thus, some 75% of the companies that are on the stock market are university spin-offs. Yet, partnering with the institution that spun out a company is the most common collaboration for a start-up, because the university expects that money will be pumped back to it through fee-for-service work from the spinout. This is often the cheapest way to get things done for a startup, but it is hardly ideal, as academic scientists often do not feel comfortable working in a fee-for-service arrangement and being told what they should do, nor do they understand the pressure of time and the corporate work culture.

Next post: Finance

Szymon Jarosławski and Gayatri Saberwal

Acknowledgments

This article is based on interviews with 14 senior people in, or associated with, companies in Australia, whose comments have been edited for clarity and brevity. We are extremely grateful to the interviewees, who gave freely of their time and their insights.  This work was supported by a grant to GS from the Institut Merieux, France. SJ was supported by France Volontaires, France. Neither organization played any specific role in this study.