Human resources

Nature Biotechnology  16,  39-40 (May 1998)

The startup balancing act: Hiring the right talent

*Simon Moroney is president & CEO of MorphoSys GmbH, Am Klopferspitz 19, 82152 Martinsried/Munich, Germany
(moroney@morphosys.de).

Case Study: MorphoSys

Nowhere is increased venture capital activity in biotechnology better evidenced than in Germany. In 1992, there was almost no seed–fund financing available. In spite of this, MorphoSys became the first of a new wave of German biotechnology companies, and has since raised over DM 38 million in equity and soft money. Today, there are at least a dozen venture capital companies that will consider first–round financing for a new German biotechnology enterprise. Part of the attraction for investors is the change in political attitudes toward biotechnology, a tangible consequence of which is plenty of soft money for new enterprises.
The existence of favorable loan and grant schemes in Germany has led to the adoption of a unique mechanism for securing founding finance for a biotechnology company. Several years ago, a federal organization called the Technologie Beteiligungsgesellschaft (TBG) established a scheme by which up to DM 1 million would be provided to a young company in the form of a "silent participation," essentially unsecured debt in which the TBG retained rights to receive information from the company. The most important formal requirement was that an equal sum needed to be committed from a third party in the form of equity. The silent participation bore nominal annual interest repayments, and was repayable after 10 years, with a premium to be paid, the size of which was determined by the success of the company. One of the attractions of the scheme was the simplicity with which the money could be secured, and the lack of bureaucracy involved in administering it.

The success of this scheme prompted the TBG to extend it. Today, amounts up to DM 5 million are available from the TBG on similar terms. Local governments have followed the TBG model in creating their own schemes. In 1996, the state of Bavaria established Bayern Kapital to administer a similar scheme for the benefit of Bavarian companies.

MorphoSys, which was founded in 1992 before the Bayern Kapital or TBG schemes were fully in place, has access to DM 7 million of silent participation. The recently founded Genome Pharmaceuticals Corp. (GPC; Munich) has been able to take full advantage of both schemes, and, with DM 6.5 million in equity, has secured a further DM 10 million through participation of both the TBG and Bayern Kapital.

Through such schemes, founders can sell less of the company than would otherwise be necessary to secure access to capital. This preserves the interests of the entrepreneur and helps to keep valuations in check, since the "silent participations" generally have no equity component. Venture capitalists also gain enormous leverage on their investment. There is even a benefit for the region providing the matching capital: GPC, a spinoff from the Max Planck Institute in Berlin, relocated to Munich to take advantage of the Bavarian scheme, thereby bringing jobs and investment to the region.